How Cultural Diagnostics Contribute to an Effective M&A Integration

Following the extended economic downturn, which slowed merger and acquisition (M&A) activity, corporate transactions have been on the rise. Global deal making reached $2.7 trillion in 2010, up from $2.2 trillion the prior year, according to Dealogic, a data research firm. Many business experts predict that trend will hold, given the large cash reserves created from several years of cost cutting, increased pressure to grow the top line and the larger number of distressed targets struggling for survival postrecession. From a strategic perspective, an acquisition or merger is typically a path to faster growth or market dominance. But the ability to achieve those goals is far from assured, as many deal makers have found over the years. When deals fail to meet financial, competitive or other objectives, the reason often comes down to how well the entities fit together in terms of culture, strategic priorities, leadership style, and a variety of workforce and workplace practices and processes. Ironically, periods of heightened deal activity often lead to a diminished focus on culture and leadership issues due to the pressure to complete deals quickly. But in any transaction requiring effective integration of multiple workforces, especially those involving knowledge workers, overlooking these elements increases the risk of reduced productivity, engagement and effectiveness later on. For large serial acquirers and other veteran deal makers, culture and leadership routinely come into the process early in some cases, even during the target evaluation phase. Identifying the challenges as early as feasible makes it easier to work with differences efficiently and avoid cultural-fit issues that can persist for years after all operational issues have been satisfactorily resolved. For midsize and smaller organizations, the issues of cultural fit and return on investment can be even more important, given the commitment and business impact that a deal can represent. And, while most executives understand the significance of cultural issues, many still struggle to address them effectively.

From a strategic perspective, an acquisition or merger is typically a path to faster growth or market dominance. But the ability to achieve those goals is far from assured, as many deal makers have found over the years.
Part of the problem, traditionally, has been the lack of a rigorous way to identify the nature, extent and likely impact of differences and similarities between merging companies. Informal discussions among management teams, sharing examples and organizational practices, help but rarely provide the fact base and level of detail required to bridge gaps and build upon similarities. In our work with clients, we rely on an array of diagnostics to help identify both the facts and the subtler attitudes and behaviors that lie beneath the surface. These diagnostics are an important element in developing the insights necessary to build appropriate and detailed implementation plans that engage the joint workforce in a newly defined culture.

Getting Started: Comparing Cultural Attributes

Corporate culture is one of the most elusive concepts to identify and measure, as well as one of the most important. Its nothing less than an organizations DNA the foundation for the structures, systems, processes and actions that support its strategy, and explicitly or implicitly define interactions among employees, customers and other stakeholders. In some organizations, everyone has a clear and shared view of their culture. In others, even people within the same organization may not view the culture in the same way. So finding out what people in each organization think about their current culture lays important groundwork.

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One cultural diagnostic we use in the early phases of a deal the Corporate Cross-Match relies on a framework of paired attributes representing opposite ends of a spectrum. It helps employees pinpoint where they think their organization lies across a list of relevant attributes. We administered this diagnostic for a global financial services company that was acquiring several business units from another firm the first time just after close, and again before the start of the integration process. All employees in the target units identified where their current employer sat along the cultural continuum, as well as their perceptions of the acquirers culture (Figure 1). While the results showed that these employees perceived both firms as having a formal style, they also felt the acquirer was significantly less entrepreneurial and more risk-averse than their legacy company as well as more respectful, strategic, stable, analytical and focused (Figure 2). To drill more deeply into the data and test the accuracy of these perceptions, the acquirer then engaged individuals from target units in specifically examining policies and activities contributing to the perception that their company was more bureaucratic and risk-averse. That information, in turn, led the acquirer to rethink some of its overly complex review processes and create communication materials to explain the need for processes that seemed restrictive to the target employees. At the same time, the acquirer also sought input on ways to maintain, and even strengthen, the attributes of the acquired company that had shaped its more entrepreneurial culture. This was particularly important since part of the rationale for the purchase was tapping into new sources of creativity and innovation to expand the acquirers product line.

Figure 1. Laying the groundwork for cultural integration: The corporate cross-match

The adjective pairs below describe opposite extremes of organizational culture. First, please indicate the type of culture you feel exists within the organization in which you currently operate on a day-to-day basis. Then, separately, indicate the type of culture you believe exists inside XYZ, even if your opinion may be based on little direct experence.
Extremely Somewhat Bureaucratic Decisive Risk avoiding People-oriented Directive Reactive Analytical Cohesive Inclusive Confronting problems Team-focused Respectful Persuasive Formal Strategically oriented Stable Consistent Focused Equal Somewhat Extremely Entrepreneurial Indecisive Risk taking Task-oriented Participative Proactive Intuitive Divisive Exclusive Avoiding problems Lack of cooperation Arrogant Intimidating Informal Short-term oriented Unstable Inconsistent Scattered

Figure 2. Acquired employees perceptions of both companies cultures

Formal Scattered Intuitive Unstable Short-term oriented Arrogant Risk taking Bureaucratic
Acquired culture

Entreprenuerial Risk avoiding Respectful Strategically oriented Stable Analytical Focused Informal

Buyer culture

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While a cultural diagnostic typically comes into play after deals are announced, in some cases, such a tool can be used in the target evaluation phase, potentially contributing to a no go decision, thus sparing untold time and resources. More often, however, it helps prevent early missteps that result from an ignorance of cultural differences that are often magnified by employees already heightened anxiety over the impact of the deal on their careers.

innovation. Well-defined structures and processes, by contrast, are more important for companies differentiating themselves through efficiency and cost savings. In the early stages of integrating two companies, its valuable to test whether current attributes align well with strategy and, even more important, which attributes will be most important given the planned strategy shifts. We use our Culture Alignment Tool (CAT), specifically designed for this purpose, to enable executive leadership from the legacy organizations to describe both their current culture and the one they think will be necessary for the merged entity. Online, leaders sort 30 cultural descriptors (e.g., support for risk taking) that have been validated for relevance to the strategies shown in Figure 3. We then conduct a statistical analysis of the results to determine the relative level of alignment between the current and future cultures of each legacy company, vis--vis the companys current and future strategic focus. Figure 4 displays the results of this process for a recent client acquiring a small competitor. In this instance, the leaders of both organizations agreed their primary basis of competition currently was brand, which the results confirmed. Both also agreed that brand would remain critical for their combined future culture, giving them an important area of similarity upon which to build.

Building the New Entity: Aligning Culture With Strategy

A body of evidence, including Towers Watsons research on the cultural drivers of organizational performance, underscores the importance of a high level of alignment between a companys business strategy (i.e., its chief basis for competition) and its internal culture. For example, a manufacturer competing mainly on cost and efficiency needs a very different culture from a luxury goods retailer for which personalized customer service is the primary differentiator. Ensuring that culture reinforces and reflects the attributes needed to deliver on a companys strategy is a hallmark of highperforming companies. Through our research, weve identified a set of workplace cultural attributes associated with financially successful organizations that excel at five specific business strategies (Figure 3). As shown, support for risk taking is one of several cultural attributes critical for companies competing primarily on the basis of

Figure 3. Key cultural attributes required for specic strategic priorities

Aligning strategic priorities with culture

Strategic Business Priorities Efciency Comprehensive training in basic processes Precise job roles Disciplined workload allocation Clear and effective structure Data-driven assessment Coordination of efforts Quality Best practices exchange Empowerment to improve processes Disciplined use of performance data Long-term focus Advanced training Superior processes Innovation Diverse thought and opinion Support for risk taking Bias for action Anticipating emerging needs Consistently recognizing new ideas Leadership clarity on future priorities Customer Service Continual information sharing Positive team relationships Strong customer orientation Customer-centric Focus on talent retention Local authority and empowerment Brand Brand promise engrained Strong belief in product Deep pride Integrity guides business Environment reflects brand Leadership inspires respect

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Figure 4. How leaders assess alignment between strategy and culture

1.

Once integration kicks

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in full force, its useful to take a baseline measure of how well the process is working and learn where and to what extent course corrections could be necessary.

Quality Buyer current culture

Efficiency Target current culture

Innovation Buyer future culture

Customer service Target future culture

Brand

At the same time, the analysis revealed two important gaps. First, although both sets of leaders agreed that innovation would be very important in the future, the diagnostic results and follow-up analysis showed that only the targets culture currently supported two attributes important to innovation diversity of thought and opinion, and a bias for action. Neither of these attributes, however, was present to any extent in the acquirers culture. Given leaderships shared agreement on the importance of innovation for the combined entity, preserving these elements of the targets culture and expanding them into the broader merged company became one of the top integration priorities. A second gap appeared in the area of customer service. The acquirers leaders saw customer service as far more critical to future success than the targets leaders did, which is why the diagnostic results showed the buyers culture to be more closely aligned with this strategy. So the challenge for the leadership team was to: Develop a shared vision of the relative importance of customer service as a basis for competition Find ways to engage the targets employees and embed this attribute in the new culture

To support that goal, we identified the specific cultural attribute that explained the difference between the buyer and target cultures in this regard: giving local employees the authority to make on-the-spot decisions affecting customers. Given the sophisticated analysis and interpretation attainable with the CAT diagnostic, we typically initiate a series of facilitated dialogues with the relevant leaders to dig deeper into the results and identify the actions required to drive alignment between the emerging culture and agreed-upon strategies. In the above example, we worked with the leadership team to determine what aspects of the targets culture produced the bias for action so important to innovation. We also explored the rationale for the buyers belief that customer service would be a critical differentiator in the future. Through this work, the combined leadership team was able to come together on a shared vision and strategy. This understanding led to a series of action steps that involved changing certain review and approval processes, and removing some of the structural barriers to rapid decision making. Both of these initiatives helped drive a culture focused on innovation and customer service.

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A body of evidence, including Towers Watsons research on the cultural drivers of organizational performance, underscores the importance of a high level of alignment between a companys business strategy (i.e., its chief basis for competition) and its internal culture.

Confirming the Integration Process

Once integration kicks in full force, its useful to take a baseline measure of how well the process is working and learn where and to what extent course corrections could be necessary. A relatively straightforward survey such as our Merger Monitor is well suited for this purpose and can be repeated on a regular basis (e.g., every three months) to assess changes over time. This diagnostic, unlike the others we use, asks direct questions about the progress of the integration, drawing content from a combination of validated questions from Towers Watsons employee opinion database and deal-specific items. Common topics include: Understanding of the deals rationale Level of personal commitment to the new organization Confidence in the integrations success Clarity of merger-related communications Confidence in leaders ability to manage integration successfully Impact on ones role and career development prospects We used this diagnostic recently during the merger of two large manufacturing companies, administering 20 questions to a representative random sample of employees from both companies. The findings highlighted several key issues for follow-up, as well as some important differences across the two companies. Specifically, employees from ABC Company were significantly less confident that their companys strengths would be maintained in the new entity than were employees of XYZ Company. At the same time, more of the ABC employees also believed leadership was doing a good job communicating about the merger than did their colleagues at the other company.

We also used the results of this survey to identify the top statistical predictors, or drivers, of employees personal motivation to make the new company a success. In this case, we identified three motivational drivers that carried across employees of both the merger partners: Confidence they could achieve desired career objectives at the new company Belief that the new company will deliver higherquality products and services than either of the legacy companies Perception that leadership will confront and resolve issues arising from the integration Interestingly, while these issues were equally important to employees across both legacy companies, we found distinct differences in their views about whether the new company could deliver on these motivators. At ABC Company, employees were far more positive that product quality would improve. At XYZ Company, however, employees had more confidence that leadership would take them successfully through the integration. Armed with these insights, the leadership team could identify not only what to focus on in building new processes career development and quality programs, as a start but also which areas should be a particular focus for each group of employees. While focusing on all three areas would help increase the commitment of all employees, there was a specific need to help XYZ Company employees understand how the company planned to improve product quality and delivery, and a similar need to demonstrate to ABC Company employees how leadership would address integration issues. This led to a more segmented and efficient approach to managing the integration process as well as a better way of determining the right communication and change management strategies for all employees.

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Putting It All Together

The impact of culture is like a strong ocean current. In countless ways, both obvious and invisible, it influences what employees focus on, talk about and look forward to. It guides their behavior in ways that can either enhance or erode performance. A cultural undertow can even wash out deals that otherwise have great strategic and operational potential. Any corporate transaction brings with it cultural integration issues; they simply come with the territory. Getting ahead of these challenges understanding what the differences are, how strong they are and what people expect to happen is the only way to determine how best to address and resolve them. In M&A integrations, as in every other important endeavor, forewarned is forearmed.

About Towers Watson

Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management.

Copyright 2011 Towers Watson. All rights reserved. NA-2011-20269

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