In 100% of the deals where significant value was lost, the senior leaders (in corporate and private equity firms) all report that culture issues were the cause.
If everyone knows the # is 100%, then optimism about the culture integration (of M&As) would seem to be negligent at best & self-sabotage at worst.
According to PwC research report “How to Create Value Beyond the Deal”, senior leaders report culture as being critical to business success and essential for value retention in a merger and acquisition; however, few truly understand it (yet proceed as if “this time” it will work out fine.)
There are obviously, better options available than leaving money on the table due to optimism, impotence and surrender. This all sounds like too much unnecessary suffering and permanent damage if you ask me. A new approach is needed to support leaders responsible for merging separate cultures more successfully.
“Buyers and sellers both are saying culture and people need to be the highest priority from day one.” – PwC
Culture is such an obvious driver of value, but “many are scarred” by overestimating their own competency and underestimating the importance (but not in hindsight). Many have learned the hard way that changing culture requires experts in both the technical and human competency of changing culture.
- 65% of companies (and 57% of private equity dealmakers) say cultural issues hampered the creation of value in addition to the 100% that said it caused value loss
- 83% of the deals that lost significant value saw between 21% – 30% of key talent leave the business
The PwC research goes on to recommend: “Put culture at the heart of the deal: Keeping people and cultural aspects up front in planning is fundamental. Failing to plan for cultural change will undermine the value created. In the face of disruption across all industries, it is important to ensure these core elements are all working in harmony to ensure maximum returns, effective integration and long-term value creation.”
“Culture, if poorly managed, can absolutely be a deal-breaker” — Iñaki Cobo of KKR London
McKinsey & Company agrees: “Understanding culture, and proactively managing it, is critical to a successful integration. This requires a comprehensive approach. Cultural factors and organizational alignment are critical to success (and avoiding failure) in mergers. Yet leaders often don’t give culture the attention it warrants—an oversight that can lead to poor results.”
Leaders get a lot of things right on the tangible and technical side of the integration but often overlook the human side due to their lack of understanding/culture competency – it is a costly blindspot.
If only a fraction of the deal cost was invested in culture competency, many of the significant losses could be avoided and the likelihood for exponential value to be created would be significantly increased. What gets in the way? The hubris or lack of awareness is baffling – why do leaders keep repeating this mistake over and over while doing all the technical things right? Perhaps it’s because on the surface, they believe they are doing enough and it looks like things are going ok – many things do go very well…
WHAT USUALLY GOES WELL? (BUT ALONE IS NEVER SUFFICIENT)
Dedicated new team time: Both parties usually demonstrate a sincere openness to working together. Space is usually opened for people to share how they feel, acknowledge the different backgrounds, and highlight concerns and opportunities.
Strong leadership steps up to get things done: Usually, leaders are willing to step up and take on tasks and difficult challenges moving forward. There is a strong focus on action and getting things done.
A high level of business knowledge: On both sides, the knowledge and understanding of the business is usually high. (However, usually the knowledge and understanding of the human side of change/integration is not as high.)
Strong leaders role model well: Some leaders effectively and/or intuitively role model the type of culture they want to see.
WHAT GETS IN THE WAY OF CULTURE INTEGRATION?
A. We need to work inside out with an understanding that change starts from within: Persistent ineffective mindsets are the biggest blockers. From a cognitive level to new habits, mindset shifts from fixed to growth, victim to player and knower to learner need practice. It typically appears that the acquirer’s integration investment in the culture/people dimension has been ad hoc and limited, reflecting a “hope for the best outcome” versus a guarantee and commitment for the best return.
B. Significant gaps in leadership’s ability to “listen to understand” and/or seek first to understand, then to be understood: People need help building the muscles/ability to differentiate between opinion versus fact. They do not know how to do this, which in turn creates barriers to being received and understood, despite good intentions. Interactions improve when people learn to speak constructively and responsibly about issues as well as their own emotional journey.
C. Thinking “win-win-win” requires more listening and empathy: People and teams need support to help them become more self-aware and practice real empathy. For example, many times the acquirer will mention that the existing standards/processes would remain in place unless there was a compelling reason to change. Surprisingly, this invitation for certainty can often create a sense of disappointment among the acquiree’s executives.
D. There are pros and cons of the “acquirer’s way” for integrating the acquiree: Become conscious that the acquirer’s way can be very effective for many purposes. Yet when dealing with a culture like that of the acquiree, where they value something slightly different, it can also be a liability.
E. People’s perception of leadership matters: Individual leadership styles matter a great deal during the integration. It dramatically affects how engaging and inspiring they are (or are not), and how they are perceived by others. Many leaders don’t have a sufficient “mirror” helping them to be more aware of their own impact on others.
WHAT CAN WE DO TO START STRONG AS ONE NEW TEAM?
Here’s how to start strong, preserve the best of both cultures and create value together…
1. Design a vision for the merger to be a model/symbol of the acquirer’s long-term commitment to the “marriage,” to innovation, to people, and to dominating the category. Use a statistically valid model (and practical visual device) to build alignment and to tell the story – e.g., the Organizational Culture Inventory (OCI/OEI®) is the world’s most thoroughly researched and widely used culture tool. Custom diagnostics/models are not better – they are too confusing, they don’t measure the right things and they cost more.
2. Support joint leadership teams to align culture and strategy – start by exploring their culture readiness (as an on-ramp to building shared clarity and alignment) and engage the teams in high-performance team development (individual and collective development/learning journeys).
3. Have joint leadership teams lead the co-creation of a new organizational culture plan with curiosity, collaboration and purpose. Use an expert process, expert model, and culture experts objectively supporting the team. Align the culture with the desired mental models and behaviors of the most senior leaders (assuming the most senior leaders represent the ideal culture attributes – if they don’t then we obviously need to have a different conversation – we will need to work on that ASAP.)
4. Avoid theoretical approaches and work hand in hand with business execution – think of this work as a culture prototype in the context of business. Implement a culture champions program to model culture throughout the organization and continuously gather real-time feedback. Pay close attention to communications coming from global and their impact on regional and local markets. The volume of global communications from different departments can be overwhelming and result in a lack of focus locally. Make sure communications are aligned behind a common vision for priorities
5. Measure the culture progress by identifying tangible metrics that allow for assessing the degree of progress.