Leaders play a critical role in defining and nurturing the vision, mission, values and culture of an organization, which serves as its DNA and guides several generations of management. However, while undertaking an M&A deal, we often lose sight off from the cultural aspects, given intense pressure to deliver synergies and convince stakeholders that the deal is going to be accretive.

It is high time to realize that an M&A deal is not just about integration of two legal entities. Moreover, generating synergies through Post-Merger Integration (PMI) process is not all about cross-selling products, consolidating overlapping business functions and rationalizing underlying IT infrastructure. In fact, it is much beyond marketing and financial levers as it involves integration of diverse teams consisting of people, who bring certain skills sets and behave according to their respective organization’s culture. Hence, a PMI program can never run smoothly if people and cultural aspects are ignored.

Another aspect of PMI which needs special attention is that it typically involves a whole lot of changes – operating model transformation, rejigging of the organizational structure, consolidation of some of the business functions, and so on. As leaders, we plan a bunch of changes but fail to effectively manage them, resulting in an unsustainable or sub-optimal PMI.

To help you avoid such pitfalls, our recent report highlighted why organizational culture should be at the core of your PMI strategy and why change management is the most critical element of the PMI process. Let’s take a deeper look.

How can you master the art of cultural integration?

Here is a three-pronged approach to help you develop a seamlessly integrated culture in the combined organization and avoid potential cross-cultural conflicts impacting the performance of the people:

1. Assess the cultural compatibility of the combining entities: Assessing cultural compatibility does not mean just going through the vision and mission statements. You need to analyze the organizational structure, appraisal process, reward and recognition policies as well as subtle behaviors of the key leaders. Basis the inputs gathered from your research, try to categorize the respective cultures as per below competing values framework:

Figure 1: Types of Organizational Culture: Competing Values Framework¹

• Create: If an organization focuses on differentiation and provides enough flexibility to its people to innovate and make mistakes
• Compete: If an organization focuses on differentiation but values speed and control over innovation and experimentation
• Collaborate: If an organization focuses on internal integration of business processes, values commitment, cohesion and collective decision making
• Control: If an organization focuses on internal integration and business processes but values attention to detail and seamless execution

In case there is a significant divergence between cultures of the combining entities, think again about your decision to pursue the M&A deal or review your PMI program to take a call on an appropriate degree of integration. For instance, assume an acquirer with “control” type of culture plans to completely integrate a target with “create” type of culture. In this case, target’s people may find it difficult to perform at the same level as they used to as an independent organization. However, in the same deal, if acquirer integrates target to a small extent, retaining its original culture, its people will be able to perform better.

2. Define a desired state of the art culture: Refer to the best practices followed by leading players of the given industry. However, make sure that you preserve the cultural DNA of the combining entities. Also pay heed to diversity and inclusion as each person from different sections of the society brings value to the table. Now, clearly articulate and document key gaps between existing state and desired state of culture for each of the combining entities.

3. Identify cultural enablers to close the gaps: These enablers may have a broad scope – right from change in the organization structure, to change in the performance evaluation criteria, to enhancement of the reward and recognition policies. However, plan the identified cultural enablers with well-defined timelines, engage regional and functional leaders to launch them and closely monitor the progress.

While using the above approach, make sure that you start cultural assessment right at the stage of due diligence, as a bad cultural fit may lead to a dismal failure of the deal. Also, allow desired deviations in the culture across different functions and business units, depending on their role and respective position in the value chain.

How can you make PMI sustainable through effective change management?

In some M&A deals, employees and customers start losing confidence in the leadership as they do not get clear and timely communication on the key takeaways of the deal. As a result, they start switching to competitors leading to serious financial as well as non-financial implications.

To help you avoid such mistakes, below are five actionable tips which you can inculcate in your change management program.

Figure 2: Key imperatives for a successful change management

1. Communicate transparently: Remember that people resist any change which comes to them as a surprise. Hence, develop a transparent and systematic communication plan to timely inform shareholders, customers, employees and third-party vendors the key changes planned in the PMI and how they are likely to impact them.

2. Engage with people right up to the grass-root level: Understand that people trust their immediate managers with whom they work closely. Hence, mobilize your business unit leaders and function leaders to be the exponents of key changes. These leaders need to engage, sensitize and prepare their team members to be ready for the planned changes. Follow this process up to grass root level to engage people across the organization chart.

3. Assure zero disruption to customers and find new opportunities: Assess how the planned changes will impact different customer segments. Connect with key customers to assure that the new entity will serve them without any disruption in service or degradation of its quality. Start the transition process well in time, in case re-alignment of key account executives is on the plan. Moreover, start having conversations around additional capabilities and scale you will develop with the M&A deal and how can you leverage them to help your clients.

4. Design a robust talent retention program: List down the skills and competencies, which are a must to drive growth in your business. Also, record the key accounts, which contribute significantly to the business. Hence, identify people across business functions who manage these accounts and have expert level of proficiency in the critical skills. Assess propensity to leave of this talent pool and define segments based on their business unit, function, and rank in the organization structure. Finally, design a retention program for each segment with a fair mix of tangible and intangible benefits with well-defined vesting period.

5. Allow enough time to people to assimilate the change: Sudden changes are difficult to adapt, be it change in operating model, or change in role, or change in performance evaluation criteria. Hence, provide people enough time to adapt any change in their ways of working. Moreover, take a digital first approach to train them on next-generation business critical skills and enable them with technology-driven tools to better manage any additional responsibilities.

Key considerations before you kick-off

Before embarking on cultural integration and change management, make sure you contemplate on below check points:

• Resources: Do you have enough resources to dedicate for cultural integration and change management? Typically, it will need a cross-functional and cross-business unit team to design and implement the program across the organization.
• Expertise: Do you have the right capabilities? For instance, cultural integration is highly strategic and should be assigned to only those with strong credentials and experience in culture assessment and cultural transformation assignments. Similarly, Change Management needs strong program management and people skills.
• Communication: Do you have expertise in managing disclosure of highly sensitive information to internal and external stakeholders at each stage of the deal lifecycle? A critical aspect here is that while communicating key implications of the deal, you maintain positive perception of the organization and its leadership in the minds of the stakeholders.
• Budget: How much budget do you have for talent retention? At what levels do you want to launch this program? How do you want to split between the tangible and intangible benefits? How much vesting period will be ideal?

In case you are not prepared on any of the above consideration, you may appoint an external partner, ideally with strong expertise in conducting end-to-end PMI program in your industry. This may certainly help as seasoned consultants having worked with multiple clients bring strong experiential learning to the table.

Lastly, to run a smooth and sustainable integration, always consider cultural integration and change management as the central elements of your PMI program. This will preserve the cultural DNA nurtured by the leaders and also drive growth to achieve the vision of the combined organization!

References

1. The framework has been adapted from Organizational Culture Assessment Instrument by Robert Quinn & Kim Cameron