M&A is a complex strategy. If done right, then it can give an overnight competitive advantage. Most companies, however, do get it wrong. As per the Harvard Business Review articles, the failure rates can be as high as 70%+.
Statistics also, show that faulty or insufficient integration planning as one of the major contributors. And the other big one being people, leadership, and organizational culture.
So, why does the integration plans fail?
The answer is quite simple.
Most integration plans are based on creation of lengthy checklists, project plans, tasks, and activities as well as huge focus on estimation upfront. And that is where it goes wrong.
First, a vast number of people struggle to work with lengthy checklists. Their mental orientation struggles with managing details. The second aspect of lengthy checklists is that it is not constructed to manage delays, change in direction, or scope creep. Once cast there is no recourse to change it mid-way.
The second one is the amount of uncertainty, complexity, ambiguity as well a volatility related to details of how to integrate two companies. What this means is that upfront estimates are likely to go wrong as the project progresses and new facts are discovered along the way. In other words, waterfall project management model is unlikely to work in M&A integration.
Of course, there are practitioners who would argue that they have nailed their M&A integration or a post-merger integration process completely. When you raise the lid, you are likely to find that most activities covered under that are simple “just do it” activities. Activities like changing email-ids, security access, identity, and simple consolidation activities. These activities in most cases are highly certain.
The moment one goes beyond these “just do it” activities, they start realizing that it is no longer possible to just implement them in a simple and straight forward way without ramifications. Case in point would be cultural integration, setting up structure for revenue synergies through cost-structure, setting up new product or services, consolidation of information and management systems, new capability building, creating new “value” sources and most importantly, how to create true competitive advantage that goes beyond financial engineering.
Over the years, we have conducted extensive research and interacted with some top management experts, and came to the following conclusion:
- Checklist and templatized based approaches have inherent constraints in terms of memory retention and ability of people to collaborate with them.
- Apart from simple and certain tasks that can be easily covered in 100 days, most value creating activities need an agile approach instead of a waterfall model.
Based on the above, we have created a 6-step process on how to create an effective M&A integration plan. These 6-steps address both the templatized approach shortcomings as well as uses agile principles for uncertainty.
An overview of the 6-step process
Alignment on M&A integration elements
In most M&A integration projects, apart from the core team, other project and extended team members do not have a comprehensive understanding of M&A and integration elements. Not just that, most organizations also, do not have provisions for online/on-demand training courses that can give these people an avenue to learn about concepts, tools, and techniques or simply, refresh their understanding. Most integration needs prominent levels of synchronization and mobilization, as well as they have several inter-functional dependent activities. Without the right level of awareness and training, people will struggle to get into a high-velocity project.
It is a simple step and yet companies invariably, end up overlooking it despite the massive amounts of benefit, it can bring to teams.
Depth of integration
Every workstream lead would like to know how much or how little they need to integrate their corresponding function from the acquired company. And once that is done then how to prioritize and sequence hundreds of identified tasks linked with them.
A simple example would be the principles to be followed with respect to employee pensions. Is it top priority compared to other priorities like getting HR prepared for synergies-based redundancy? If it is lower in priority, when should it be done? Does the budget include the cost of effort to consolidate pension schemes?
And this was just one example.
Every integration needs a principled based approach on how to decide the depth and the speed required for each of the sub-functional components.
Haspeslagh-Jemison model is a prime example of a principle that can be used to determine the depth.
Second aspect of depth deals with management and operational practices.
As you know that differently sized companies behave differently in terms of their management practices. Entrepreneurial companies and start-ups are highly dependent on their founders. These companies have extreme focus on revenue generation, and they expect all-hands-on-the-deck from all their employees to contribute towards revenue generation. All strategic and operational decisions are made by the owner. The level of functionalization is limited.
On the other side, large sized company would focus on stability and profitability. Apart from the market, they will also have strong focus on making their operations more stable and efficient. The operational decision making is delegated to functional levels whereas strategic decision making is through consensus.
Now, imagine when a large company buys an entrepreneurial company. All the management and operational practices need to go through transformation of the acquired company. This transformation takes time, structure, and a good understanding of the ramifications of each of the choices.
Many companies get it wrong. A notable example would be the mental state of the CEO or top leaders of the acquired company after 6 months. Despite the promises made, most transformations do not include addressing the journey and instead focus on a shotgun approach where the leaders of the acquired company are expected to follow the new order of the integrated organization. These leaders end-up getting frustrated and eventually, exit the system under bitter circumstances since nobody bothered to walk them through the transformation journey and its corresponding ramifications.
It is not the components of the transformation journey, but it is the lack of empathy related to the ramifications that cause these issues.
Greiner’s Growth Model is a fitting example of a structure that can be followed.
Organization Structure and Operating Model
The third step is defining the organization structure and target operating model. While there are specific acquisitions where the acquired company is largely left alone and their operating model is “preserved,” in most acquisitions the acquired company is either absorbed or merged. In both cases, too much money is left at the table by not constructing a new organization structure and an operating model that is focused on creating proper (non-financial engineered) value by consolidating the two organization. For those of you who are familiar with joint ventures would know how two companies come together to form a new entity and operations, to address the market. There are lot of similarities with JVs and acquisitions when it comes to organization structure and operating model.
In many acquisitions, cost synergies are based on employee redundancies. While there is a 30,000 feet level strategy on people redundancies but when it comes to departmental levels, most companies end up cherry-picking employees who would be made redundant. This cherry-picking is essentially done by the departmental manager based primarily on their own judgement, likes and dislikes.
Companies end up spending millions of dollars on acquisitions and yet when it comes to people redundancy, they delegate it deep into mid-management operational levels. And these people do not possess the strategic mindset, or the critical thinking required for driving synergies in an optimized manner. And we should not blame these individuals for cherry picking either. These people have never been trained on any other method either.
One of the best tools that can be used for building organization structure is “Business Model Canvas” developed by Strategyzer.
Change, Communication and Culture
As per the Cambridge Dictionary, transformation can be defined as “a complete change in the appearance or character of something or someone, especially so that that thing or person is improved”.
In the business world, unfortunately, the word transformation is widely misused and abused. In most cases, transformation projects are marginal improvement projects rather than a comprehensive change in character or in operating model. Most M&A and post-merger integrations are supposed to be transformational in nature as well especially for the acquired company and to a reasonable extent to the acquiring company unless the size difference between the two companies is huge.
And every transformation needs “Change Management” and “Cultural Integration” to address people, leadership, and organizational cultural aspect of an organization. And along with it the right level of “Communication.”
When we refer to Change Management under this context, we refer to the people factor.
To manage change in an integration, there are numerous tools and frameworks that can be used. One of the tools that we recommend is a combination of Kübler-Ross Change Curve along with William Bridge’s Transition Model.
Similarly, for Cultural Integration, there are several models that can be followed. Edgar Schein’s organizational culture is a great model to follow.
Another model is Cameron-Quinn’s Competing Value Framework. Competing Value Framework is a combination of organizational values, market orientation and degree of required flexibility-stability matrix.
A third model for culture especially for overseas acquisitions is Hofstede’s cultural dimension theory.
For communication, there are dozens of approaches that can be pursued. Your approach should include a framework of these five components: Audience, Content, Medium, Timing and Roles.
Once you have gone through various elements of M&A integration, you have discussed and debated the depth of integration, you have worked through what organization structures and operating models are required and then discussed an approach to address the resistances, you now need to put all these elements into an implementation blueprint.
This implementation blueprint will include elements of Integration Management Office (a program management office for integration), various integration related roles and responsibilities, project governance, operating rigor, risk management, disputes, and escalation management and various workstream managements.
Your blueprint will give you an idea about what to do at the time of exchange of ownership (Day-One), what needs to happen in the first quarter (100-days), what synergies should be realized by when, and other milestones. Milestones would reflect real-estate consolidation, management structure consolidation, headcount redundancy, vendor/customer optimization and re-engagement. Milestones should also, include major communication, cultural and change management intervention points.
Once the entire integration blueprint has been created, it then needs to be shared with functions, departments and other business units for calibration and further adjustments.
As integration planning is a massive exercise, a core foundation must be developed first with input from all business units and functions. Once the core foundation has been developed in terms of organization structure, operating plan and change management, and when the blueprint has been created, it must be further stress tested with functions.
This step is especially important for all activities that are multi-functional, multi-business unit or multi-geographic to address silo-thinking paradigms as well as situations where ramification on certain function is much bigger than the others.
A couple of examples to illustrate this point.
ISO certification especially 27001 which deals with information security of an organization. In general, organizations have specific teams or individuals who are responsible for certification and compliance. On the other side, a large part of information security is managed by IT function. And in some organizations, there is a separate unit on data privacy and information security. In an integration when ISO 27001 needs to merge, all the teams need to come together to chart out a plan. When a final blueprint is created, it is entirely possible that there may be other activities that need to be performed within the IT organization and thus, original timelines on ISO 27001 consolidation can not be met and a new timeline must be developed.
Another example would be compensation and benefit adjustments. In some acquisitions, salaries of the employees of acquired company may need to be adjusted as per the standards of the acquiring company. During the due diligence stage, a certain amount of costs was calculated to conduct this activity. Once the blueprint is created and some new discoveries are made, it is found that it is no longer feasible to conduct the adjustment either due to shortage of funds or other priorities need to be addressed prior to this one. Thus, the timeline and plan for salary adjustment may need to be reviewed and recreated.
As you can see, a lot goes into planning an integration properly. And now, if integration managers and team members must solely rely on checklists and list of tasks, you can see how quickly things can go wrong.
You may have noticed that each of the 6-steps are also six principles guiding an integration. By putting these six principles into a 6-step process, you are creating a pattern design.
Each of these six clear principles will allow you to think in an agile way where you can create content as well as boundary lines and guard rails on each of the six principles as well. Moreover, if something goes wrong or scope need to change, you know exactly which principle to address instead recreating the whole integration from scratch.
This approach of creating a pattern design is a lot easier for people to internalize and retain rather than a 100-task checklist.
As mentioned early in this article, most integrations fail due to poor integration design or people-related issues. With this 6-step approach, you can address both the items together.
Last but not least, we cannot promise that integrations are never going to fail again but with this 6-step approach, you will find that you have developed faculties by which you are able to plan well upfront and identify people, leadership, and cultural issues long before they have a chance to erupt. And in turn, help companies avoid throwing billions of dollars down the drain due to a failed acquisition.
P.S. This article is based on the framework that is used in the M&A Integration Masterclass and other training-workshops and is developed by Fifth Chrome.
This article is written by Anirvan Sen.
It is edited and keyword optimized by Blanca Monni.[/vc_column_text][/vc_column][/vc_row]