The role of HR in Mergers

June 19, 2011

In any merger or acquisition, one of the most taxed groups is the Human Resources Department. The success of the venture and the health of the resulting merged organization in the future are highly dependent on the skill and dedication of the combined HR unit. It would be tempting to downsize the HR function early in the merger process, since duplicate staff functions are generally trimmed as a result of any merger. That would be a big mistake.

HR has so many different and critical roles during the integration, having to perform them all flawlessly during an extended transition with reduced staff would result in high jeopardy for the business. Let’s look at a sampling of new roles to be played by HR during a merger. These are over and above the normal listing of roles that keep all HR staff hopping in steady state times.

Advocating for the people process during all negotiations

The process leading up to a merger can take many months or even years. During that time, both organizations are expected to run normally, with top performance, because each one is being scrutinized for valuation purposes. The HR staff must keep all elements of the planned merger under wraps for legal reasons while simultaneously analyzing the potential impact of the merger.

Creating uniform policies

HR policies and procedures need to be shaped to the new reality. This involves working with key stakeholders in both units to sort out a steady stream of issues, like flex work plans, vacation plans, salary rationalization, benefits alignment, movement of people, communication systems, and numerous other critical operational decisions. In these decisions, the HR role is that of a pivot player with management and the workforce.

Working to blend the cultures

Historically, when mergers fail to produce expected results, it is often due to the inability of the cultures to blend into a homogeneous hybrid culture. A classic case example of this was the Daimler Chrysler merger where the two cultures never did merge. The more formal style of the Daimler culture and the more free-flowing style of Chrysler made an integration impossible. HR must take the lead at bringing in the appropriate resources (such as teambuilding experts or leadership improvement consultants) early in the integration to keep the two old cultures from becoming calcified and rigid. It is during the integration process that all kinds of dysfunctional and even childish behaviors may become evident at all levels.

Sorting through downsizings

Inherent in most mergers is the ability to trim back on redundant functions in the staff areas and even in production groups. This is a critical issue for any merger process. HR must ensure that any downsizing activity is done fairly and with the appropriate sensitivity to the welfare of impacted individuals. When reductions do occur, it is often the people staying who feel like the true losers, because they need to survive in a working world that sometimes seems untenable. Usually HR is involved in trying to prop up sagging morale before, during, and after downsizing efforts.

Advocating for transparency

Information dissemination during a merger process is a critical element, and HR is usually at least partly involved in the roll out of information. The ultimate level of trust in the merged group will be closely linked to the level of transparency people witness during the various phases. The conundrum between what must be kept under wraps and what can be shared at any point in time is like a giant jigsaw puzzle. Eventually all the pieces fit into place and the big picture can be viewed, but along the way it really does matter which piece is played at any point in time. HR takes on many roles from advisor to top management, to conduit for information, to designing communication processes and being a sounding board for feedback.

Training Integration

The Learning Management Systems (LMS) of the two entities are likely to be different. Each group will want to hang onto their familiar way of scheduling and tracking the training activities of their people. Major battles can erupt over the work required to convert from one LMS to a different one. The “victor” is perceived to have “won” over the group that needs to retool. Hard feelings over this issue can last for years. Sometimes a blending of the two systems works well where both groups are called upon to modify their past patterns.

Minimizing distractions

What is the name of the merged unit? If both names of the separate units are in the new name, which one comes first? Which CEO is perceived to be the top dog and which one has to get used to being second in command or needs to leave? What will the logo look like? Who gets to reside in the prime real estate? What outside training group is selected? On and on, the issues seem endless, and what appear to be rather straight forward decisions quickly become emotionally charged.

It is common in a merger to have both parties feel beleaguered and put out by the other party. It is hard to maintain objectivity and the perception of fairness when groups feel they are under attack. What might seem like a fair split of the pain to top managers may feel incredibly lopsided to both groups on the shop floor.
The workload of HR during the entire process from first inkling to full integration is many times what will occur in a steady state operation. That is why it is important to not downsize any seemingly redundant HR resources until full integration and stability have been achieved.

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10 Tips to Improve Temporary Assignments

February 13, 2011

Organizations use temporary assignments for a variety of reasons. These assignments are usually loosely controlled activities of convenience for the individual, the boss, the organization, the family, or all of the above. Sometimes temporary assignments are for a specific project, such as to serve on a transition or integration team during a merger or acquisition.

Many of the most respected organizations use temporary assignments as a way to enhance the skills of an individual or to test the person in different ways prior to a promotion to a higher level. If a person is truly on a fast track and being seasoned by some temporary assignments, it is imperative that he or she be told this information. That will serve as a great source of motivation and fortitude to endure the hassles.

Temporary assignments can be delightful opportunities to pick up new knowledge and to shine in a different way that has more exposure than the status quo. As all businesses become more global, temporary assignments give rising executives a convenient way to become more sensitive to cultural differences. Not all temporary assignments involve relocation; they can just be a transient change in function.

In a merger or acquisition process, there are often numerous temporary assignments because, by definition, conditions are changing dramatically. It is important to have some people pulled out of the daily business decisions to focus on the integration effort. In the steady state, these design and policy-making positions will no longer exist, so during the transition there will be numerous people in temporary slots.

Note, I am not referring to “temporary” or “contract” jobs, which are often used by organizations to reduce costs due to lower benefits. I am focusing on permanently employed professionals who have a defined position but are given different duties for some short period of time, usually less than 2 years.
The science of making temporary assignments work well is rather eclectic, and the track record of success is spotty. This paper deals with some of the problems that can occur and several ideas that can help improve the probability of success.

1. Poorly defined position – This often occurs when the reason for the temporary assignment is done for convenience. The person needs to be moved in order to eliminate some issue or to provide a slot for another individual. The assignment is drawn up hastily, often without much documentation of what this person will actually do. The focus is on getting the person moved quickly. The cure is to take the time to consider at least a partial list of duties that will be transferred with the individual. Make the assignment one that includes a real challenge, along with the authority to make professional decisions that help the organization.

2. Inadequate facilities – Many temporary assignments require people to perform in ad hoc or formal project teams. Finding a central location with the proper facilities in which to do the work is a typical challenge. For some period of time, individuals will have to work out of hotel rooms or sparsely-equipped community gathering places. One obvious alternative is to rent fully equipped and furnished office space from a real estate vendor whose business is providing flexible and convenient housing for professionals on the move. Another potential source of facilities is the real estate listings. Often there are buildings that are being underutilized due to bankruptcies or other discontinuities. The owner may be happy to make some low cost office space available rather than have a location atrophy while waiting for a buyer.

3. Inconvenient location – In most cases, people chose their domicile location to allow a reasonable balance of work function and lost time due to the daily commute. If a temporary assignment changes the pattern significantly, it can present a real hardship. Since, by definition, a temporary assignment has an end point, it is not likely the individual will go through a change of residence, and instead will choose to endure the hassle of a much longer commute. Often the need requires an individual to live in a different city and fly home on weekends for months on end. Sometimes it is possible to arrange temporary housing for the person in a convenient location to the job that allows the entire family to move in yet still maintain the original residence for the return path. This is a typical scenario for expatriates. The downside is that the vacant home needs to be made secure while unused, which can get expensive.

4. Lack of Authority – Since the roles of a temporary assignment are transitory by definition, individuals often feel a lack of authority at a time when they are forced to assume greater responsibility. They can see all the work and the confusion of carving out a niche of credibility, but they have little formal purchasing power to make their decisions stick. If individuals do not like or are threatened by the changes represented by the person in a temporary assignment (which is often the case), then it is possible to make the assigned person miserable through any number of ploys. Some people will get cynical and drag their feet, others will take a passive aggressive attitude, still others will undermine the individual through rumor or other hostile means. All of these methods can be like a Chinese water torture for an executive who is already under immense pressure. The antidote here is to give decision rights to the individual on the assignment and back up this person’s decisions and actions publicly.

5. Bad Personal Chemistry – An individual doing a temporary assignment is often entering a society with little knowledge of the people, customs, and culture. The reason for this person coming in may not have been well explained, and the individual is forced to establish new relationships from a position of distrust. That may get things off to a rocky start and require extra effort to achieve a good social balance. The antidote here is simple. The person arranging for a temporary assignment owes the person being moved a good introduction to the new group that includes an adequate rationale and an expectation of fair play.

6. Sense of futility – A person in a temporary assignment can become depressed simply due to a lack of foundation. The work being performed is difficult and seemingly unappreciated. Not having daily interface with former peers at the central office gives one a lonely feeling of isolation. If the assignment is working on a merger transition team, there is the constant pressure of who will be the survivors on the ultimate team. Not being in close physical proximity to the top decision makers on a daily basis can lead to additional anxiety that the person might be overlooked. In this situation, top managers need to assure the individual that it is precisely due to this person’s worth to the organization that he or she was picked to help design the integration process. There will be a good job at the end of the ordeal. Actually, people on the integration team have a natural advantage because they help invent the structure and rules for the merged entity. It is the people left behind to run the ongoing business who have the greater jeopardy once the musical chairs game comes to an end.

7. Burn out – When temporary assignments are for the purpose of designing details of a merger or acquisition, the technical detail and amount of work can be overwhelming. Transition teams are usually kept lean because, during the integration, both of the former businesses need to keep operating at top efficiency as well. There are just not enough resources to cover everything, so both the ongoing business resources and the integration team are forced to stretch to the limit. It is easier for the ongoing business to stretch because some people from lower levels can step up to temporary management positions to cover. For the transition team, life is more difficult. There are literally thousands of details to consider, and many mutual processes that need to be invented. The work is endless, critical, urgent, and highly emotional in nature. That, coupled with the individual living or working out of temporary housing, causes many people in these assignments to burn out, have health problems, or get fed up and leave. For this reason, senior managers need to provide some modicum of work-life balance or “R&R breaks.” One observation is that people on the edge of total burn out often do not realize their peril. One must consider the ongoing health and welfare of each person serving on a transition team.

8. Guilt or sense of punishment – Some individuals will over-analyze the nature of a temporary move. They may feel a sense of failure; after all, other people were not moved out. They wonder if this is a signal from top management that there is a serious issue or some chemistry problem with the senior people. The individual may feel he or she is being punished for being too aggressive, outspoken, or some other interpersonal skill shortage. If there is a suspicion of this flavor in the body language, it will seriously undermine the motivation of the moved individual to do a good job. To prevent unwarranted worry, top managers need to be transparent and share the true reason for a temporary assignment. If there are issues, then the individual is due an explanation and a chance to mitigate the damage to his or her reputation before being moved out.

9. Squishy Return Arrangements – It is common for a person on a temporary assignment to have no visibility to his or her return path. Will there be a good job at the end of the assignment? When will the assignment end? Was this little adventure good or bad for the person’s ultimate career? It can be a lonely and scary situation for a good performer to find him or herself in a remote site with little connection to the home office and no concrete way back home. A simple fix is to have frequent communications with the remote individual to assure him or her that the temporary service is appreciated and a return path is not going to be forgotten. It is easy for managers to get embroiled in the urgent matters of daily decisions and neglect individuals in remote areas who may be feeling insecure about their future.

10. The pasture – Unfortunately, some groups use a series of temporary assignments to encourage an under-performing individual to leave the organization. The jobs have marginal value, yet keeping the person on organizational life support seems kinder than pulling the plug. People who are being led out to pasture are usually well aware of the intent. Many upper managers hope it will cause the person to quit and leave, unfortunately in a lot of cases it causes the person to quit and stay. Here again, the antidote is candor and transparency. Let the individual know the truth so he or she can make appropriate choices rather than guess.

These are just 10 of the common issues with temporary assignments and how upper management can reduce the stress and pain having to do with them. Properly managed, temporary assignments can be invigorating and helpful to both the individual and the organization. If done poorly or without care for the individual, they can be a real problem.

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Who is “On The Bus” After a Merger?

December 11, 2010

Whenever two groups merge, there is a change in personnel and positions. Typically, there are fewer slots after a merger, so some staff are let go. Often, this winnowing process goes all the way to the top of the organization. A huge conundrum for the health of the business is how to keep the right people on the bus and get the wrong people off the bus.

During the assimilation process after the merger is announced, there is normally an evaluation period where top brass figure out how many positions there are going to be and then seek to fill those slots with the best qualified individuals from the talent pool of the combined groups. After the selection process, the remaining people will receive some painful but expected news.

This process is what appears to be the ballgame with personnel after a merger. Actually, I believe the real ballgame happens long before the official selection process, and top management had better do the right things then or some of the most talented individuals will not be in the crowd when the selection process begins. Long before the announcement of a merger is made, people in both camps are at least vaguely aware that something is afoot. In most situations, the rumor that there is going to be some kind of a major discontinuity has been circulating for months.

People in both organizations are justifiably nervous when facing some unknown hazard that is bound to create casualties. In my own experience, I have noticed that even the highest performing individuals are unnerved enough to start questioning their longevity, at least to themselves. The very best and most marketable individuals have a good chance to land comparable or superior positions in other, more stable, organizations. So, the most valuable people start looking for alternatives long before any forced ranking of staff members takes place.

On the flip side, the least talented people or the ones who are lazy or have interpersonal issues recognize that they are vulnerable. They also realize they are not going to find many opportunities on the outside, so they hunker down and prepare to defend themselves through legitimate or fraudulent tactics. Their objective is to stay in the game if at all possible, and they will do whatever is necessary to ensure that when the music stops they are near an empty chair. This may involve some unfair pushing and shoving.

One of the very first actions top management should take is to identify the critical few people they need to be around for the afterlife in the merged configuration. These people need to be informed that their place in the new order is assured, and it will mean a better existence for them. Of course, that is a tall order because the truth is that there are far too many unknowns in the months running up to a merger to legitimately assure anyone of anything.

In this situation, some kind of contingent bonus may be helpful. Stock options are often used as a tool here because payment can be substantial, but it only occurs when the organization itself thrives. People will think twice about leaving a $100K job to go to a new organization if they can see a potential $1M payout in stock options if the merger is a success.

The downside of any bonus incentive is that of fairness. Basically, top management is singling out a few of the best people (in their opinion) to incent to stay. That will unnerve the mass of people in the middle who believe they are contributing just as much to the prior organization as the fair-haired individuals, but are not receiving an incentive to stay. That sends a chilling signal that impacts motivation and productivity for the majority of people at the very time when the due diligence process is examining the numbers for valuation purposes. This problem can be mitigated if the performance evaluation system in place is sensitive enough to already single out the top 5% of individuals, so any retention incentive can be thought of as an adjunct to the normal performance management process.

Monetary incentives are not the only tool managers can use to allow key individuals to know they are valued during a merger. Simply having a candid discussion about the situation with individuals can go a long way toward having them want to stay on the team. Of course, it is always a good strategy to let the best people know they are valued, but the benefit of doing it is amplified significantly during the months running up to a merger announcement.

Another idea is to have people serve on planning groups that are charged with assembling data for the due diligence process or in developing the communication roll out. When individuals are included in active work to accomplish the merger, they instinctively know there will be a place for them once the dust settles.

Having the right people on the bus following a merger is the most critical consideration governing the success of the effort. I believe it is essential for top management to take steps to ensure the best people stay. These actions need to be accomplished during the conceptual phase of a merger and not while the formal integration process is unfolding.

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Merger Miseries 8 – Scrambled Cultures

November 14, 2010

This is the eighth in a series of articles on the trials and tribulations of mergers and acquisitions. This episode concerns the blending of different cultures into a homogeneous new culture. Regardless of the size and scope of an M&A, or even an internal restructuring, there needs to be a successful merger of two distinct cultures to realize the benefits. Managers often assume this will happen naturally over time, so they give this aspect little attention when planning the merger. WRONG! Achieving a stable culture where people are at least supportive if not enthusiastically driving a singular mindset is the most significant challenge for most change efforts. Do not assume things will work out; instead, take a highly proactive approach to defining a new culture.

In every case, even when the action is described as a merger of equals, one group will feel they have been “taken over” by the other. Curiously, in many instances, both groups feel they have been taken over because employees in each former group will need to modify procedures to accomplish the union. Usually, one of the parties is assumed to be in the driver’s seat, so it is the other party that needs to endure the bulk of changing systems.

Lack of trust and genuine animosity lead to resistance when it comes to blending the two groups into one. It is common to have the conflict occur as passive resistive behavior. People will have the appearance of agreeing, but subversively undermine the other group however possible. This kind of “we – they” thinking can go on for years if allowed. So what actions can management take to mitigate the schism and promote unity? Here are a dozen ideas that can help.

1. Start early – Do not let the inevitable seeds of doubt and suspicion grow in the dark. Work quickly after the merger is announced to have teambuilding activities. Openly promote good team spirit and put some money into developing a mutually supportive culture. Good teamwork is not rocket science, but it does not occur naturally. There must be investments to accomplish unity.

2. Have zero tolerance for silo thinking – This is hard to accomplish because human beings will polarize if given the opportunity. Set the expectation that people will at least try at all times to get along. Monitor the wording in notes and conversations carefully and call people out when they put down the other group. This monitoring needs to include body language. Often rolling eyes or other expressions give away underlying mistrust.

3. Blend the populations as much as possible – Transplant key individuals from Group A with counterparts from Group B. If this is done with care, it will not take long for the individual cultures to be hard to tell apart. Sometimes the transplanting process is unpopular, but it is an important part of the integration process.

4. Use the Strategic Process – It is important to have a common set of goals and a common vision. If the former groups have goals that are not perfectly aligned, then behaviors are going to support parochial thinking. When conflicts arise, check to see if the goals are really common or if there is just lip service on this point.

5. Reward good teamwork – Seek out examples of selfless behavior from one group toward the other and promote these as bellwether activities. Verbal and written reinforcement from the top will help a lot. You might consider some kind of token award for outstanding integration behavior.

6. Model integrated behavior at the top – Often we see animosity and lack of trust at the highest levels, so it is only natural for the lower echelon to be bickering. People have the ability to pick up on the tiny clues in wording and body language. The leaders need to walk the talk on mutual respect.

7. Co-locate groups where possible – Remote geography always tends to build polarization in any organization. If merged groups can be at least partially located under one roof, it will help to reduce suspicion by lack of contact. If cohabitation is cost prohibitive, it is helpful to have frequent joint meetings, especially at the start of the integration process.

8. Benchmark other organizations – Select one or two companies who have done a great job of blending cultures and send a fact finding team made up of representatives from each group to identify best practices. This team can be the nucleus of cooperation attitudes that can allow unity to spread through the entire population.

9. Make celebrations include both groups – Avoid letting one group celebrate milestones along the way while the other group is struggling. Make sure the celebrations are for progress toward the ultimate culture instead of sub-unit performance.

10. Align measures with joint behavior – Make sure the measures are not contributing to silo thinking. If the goals are aligned for joint performance, have the measures reinforce behaviors toward those goals. Often, well intentioned measures actually drive activity that is directly opposite to the intended result. One way to test for this potential is to ask, “what if someone pushes this measure to the extreme – will that still produce the result we want”?

11. Weed out people who cannot adjust – A certain percentage of the population in either group are going to find it difficult to get over the grieving process. Identify these individuals and help them find roles in some other organization. It will help both the merger process and the individual. On the flip side, identify the champions of integration early and reward them with more exposure and more span of control.

12. Create incentives for the desired behavior – People should be encouraged in every way to act and think in an integrated way. This can be encouraged by having the incentive plans pay out only if both units perform seamlessly.

The road to a fully functioning integrated culture can be long and frustrating. By following the ideas given above, an organization can hasten the day when there are few vestiges of the old cultures, and people feel a sense of belonging to a single new order.

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Merger Miseries 7 – What a Rip Off

October 31, 2010

This is the seventh in a series of articles on the trials and tribulations of mergers and acquisitions. This episode concerns the speed of the integration process. A typical merger or substantial organizational change normally takes the better part of a year from inception to complete integration. Many examples take much longer than that. For example, many of the large bank mergers over the past decade have taken 2-3 years to complete. During the transition time, few people in either organization are happy.

For the management, the financial staff, the rank and file employees, and even customers and suppliers, the transition period can be excruciatingly painful. People realize that there are going to be hassles and lost opportunities while the organization is distracted with the details of the consolidation. They also realize there are likely to be layoffs to reduce duplicate staff.

Waiting for the transition to be over is like taking a bandage off a scabbed-over scraped knee. You can do it slow and painful or you can rip it off and deal with the same pain more quickly. Given those two choices, most people choose to rip off the darned bandage and get it over with. Others will peel the adhesive as slowly as possible thinking it is less painful in total, but is it really?

Typically, management votes to drag out the process so individuals in the organization can “get used to” the change. They put out half-baked plans and temporary structures in an attempt to keep people from panicking while the details of the merger are being worked out. This is like a Chinese Water Torture to the people in the organization who are looking for crisp decisions and clarity of direction. Instead, they receive vague intent and lots of sideline cheering about what a wonderful job they are doing. This is total BS, and people resent it.

The other danger is that during the consolidation process, nervous employees tend to start looking around for more stable employment. Logic tells us that the most employable people (the ones with the most talent) are going to find alternate employment easier than the dregs of the organization. So, a protracted period of integration can result in the best people leaving while the slackers or poor performers end up staying. Some companies anticipate this problem and offer some kind of incentives for the best people to stay. Stock options are the usual mechanism to retain the better workers because they only have value when the organization has success down the road. The whole exodus can be mitigated if the integration is crisp and well planned in the first place.

I am not advocating making hasty and dangerous decisions in order to just get it done. Rather, I am proposing that there be intensive planning about all aspects of the consolidation before the starting gun goes off. I am proposing that the people involved in the consequences be allowed to participate in this planning process so they have an opportunity to contribute rather than sit at their desks and shake with fear. The more specific and concrete the plans are for integration the better. Then, once the consolidation is formally announced, the time to return to a fully functioning organization is much shorter. Yes, it will be painful, but the upfront work makes that pain more manageable. The planning process is rather like Novocain at the dentist. Yes there is some pain involved, but it is far more tolerable than going without it and just grinding away.

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Merger Miseries 6 – Bean Counters and Bubbleheads

October 18, 2010

This is the sixth in a series of articles on the trials and tribulations of mergers and acquisitions. This episode concerns who takes the leading roles in the process and how that choice impacts the entire process. It is obvious that the people leading a business deal will color or slant the discussions toward their personal area of expertise. Since mergers and acquisitions involve serious reconfiguration of the financial structure of the organization, the financial side of the house normally takes the lead role. Any kind of restructuring activity is going to have implications that directly impact all financial reports, which alter how the entity is viewed by the investment community.

Letting the financial aspects of a restructuring be paramount is only natural, but it has the effect of subrogating the impact of the action on people from the very start. In most cases, people are visualized as falling in line with the plan once the financial details have been struck. This attitude allows the bean counters to conjure up options that have maximum value in terms of the balance sheet and income statements, but their points of view are in a vacuum in terms of how people will respond.

Top managers act as if they are in a bubble of secret and titillating information about the possibilities of the proposed action. Early conversations are kept strictly inside the secret bubble. The human impact and ideas from the impacted people are not front and center at this point. The bubbleheads do fully intend to cover all personnel (some call it HR) issues later and “roll out” a communication plan to explain the process and benefits. The problem is that later is often far too late to be perceived as anything but a “lay on” by the people in the organization.

The well known Pareto Principle states that for any set of items, 20% of the items contain 80% of the value. I think this principle holds in early merger talks because the human aspects of the proposed action get less than 20% of the attention early on, but they really contain 80% of the value to the organization long term. Unfortunately by giving short shrift to the human aspects of a merger, a great opportunity to build stake and understanding is squandered.

There is a simple antidote to this problem. It is to create a nucleus of individuals with equal power to impact the decisions up front. This group would be represented by people centered individuals (HR or Operations Management), Financial Managers, Senior Officials, and Legal Counsel. This group would work on all aspects of a proposed action in a balanced approach that considers how and when to include the people in the process as a prime consideration. This policy would set up talks on future organizational changes for success. From first inkling of a merger, don’t let the bean counters and bubbleheads be the only parties at the table.

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Merger Miseries 5 – Mini Mergers

October 4, 2010

This is the fifth in a series of articles on the trials and tribulations of mergers and acquisitions. The topic for this episode is “mini mergers.” Every day in the news we hear about the mega mergers between giant organizations like airlines and automobile companies. These consolidations typically involve billions of dollars and take many months or even years to accomplish. The moves are the subject of constant Wall Street and popular business press analysis. In reality, there are literally thousands of smaller mergers, acquisitions, or restructurings that go on every day. These smaller but more numerous actions, when taken in aggregate, dwarf the mega mergers in terms of total impact, even though they do not get as much attention.

Any activity to change the way a unit goes about accomplishing its mission is a form of change that involves restructuring the roles of people. The activity goes under a wide spectrum of names, like: reorganization, merger, restructuring, downsizing, acquisition, reengineering, work-out, process improvements, Lean Six Sigma, and layoffs. Regardless of the name, each of these efforts is designed to make the resulting organization more effective than the prior pieces. The problem is that in roughly 80% of the cases, the activity consumes more resources than planned and is far more troublesome than anticipated.

Unfortunately, the tendency is to focus on the mechanical nature of the action with little planning on the consequences on people. For example, if a merger of two groups within a corporation is contemplated, far more energy typically will be spent on the timing of the move and the layout of the new office than on what changes will need to be made to the way people work together during and after the merge. The procedural issues and training needed are usually given short shrift until the mechanical merger is consummated, which misses an excellent opportunity for people to become invested in both the process and the outcome. The typical sequence almost guarantees a lapse in customer service and great consternation among the workers while managers try to sort out the mess.

There is a solution to the problem. It is to begin by addressing why we need to do something in the first place. If we need to be more competitive in order to compete with a new worldwide market, then start by discussing this problem with the people in the organization. Take the time to solicit creative ways to solve the problem that may or may not involve a restructuring of units. Let the individuals affected come to the conclusion that if the organization is to survive at all, something significant needs to be done.

Then, when the topic of combining units comes up, it is born out of involvement with the impacted groups. They can help configure the mechanical set up of the merged entity, and also begin to plan for the impact on people long before the actual event. They can set up groups whose job it will be to take care of customer issues with “one voice” while the organizational turmoil is going on. They can establish training programs for individuals who need to learn different functions. They can help people who are impacted find a path to a viable future inside or outside the old organization. In other words, the impacted people can and should help figure out what to do before the mechanical merger begins.

Involving people is often avoided out of fear that impacted people might get angry and start some forms of sabotage. It is true that there is some risk of that kind of problem, but it is far better to take this risk with eyes open and manage it intelligently. Reason: The vast majority of individuals will act responsibly when they are treated like adults and given some ability to shape their own destiny. Even though considerable pain is involved, a company can get through a transition phase quickly and with grace if top management allows people at all levels to be part of the design process.

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Merger Miseries 4 – Do Do Diligence

September 25, 2010

This is the fourth in a series of articles on the trials and tribulations of mergers and acquisitions. The topic for this episode is “due diligence.” In every merger there is a phase where a kind of Kabuki Dance occurs. The outcome is fairly certain, but the parties investigate each other in order to negotiate the deal with higher confidence.

Actually “confidence” is a good word for it because the con-men involved in going through the motions are often more interested in subterfuge than transparency. The exercise has an aura of discovery where the acquiring party obtains lots of data and several tours, so they ostensibly have good data going into the actual negotiation.

The interesting point in this dance is that the level of deception can never be truly known until several months down the line after the deal is consummated. In some cases the disclosure is mostly forthright with only a few areas where the sellers are bending the truth, AKA “putting our best foot forward.” In many cases it degenerates into conscious deception or downright fraud. Let’s examine why this is the case.

Our society is structured with the doctrine of caveat emptor, or “let the buyer beware.” Under the doctrine, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud. The problem with this definition is that what may seem like polishing the brass to one lawyer might constitute deception to another. Let me illuminate a few examples of behavior that is considered OK versus behavior that is marginal or even totally illegal.

You have put your house on the market. You know there is a large problem of termites eating the wooden beams near the foundation. Sweeping up the loose sawdust on the floor to make the problem appear less evident or severe would be simply “staging” the house for sale, and it is perfectly legal to clean a house thoroughly before listing it. Covering up the damaged area with a new board in order to hide the nest is not appropriate, although many home sellers do things like that. They might list the subterfuge as a “cosmetic upgrade.” Certifying that the home is free of termites in a signed statement would be outright fraud. Of course, in buying a house, you would hire an inspector who is trained in how to look for termite evidence and other problems, so the ability to hide a large infestation is limited.

The same phenomenon takes place in due diligence for organizational mergers. Teams of consultants go in to look at the facilities, inventory, and financial records of the seller to protect the buyer from exaggerated or incorrect claims. In a merger situation, it is easier to hide minor or remote problems than it is for a homeowner to hide termites from an inspector.

Smart buyers find the right kinds of experts to gather the right data, do the careful research and forensics, and ask the numerous carefully worded questions that force disclosure of any flaws or potential time bombs. An excellent attorney/legal firm specializing in a particular type of transaction can ensure that both parties in a deal are protected. Scrutiny must go far beyond the straight accounting issues into other areas that could spell trouble for the organization over time.

It is also important to focus on due diligence regarding personnel issues. The intellectual abilities and motivation level of the current workforce are substantial parts of an organization’s assets. These less-tangible assets are no less important than the buildings, physical inventory, and accounts receivable statements of an organization. If the population included in a merger has habitually been abused by the current owner, the buyer is going to inherit these problems on steroids once the merger becomes public knowledge. How can a potential buyer accurately assess the level of human related assets?

Survey assessments of the current populations would be tempting, but there is a high probability of a Hawthorne Effect in doing surveys. A Hawthorn Effect occurs when people change their behavior or input based on the knowledge that they are being surveyed for a certain reason. This renders the data less valid. The information may show a rosy picture only to have the truth of a sweat shop environment come out after the merger.

The use of extant data is a more objective process. This is where existing historical records of HR data are collected and benchmarked with other companies of similar size and structure. These might include the following types of information:

• Wage rates for all levels of employees
• Absentee data going back several years to spot trends
• Safety incidents and accident rates (OSHA reportable and otherwise)
• Turnover rates and length of service trends
• Reports of disciplinary actions
• Union grievances and other labor relations data
• Manager turnover and tenure information
• Training records including the number of training hours per employee per year
• The communications plan of the organization (both internal and external)
• Performance appraisal information and trends separated by individual leaders

The use of extant data is much more difficult for a seller to disguise because the data are available and verifiable. If some of the metrics show alarming trends, these can be used as levers to investigate further with focus groups or individual interviews. The important thing is that the buyer needs to spend as much time and energy developing a profile of the human assets of a proposed acquisition or merger partner as is done with the physical and product portfolios of the other party.

2 Comments | Candor creates trust, Communications, Enabling Actions, Trust, Trust and fear | Tagged: , , , , , | Permalink
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Merger Miseries One

September 6, 2010

This is the first in a series of articles related to building trust and transparency in merger situations of organizations. This particular article focuses on how the complexity of doing a merger is often downplayed in organizations and gives one possible antidote that CEOs should heed before jumping head first into a merger.

Why are the hassles underestimated?

Mergers are usually considered in an attempt to pool strengths and eventually drive costs down to improve competitive positioning. It is normally envisioned as a way to survive, but frequently turns into a way to commit suicide.

Top managers who study the impact of a merger can readily see the tangible rewards, and the benefits look seductively attractive. The costs and hassles seem to be manageable, so not a lot of energy is spent on an organized campaign to mitigate potential negative aspects. The upfront cultural work is often neglected as managers just announce the merger and tell everyone to “work together and get along as new processes are invented.” This typically gets the venture off on the wrong foot, and it gets a lot worse before emotional bankruptcy, if not physical bankruptcy is reached.

Consultants hired to smooth the process focus on the benefits and the quick shot of cash from doing the merger. Their remuneration is tied to an efficient and speedy process, so they spend little energy on the blending of two cultures until the fan becomes very soiled. This pattern is so stubbornly consistent that one wonders why more caution is not exercised. Some groups have found ways to do mergers right, and I hope to add some value with tools and ideas that can contribute to the art.

One bit of advice is to be more conservative during the initial planning phase. First, assume your calculations of the benefits are order-of-magnitude correct, but quadruple the estimated time it will take to accomplish them. Next, take the projected investments required to achieve the benefits, as best you can estimate them in advance, and multiply that number by 10. Finally, take the best intelligence on how this merger is going to negatively impact customers and suppliers, and bump that up by a factor of 5X. That might be a reasonable approximation of a business case for the venture. If the merger still looks viable under those circumstances, then going on to the next steps is probably worthwhile. If the figures based on this more realistic scenario cause you to gulp, better read up on some of the horror stories of merger disasters in other organizations and check your medicine cabinet for antacids and tranquilizers.

Acquisitions gone bad are not hard to find. For example the Daimler-Chrysler merger in 1998 was a classic debacle that cost Daimler nearly $36 Billion over a decade. Just as a reality check, my calculation reveals this to be about $10 Million a day for 10 years. Large scale disasters like this are plastered on the front pages of business periodicals. Unfortunately, the more pervasive problem is the thousands of unsung smaller-scale disasters that go on continually within organizations of all sizes and types.

I am not saying all mergers are failures compared to intentions. I am sure there are some positive surprises as well. My thesis is that the track record does not indicate a positive result is most likely. In the coming weeks, I will be sharing many different aspects of the merger and acquisition business. We will look at the issue in both large scale mergers and in the tiny restructuring efforts that go on daily in most organizations. I would appreciate any comments, suggestions, or ideas you have along the way.

8 Comments | Candor creates trust, Communications, Enabling Actions, HR, leadership, Organization, Teamwork, Trust, Trust and fear, Trust and motivation | Tagged: , , , , , , , , , | Permalink
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