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Wednesday, 19 July 2017 00:00

The ROI of Culture in M&As

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There is so much talk lately about acquisitions and mergers.  Seems like everywhere you turn, someone is buying someone or merging with another.  Big seems to be in.  I'm good with that, but with all the focus on the money end, I bet few are thinking about how bringing two cultures together will affect their bottom line.

Let's start with some statistics:

  • 70% of mergers and acquisitions fail to achieve their anticipated synergies
  • 50-90% fail to meet financial expectations
  • 50% suffer an overall drop-off in productivity for the first 4-8 months
  • 'People problems' are cited as the top failure factor in mergers and acquisitions

[Some information above is from "Culture Management in Mergers & Acquisitions" by SquarePeg.  You can download the PDF here.]

leaving money on the table change management

 

There are a variety of reasons why mergers and acquisitions fail (TechCrunch has an interesting list - which includes more than a couple of the 7 Deadly Sins), of course.  But the one that often goes under-recognized is the role of organizational culture.

I suppose in some ways it's not surprising that 'culture' isn't addressed more often or more thoroughly:  Typically, the people driving an M&A are the $5000 pinstriped-suit, Bluetooth-obsessed finance guys (and they do seem to be predominantly male) who are more comfortable with variables they can quantify, like shareholder value, than they are with more qualitative concepts like 'organizational culture'.

Except that it's not actually all that difficult to quantify the cost of a culture fit misfire - it's just a matter of breaking it down into its component parts.  Let's look at some ways to do this.

Loss of top performers:

In my experience, it's the loss of senior A-list employees that can cause the most lasting damage to a merged or acquired organization.  It's not just at the VP-level, either.  Losing senior managers - the ones who've been quietly ensuring that their departments run smoothly and productively, but who are often ignored during a flashy M&A and who are left reeling from a sudden, dramatic change in organizational culture - can leave gaping holes in an organization that take months, and sometimes years, to fill.

But let's quantify the loss.  Assuming we lose 5 senior managers with an average annual salary of $110,000 each, and using a turnover calculator from Drake International, this represents a cost of $5.7 million.  (Sure, Drake's a staffing company and they're a little biased, but even the most conservative estimate here is more than $2 million - and that's just 5 senior managers, not the employees who follow those managers to their new employers.)

Loss of market confidence:

If there's one thing M&A people love, it's Driving Shareholder Value.  But culture clash can mean a drop in shareholder value, as Microsoft's acquisition of Nokia last year has demonstrated.  There are probably other more recent one's, but I particularly like this one.

Loss of productivity:

Mergers and acquisitions can cause productivity losses even in the best-case scenarios.  An unaddressed culture fit problem can make the problem much, much worse - and exponentially more costly.

Let's think about it this way:

  • 5000 employees
  • Each of them spends 30 minutes a week for 3 months overcoming culture fit challenges (either in increased meetings or decreased work product)
  • That's 32,500 hours in lost time
  • At a blended cost of $150/hour, that's $4.8 million

It's not difficult to quantify the cost of ignoring the ROI of culture in a merger or acquisition.  The bigger question is:  Why are the M&A drivers leaving so much money on the table?  It isn't hard to manage, you just have to pay attention to it and put people on it that understand both culture and business.

Read 26387 times Last modified on Wednesday, 09 August 2017 15:27

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Beth Banks Cohn, PhD, founder and president of ADRA Change Architects, is dedicated to helping you and your organization reach your full business potential…
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