M&A confidence is building, following last year’s trends. According to Allen&Overy’s M&A Index for Q1 2014, the U.S. continues to be increasingly active while Europe is beginning to recover.
Despite this growth, companies are still missing some key integration focus points that are, most often than not, conducive to a failed merger.
Cultural integration was the second most common direct factor cited for deal failure by companies in Aon Hewitt’s Global Survey and has increasingly become recognized as a top issue in M&A.
Let’s take a look at the main reasons why culture integration plays such a critical part in a successful merger.
Managing M&A cultural integration
Cultural integration is not just a leading cause of deal failure, it’s also an indirect driver for a significant number of other causes, such as delayed integration, retention of key employees, productivity or talent attraction.
Managing cultural assimilation is a process of its own, that should be integrated in the overall transition process.
It’s clear now that organizations understand the importance of cultural integration, but it seems that their actions speak to the contrary. Culture is a focus in all planning efforts but when it comes to actual steps being made towards preventing a culture clash, things get lost in translation.
When should cultural integration be a key focus?
In a global study by Aon Hewitt, nearly half of organizations rank culture assessment and integration in the top three areas of importance in due diligence (30% rank in top two priorities). However, during the integration stage, only 24% rank cultural integration in top two priorities.
It seems counterintuitive that cultural integration stops being a critical success factor in a stage where companies have more access to information and employees.
But, if you think about it, strategizing a war and fighting one is not the same. During the initial planning effort, objectively, culture is a key focus. However, at the time of the actual integration, the pressure rises, other priorities mount to the top of the list, critical issues threaten the deal and there are still only 24h in a day.
The top reasons why cultural integration fails
The first and foremost important reason: lack of a well-managed approach to culture. 58% of companies admit to not having a specific approach in assessing and integrating culture in a deal (Aon Hewitt). Not knowing what to do.
Bottom-line: Almost everyone agrees it’s important, it’s on the due diligence checklist but it’s not really clear how they should go about it.
And here are the top contributing factors to an unsuccessful cultural integration (Aon Hewitt).
Concrete action steps towards a successful cultural integration
No merger is easy and there is no general integration template that can ensure a successful outcome. In order for cultural integration to be effective, it has to be specifically designed for the two companies involved. You need to create a roadmap that you can easily follow.
Here are some concrete action steps to help you build a targeted cultural integration strategy:
Focus on culture early on
Like I mentioned before, cultural integration starts in the due diligence stage. It’s extremely important that the leadership body of the newly formed entity is fully informed and prepared to design and implement a cultural integration strategy.
In this early stage, it’s important that culture management is part of the overall integration effort, rather than an isolated HR process that will slowly loose its significance as the deal progresses.
Get management approval in this early stage. Make sure that cultural integration is part of the overall M&A action plan and that all stakeholders agree on it.
Define how you want your culture to look like
Culture is often overlooked when in fact it should be used to the benefit of the transition process, as a catalyst that brings together the two organizations.
Start by assessing the current state of both cultures. Analyze individual and organizational behaviors, the business outcomes they produce and the key factors that influence patterns of behavior.
This will help you understand how people operate in both cases and it will serve as a starting point to creating the new merged culture that will serve your business objectives.
Set a clear image of how you want your culture to look like in terms of:
- Leadership style – patriarchal or community-oriented?
- Company values and direction
- Environment attributes: collaborative or process-driven?
- Coordination and control (management style)
- Capabilities and talent management
- Employee engagement and motivation
- External orientation
As a key M&A success factor, cultural integration does require its own time and effort investment. In order to overcome the action freeze that follows the well intentioned planning stage, you need someone to make triage decisions, manage taskforces and set the pace; you need time, effort and involvement.
You should have an integration team to oversee the entire M&A integration process and, within this team, someone exclusively responsible with the cultural integration.
The main resources you will need are:
- A strong leader to oversee and coordinate the cultural integration process
- Time and effort to analyze and strategize on the existing cultures and the desired final culture
- Preparation and involvement of the leadership body
- A communication strategy
- A communication channel available at all times to connect with middle management
Focus on leadership
As you’ve noticed in the graph showing the top reasons why cultural integration usually fails, lack of leadership support has a 44% bearing, while lack of agreement among leadership on the final desired culture accounts for 48%.
Companies often overlook an assessment on the capabilities and capacity of the leadership team to manage a cultural integration. They are the first people who should be informed, trained and equipped with the necessary resources to actively ensure a successful cultural integration.
McKinsey takes a practical approach on company culture by focusing on management practices. By viewing culture as a result of these practices, they make it easier to define, identify and tackle cultural integration.
One of the main reasons why M&A cultural integrations fail is the inherent power struggle. The new company has to be designed around the desired culture. Its new leadership body has to include people from both organizations, people who are enthusiastic about the new vision and who are able to contribute the most to seeing it accomplished.
Don’t wait too long to select your new leaders. You risk endless corridor debates about who’s leaving or staying, power conflicts, frustration and turnover.
Manage it actively
Aon Hewitt did a comparative analysis of companies they categorized as “Overachievers” (those organizations that exceeded some or all of their deal objectives and targets in past M&A deals) and “Underachievers” (those that did not) to get a better understanding of the main reasons why cultural integration fails.
This analysis revealed that Overachievers spent more time actively managing culture and less time assessing culture as compared to Underachievers. While 89% of Underachievers said they focused on assessing the current culture state, deﬁning the future culture and identifying gaps between current and future circumstances, more than 90% of Overachievers concentrated on making changes to organizational structure, redesign of HR programs/practices and team building sessions.
Overachievers took action early on and that’s what set them apart. It also allowed them to react more quickly to other issues that arose during integration.
Change communication is a critical element in creating, managing and distributing the messages at each stage of the cultural integration process. To help employees understand and cooperate in this monumental effort, leadership must present the story early on, in a straight-forward matter, addressing all key aspects that deal will involve.
Employees need to know what’s changing, why, when and what will happen, both in the overall big picture, as well as on a day-to-day basis. They need to understand what this means for them and what the newly promoted behaviors are.
Overachievers rank communication and change management as one of their top 2 highest priorities during integration, trailing only retention of leadership and key talent during integration in priority level (53% for Overachievers vs. 31% for Underachievers).) (Aon Hewitt)
It’s essential that these communication efforts be organized in a well-thought change communication strategy and that they remain constant throughout the merger (both pre-merger, as well as post-merger).
However, be careful to remain human in your communications efforts as this is already a challenging time for your personnel. Microsoft just gave a really good example of how not to communicate the layoff of thousands of employees following its integration of Nokia.
Have your cultural interventions target specific behaviors
Focus not only on the “what” but the “how” of culture. In the early stages of assessing a culture, the most valuable information you have to obtain is what the key cultural drivers are.
What makes people engage in certain patterns of behavior? Understanding how a culture works gives you all the information you need to design a successful cultural integration strategy.
Seeing how these drivers interact will help you asses the threats and opportunities that you face and build dedicated approaches.
Hppy is a great tool to use in identifying the main culture and engagement drivers in your company. It gives you an honest, detailed analysis into what determines certain behaviors and how people feel about a cultural integration.
Using this information, you can customize both your communication strategy, as well as your cultural integration activities, to fit the need of your employees. This way, you avoid losing your key talent and you keep productivity levels high.
With Hppy employees get to register how they feel during every stage of the integration process and they can give anonymous feedback, voicing their honest opinion on how things have been progressing. Hppy makes feedback management easier. Due to the fact that feedback is anonymous, employees are much more inclined to share valuable information and give actionable observations. What makes the data even more valuable is that we correlate it with moods and we track the reasons registered for any mood or feedback that the employee submits.
Leadership gets a detailed report of how their team is feeling and why, along with useful, anonymous feedback.
Cultural integration is a key part of the overall integration process, as most companies foresee in their planning efforts. However, planning rarely translates into action.
For some companies, this is due to a lack of understanding into what culture is and how it can be productively managed during the integration process. For others, priorities shift and all that remains is a well-written plan that never got to be executed.
In order to ensure a successful cultural integration, the focus should be on acting rather than planning. Creating a cultural integration roadmap requires resources, effort and a targeted approach.
Hopefully the advice we gave you today can help improve your efforts to conduct an effective cultural integration process.
We’d love for you to share some of your key insights into managing culture in M&A in the comments section bellow.