PART I: The People Side of Merger IntegrationOctober 19, 2015 . .
Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.
C.M. Christensen, HBR
Why is the failure rate so high? What are the costs of doing a bad job? And what can companies do about it? Let’s take a look at the people side of merger integration.
There is so much pressure in acquisitions to deal with immediate financial and operational issues that the talent and culture side of mergers is often under-managed. This costs organizations millions of dollars in:
- reduced employee engagement, productivity, and retention
- poor communication and teamwork
- declines in work quality and customer service, and
- opportunity costs
Where the costs come from:
Here are some metrics to help you (i) budget for some of the costs, (ii) build your case for action, and (iii) focus your merger integration efforts.
Risks and costs of poor integration management:
- Reduced employee morale, motivation, focus, effort, and productivity
- Poor work quality: sloppy work, errors, poor service
- Safety issues: stress and lack of focus can effect process, procedure, care
- Employee absenteeism & turnover: losing talent, expertise, relationships…
- Time to full productivity
- Time to new employees living your core values
- Under-leveraging talent, economies of scale, and potential synergies
- Low trust, respect, and loyalty to the new organization and its leaders
- Poor communication across boundaries; confusion about roles & goals
- Poor teamwork, e.g., sloppy hand-offs and conflicts
- Lack of alignment due to turf wars, silos, egos, and conflicting & old agendas
- “Us vs them” mentality; heightened internal competition
- Opportunity costs: so busy putting out fires that you miss business opportunities
Reducing these costs—the impact of these problems—can be worth millions of dollars when merging organizations.
To put the stakes into perspective, consider this one example: employee turnover. Losing employees typically costs 100% of their annual salary, and at least three times more for top performers. The cost of losing just two average and two top $70,000/year employees will be approx. $560,000, and turnover is just one of the many costs of poor merger integration.
A dismal affair:
A Hay Group study found that 73% of companies did not analyze the cultural compatibility of the firms to be merged, and 78% did not carry out a human capital audit (Hay Group).
In an Aon Hewitt study, 58% of executives reported they did not have a specific approach to assessing and integrating culture in a deal, and none (0%) reported that its cultural integration practices were effective.
It is not at all surprisingly, therefore, that 50% of executives cited organizational cultural differences as the most significant post-deal issue they faced (Marsh Mercer Kroll) and 33% blamed “cultural integration issues” as the reason their deal failed (Aon Hewitt).
All of this is having a disastrous impact on the success of the integration process. A study by the Hay Group found that:
- 78% of acquired company employees opposed the mergers
- 38% expressed dissatisfaction with the post-merger climate
- 22% described the early months as “culture shock”
- 16% labeled it “trench warfare”
Think about how challenging it is to engage your employees at the best of times. It is going to be almost impossible to do great things if your post-merger environment is toxic.
This is not even new information. Decades ago, the British Institute of Management surveyed executives involved in a number of acquisitions and concluded, “The major factor in failure was the underestimation of difficulties of merging two cultures.” And in a study by Coopers & Lybrand of 100 companies with failed or troubled mergers, 85% of the executives polled said that differences in management style and practices were the major problem.
What you can do:
Where should you intervene? What kinds of actions are most valuable in a merger-type situation? Here are five major practice areas you need to consider—all practices that Incrementa helps its client with:
- Pre-merger cultural due-diligence: identify key challenges, leverage points, and synergies so you can be more prepared.
- In addition to this, Incrementa has its own proprietary “Culture Compatibility Assessment” that enables you to identify precisely those cultural differences that pose the greatest risks & costs—that are likely to cause the most damage.
- Fostering communication, teamwork, and relationship building across boundaries.
- Facilitating speedy compliance with your core values: “living the values.”
- Speeding up time to full productivity and loyalty to the new organization.
- Integrating talent to bind the two cultures together and enhance teamwork, productivity, and retention.
- Helping employees deal with and make the most of the change.
- Caring for self during change, and dealing with rapid, non-stop change.
- Learning from the acquired company: identifying opportunities for culture improvement in a way that builds bridges and shows respect to your new colleagues
- Shifting overall culture to better align with vision, strategy, and core values
Look for our upcoming blog on merger integration secrets.
- When to change your culture
- Culture and the bottom line
- Aligning culture with strategy
- Anchoring core values in culture
- Creating a culture of innovation
- Change and transition management
- The real cost of employee turnover
The Incrementa team has broad and deep experience with all aspects of merger integration, from finance, IT, and risk management to consolidating operations and cultures.
Joel Shapiro is passionate about making employees part of the solution, and finding the perfect blend of humanity and business performance. You can read more of Joel’s thoughts on the Incrementa website, at his former blog, and on twitter.
Copyright © 2015 Joel Shapiro, Ph.D., all rights reserved.