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Wednesday, 03 December 2014 00:00

The ROI of Culture in M&As

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.

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We often talk about change leadership within an organization:  Whether the organization is changing their software, the sales function, or the entire business focus, having the right leadership is crucial to success.  And in many cases, leadership starts with the president or CEO - it's important for the person at the top to be a positive, engaged role model for the change.

dueling banjos in change management

But what happens when the change is happening in an M&A (mergers and acquisitions) context?  In those cases, there is often more than one person 'at the top' - each organization has a president or CEO or chairman, and it may not immediately be clear which of them will, ultimately, be in charge, or who will ultimately wield more power.  This can create serious problems for change management, particularly in change leadership.

A few years ago, the British Journal of Change Management published a study in which several organizations were studied over the course of 7 years.  One of their findings was that during the M&A process, change was derailed when individual workers felt that change had been imposed on management, rather than being led by management.

It's not surprising:  In most mergers and acquisitions, one company is seen to be dominant, while the other feels like it's getting 'swallowed up'.  It's not unusual for the senior leadership of the 'swallowed' company to feel like they're just marking time until their position is made redundant and they're given a nice severance package.  It's hard to lead anything - including change - if you're just waiting for your pink slip, even if that pink slip is going to come with a lucrative cushion.  And that's the best-case scenario.  If the merger/acquisition has been acrimonious, there may be active negativity emanating from the executive suites.

When leadership figures appear to be ambivalent (or actively disparaging) about the changes happening to the organization, two things happen:

  1. Leaders stop being leaders:  When leaders appear disengaged from the process, they stop leading and start looking like they're just victims of change.  That's when employees start feeling like the change has been 'imposed' on the leaders - and start seeing their former leaders as fellow 'victims' of change.  It's hard for anyone to lead much of anything when everyone's feeling sorry for them because they're a victim.
  2. Change resistance becomes more entrenched:  It goes something like this:  "If the president, who we've always liked, isn't engaged with this merger and seems to have been unwillingly stuck with it, then it must be bad.  So we're just going to keep doing business as usual, and let those new corporate overlords put that in their pipes and smoke it!"  This isn't good for anyone:  It makes the existing employees of the 'swallowed' company look petty and unproductive; it makes the work environment for everyone toxic; and ultimately it costs a whole lot of money, either in lost productivity or in massive turnover.

What's the solution?  More attention paid to the importance of transitional leadership during a merger or acquisition.  Letting the leaders of the acquired organization disengage or take on a victimized attitude is short-sighted - and costs money in terms of productivity, increased turnover, and a longer ROI horizon.  Leveraging those leaders to help facilitate change during the M&A process means the new, merged/acquired organization can start delivering efficiencies more quickly.

 

 

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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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