Mitigating People Risk in Major Transactions (Part 2) – A Guest Blog by Paul Pittman

Posted by MarchFifteen & filed under Organizational Transformation.

The following is the second installment of a two part blog by Paul Pittman. This blog centers around a situation where the cultural integration of two organizations was only considered late in the game, and how one individual mitigated the people risk of this major transaction.  This two part series highlights the tendency to overlook the importance of organizational culture when other transactional matters are perceived to be more critical.

Happy reading!

Mitigating People Risk in Major Transactions

By: Paul Pittman

Soft Due Diligence

Gerald realised the success his company was currently enjoying was the result of a lot of hard work around culture and engagement. He only knew about the culture at the target company anecdotally. He had been able to recruit a few people over the years and had learned that while the environment was positive it was different. A number of the divisions were going to be merged, including the one that was regarded as the engine room of his company and had contributed most to past profitability. Understanding the culture that was going to be inherited was going to be critical when it came to merging the two functions. Allowing an “us and them” mentality to emerge would take years to correct and the resulting inertia would destroy the identified value in the merger and damage his company’s ability to continue to generate profit.

If culture assessment is completed at all in the pre-offer phase it is usually cursory, with only visible characteristics identified. Deeper analysis can help identify the causes for the way individuals feel about their employer.  Organizational culture is formed and maintained through many channels but in particular leadership style, communication, terms, conditions and benefits of employment, performance and development. Analysis of these and other features will not only identify the culture but also the types of individuals attracted to the organization.

This analysis should be addressed early and before any attempt at merging respective teams is attempted. The analysis needs to be timely and factor in the impact on attitude and engagement of the announcement of the merger. Being acquired will do much to affect confidence and commitment particularly if the businesses have been fierce competitors. The sense of loss will need to be repaired and quickly with a vision of the new opportunity.

Gerald was informed that the pre-offer analysis had identified the functional leaders in the new company and that these were all protected by retention arrangements that would allow time to assess their contribution to the newly merged businesses. Gerald new however that it was not the top team that caused employees to do what they were good at every day. Spattered throughout the organization there were going to be five, seven or ten managers or supervisors who were the true influencers of employee behaviour and engagement who were likely not covered by retention arrangements, who would be most affected by a merger and who right now, were likely feeling neglected and were vulnerable. Until his company had had the opportunity to have a long look “under the hood” and understand how this business really worked it was going to be critical to identify and keep these individuals in place as long as possible. That process would need to start now.

An independent voice inserted into this process can be an advantage. Key employees in the target organization may not want to risk opening up so early to their potential new boss which may be particularly difficult if they were sworn enemies only a few short weeks earlier. An anonymous interview or survey process could help quickly identify cultural indicators, levels of engagement and key contributors without appearing threatening.

Gerald suddenly remembered the organization’s people in the international operations in the US and France. So often left out of the communication process for normal business matters they would for sure have been overlooked with detailed explanations of the synergies about to unfold. Did the acquired business have operations in these or other countries too? How would the type of transaction be interpreted in these markets? What was the importance of these markets to the new strategy? Gerald did not have the resources to timely manage the communications and risk assessment let alone manage the message in a way that was culturally sensitive in the context of the local market.

Out of sight out of mind is how satellite operations often feel when HQ is involved in a merger. Attention and focus is centered around the top teams in the home offices. This can be at odds if the merger rationale anticipates growth from international expansion. Some of the individuals that Gerald is keen to identify will be local office managers in key markets. Retention arrangements may need to be very different in those markets because of employment or tax law differences. To be effective they will need to be tailored to local needs. Understanding how local employment law protects employees will be critical as well as understanding the rights and obligations that are triggered. Most of all ensuring that a consistent message is shared with local employees using the appropriate terms in the local language.

Hard Due Diligence

Gerald was confident that whoever had completed the pre-offer assessment would have ticked off all of the important people liability boxes related to severance, benefits etc . These were unlikely to be deal breakers but in aggregate may have represented a bargaining chip in settling the purchase price.  

He was also confident that no one had looked at the opportunities from combining employee risk. The new scale would present more choices in risk management and result in cost reductions.

He was absolutely certain that no work had been done on understanding and transitioning compensation incentives, re-orienting employment agreements, transferring and extending insurance coverage, the consequences of inherited retention agreements, budgeting of same and scheduling their expiry dates into the talent management plan. As he walked back to his office the to do list became longer and he thought how better prepared he would have been had he been included earlier. No wonder so many transaction fell down on the people issues.

Generally, the primary goal of an acquisition is to capture a substantial opportunity and no one is likely to do a better job of that than the architects who identify the deal, usually the top leadership teams. But often in their eagerness to create value companies overlook the down side and how these risks might be reduced.

Challenges will increase as the organizations get closer together and will be compounded if integration is not planned and the hurdles anticipated. Important acquisitions don’t happen every day and therefore there should be no hesitation in involving external HR expertise. This is a small investment compared to the value at stake if it is not done well. Involve your internal expert and if necessary provide a budget to dive deeper with external expertise to identify potential productivity risks and where opportunities exist.

M&A practitioners talk about the 100 day rule within which organizational change needs to happen if the damaging consequences of inertia are to be avoided. Left any longer and perceived injustices will linger and will do more to undermine engagement and create value destruction than any structural deficiency.

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