M&A happens because companies believe there is an intrinsic benefit to be had from deal-making, but failure or underperformance happens time and again because the “people” side of the equation is misunderstood or poorly managed throughout. When processes, tools, and methodologies take center stage in isolation, companies will miss the opportunity to extract the very benefits they initially identified.
More specifically, PwC suggests that in the flurry of activity required for M&A integration, companies commonly miss the opportunity to design and implement an effective change management program to align and motivate people in delivering deal objectives. Often, leaders talk about making people and changing cultures the top priorities when a deal is imminent, but then the practical realities of due diligence, valuation, negotiation, and tactical integration planning around financials, legal, HR, IT, sales and marketing overwhelm the people and cultural sentiments. Suddenly the people factor feels less relevant, less immediately critical, and gets deprioritized or even completely ignored to the detriment of a project’s desired return.
The position is best summarized in a Bain & Company interview, where the experience of one industrial goods company CEO on the heels of a major acquisition serves as a strong example:
“I have no doubts about the strategic rationale and synergies. However, I need to build a new company now. How do I engage thousands of people globally and align them behind our ambition, while keeping our customer focus and delivering on our budgets?”
With the above words in mind, and because truly successful companies understand and prioritize the critical role people play in delivering deal returns and realizing deal value, we will delve into the three critical building blocks of successful change management: preparing for change, managing change, and reinforcing change. Focusing on these three core initiatives will ensure the culture, fit, and human-centered transition issues are prioritized and executed repeatedly and effectively.
What is Change Management?
Change management is more than a philosophy about smoothing the natural bumps brought on by disruptive business activity. For enterprises that prioritize it, it becomes an important organizational core competency at the same, or even higher, level of priority as deal planning, pipeline management, or due diligence.
Consequently, and perhaps contrary to previously held beliefs, change management is not just “HR’s job,” but rather must be initiated from the top down and be aligned across all functions and workstreams. Specifically, change management examines processes, tools, people, and company values and how shifts in these areas can create value and sustainability.
Why Change Management Matters:
While the benefits of change management are widespread, two key benefits are:
Project objectives will be achieved – One study from 2,000 plus data points over eight years shows that initiatives with excellent change management are six times more likely to meet objectives than those with poor change management. In fact, even simple adjustments that move practices from “poor” to “fair” increase the likelihood of success by 300%! In addition, McKinsey data shows companies that embarked on making big corporate changes found change management drove, not surprisingly, the returns for the biggest gainers (see the chart below from the McKinsey study). These companies also had buy-in and participation at all levels of leadership – from executives to frontline employees.
The real value work of M&A happens after the deal is closed – This occurs with the robust integration and coming together of multiple disciplines: diverse functional departments, differing corporate and/or geographic cultures and customs, and managers, teams, and people with varying worldviews. Even when companies tout the need for change management, the approach is often fluid and without specificity or is fragmented – in that it addresses only a few of the critical requisite drivers to succeed.
Conversely, the creation of a holistic plan and the application of actionable plans will drive greater returns. It is with people that integration, adoption, and execution around deal priorities and new initiatives take place. And while organizations once enjoyed the luxury of time to test and roll out new initiatives, they must now do so in compressed periods while competing with tens or hundreds of new existing projects. In this fast-paced dynamic, McKinsey advises, is where competitive advantage accrues to companies with the ability to set priorities and implement their processes quicker than their rivals…this ability is primarily people-driven.
The Three Building Blocks of Change Management
1. Preparing for Change
From the outset, companies need to set an effective stage for supporting cultural change. A clear definition is critical; this includes: defining desired behaviors, propping up role models or examples, and providing meaningful incentives.
In the preparatory or design stage, common questions asked may include:
- How much change management is needed for a given project?
- Who is going to be impacted by this initiative and how?
- What sponsors or leaders need to be involved to ensure success?
This situational awareness is essential for effective change management. By performing this initial step, companies will create outputs helpful for subsequent planning stages.
Furthermore, change management advisory firm Prosci generally recommends the target outputs during this block or phase be similar to the following:
Establishing a ‘change characteristics’ profile:
This is essentially a summary of the change being proposed, the timing for desired changes and the size, organizational scope and general impact areas. Project or deal sponsors should lead this effort early on with leadership across affected business units.
Defining an organizational attributes profile:
This is a profile of specific teams or groups that are being impacted and sets out specific attributes, dependencies, ongoing projects or existing priorities that may cause issues during the changing effort.
Organizing the change management team and resource structure:
Deal team leads may perform this assessment in the early phases of deal planning. This effort helps define how many change management resources (e.g., people, trainings, town halls, etc) are needed for the effort and where and when they are assigned in relation to the deal timeline. Within this as well, it is important to establish the sponsorship structure. In this, change management sponsors will be assigned to act as primary advocates for change. While executive leaders may often be key sponsors, they should also be engaged to drive buy-in and engagement from mid- or front-line level leaders that need to participate in the change effort.
Clarifying the impact assessment:
Here, a more detailed assessment of the groups of individuals being impacted by change is scoped. Done thoroughly, this effort will conclude with a report on the level of impacts, change expectations, and any foreseeable challenges associated with each group.
2. Managing Change
Based on assessments and guiding change summaries developed in the previous phase, companies will move on to the managing change phase. Here, a strategy is specifically articulated that captures the scale of change being targeted and aligns with the nature of change that is needed. It is also within this phase where specific actions and workflows are assigned and executed to begin the reorientation of people and processes to meet desired targets.
While change happens at the individual level, it is impossible to manage change on a person-by-person basis. So, it is in this phase where organizational change management efforts take shape and where custom plans tailored to the targeted groups and activities – and integrated with the overarching deal plan – are built and rolled out. Steps Include:
Starting a communication plan:
Recognizing that change begins with people, communication becomes perhaps the most critical part of successful change management. Having moved past phase one, a company now has the vision for change, targeted change outcomes, an impact assessment and a sense of the level and disruptiveness of change on an individual and group basis.
Mainstream change management methodologies highlight two particularly critical elements of this phase: awareness and desire.
Awareness is about making sure that those impacted understand the underlying point of change. [Of course, this demands that the proposed deal has a true strategic imperative and a legitimate ‘why’]. This also requires sponsors and ranking leaders to present the opportunity the deal affords, propose how change will benefit the company and justify the effort involved in terms of impact to the individuals. These cannot be abstract arguments. Change is people-focused, thus, the benefit explanations must be also.
The awareness conversation naturally bleeds over to desire. Inspiring change is about seeding the desire in impacted individuals – and it demands both logical and emotional appeals. It is encouraged to give real-world examples, promote relevant benefits, listen to feedback and create ownership by giving impacted parties a voice and responsibility in the process.
Consider a recent example of communication success during a major change management initiative. After being named CEO in February of 2014, Satya Nadella undertook a major restructuring of Microsoft. His desire was to reinvent productivity and business processes, do away with the destructive internal competition, build cloud offerings, and prioritize more personal computing. During this upheaval, Nadella reinforced a new sense of mission: to empower every person and every organization on the planet to achieve more. He recalled his thought process:
“Over the past year, we’ve challenged ourselves to think about our core mission, our soul — what would be lost if we disappeared… We also asked ourselves, what culture do we want to foster that will enable us to achieve these goals?”
Microsoft had lagged under a purposeless culture and low morale and weak employee engagement. Today, that commitment to building current-state awareness and nurturing future- state desire has allowed Microsoft to flourish.
In the case of M&A in particular, one thought leader reminds that “[…] Bringing two companies together is not unlike a marriage. Sometimes opposites attract and complement each other, but for a marriage to work, you really need to share the same values.
Mapping the sponsor roadmap:
The sponsor roadmap outlines the actions needed from those primarily responsible for sharing the vision behind the deal. This effort orders executive participation – keeping them active, visible, and aligned. It will organize even the practical detail on what communications are being sent, to whom, and where they need to be present for in-person events.
Analyzing system changes and process updates:
Systems and existing process changes are common M&A execution points of failure. Here, companies need to define the gaps between post-change requirements or results and where things currently stand. Whether related to financial, ERP, HR, or customer-facing systems or processes, thought needs to be given to what needs to be integrated, retired, and/or created. Some of this will have been captured in the Impact Assessment effort noted above in the change preparation stage, however, now is the time to capture the specific changes to be made. Give significant thought to sensitive employee impacting areas such as sales compensation plans, territory assignment, and payroll and benefits updates.
In the popular 7-S Change Model, McKinsey recommends that during systems review companies should pose the following questions:
- What are the core systems in your business (HR, finance, document management, team management/meetings, etc)?
- How are these systems and/or processes stored and used?
- How are they updated?
- Are these systems accurate (are they being used word-for-word)?
- How do you track and assess the results of these processes?
- Who has access to these systems?
These sorts of questions will likely trigger further questions and new insights to establish a full view of change steps related to systems and process changes.
Assigning Integration Owners:
Integration efforts, especially those specifically related to business systems and processes, require ownership assignment for the maintenance of completion accountability. As sponsors’ communication efforts build awareness, desire and engagement, they should crescendo with a message of accountability. Here, identified activities are assigned and project leaders or responsible individuals are engaged to deliver on what’s been assigned.
Developing a training and coaching plan:
Companies cannot assume the new post-deal vision will be seamlessly adopted. Individuals require training to build the knowledge and ability needed to work in a new way. Training plans flow from the analysis of cultural, business, and process changes in store. They need to follow communications so impacted people will have already been conditioned with appropriate messaging before being asked to do new training. Embedded in this training for managers is coaching.
A coaching plan, complete with tools and messaging, dovetails with training initiatives to help leaders figure out how to aid the change management effort within their areas of responsibility. The effort should offer leaders guidance on dealing with resistance, too. Resistance can be prepared for in advance through proactive identifying of people or teams that are essential to the change effort but maybe inclined to push-back. Identifying, understanding, and combating resistance should be covered.
3. Reinforcing the ‘Change’ in Change Management
The scorecard for change management success isn’t how quickly or fully the implementation plan was executed, but how sustained the change actually is. A big merger or deal may incite some early interest and energy from individuals. Even those whose roles or responsibilities are impacted may be intrigued by the change and show some buy-in; perhaps they initially welcome a respite from the same day to day work. Quickly, however, people revert to old norms and customs unless there are mechanisms in place to ensure the new prescribed way of doing business is being followed.
This third phase of change management is about reinforcing the change initiatives. Here is where the target synergies and value-creation opportunities identified early in the deal actually materialize. As a result, best practices to sustain established changes include:
Measuring changes and correcting actions:
When change is introduced and new solutions, processes, systems and roles go live, it is important to a) determine meaningful measures, and b) report on progress. These will vary depending on the change scenario, but companies will want to establish quantitative indicators of progress. Perhaps it’s a published usage report on a legacy system versus the new system or peer-led scoring on how collaborative members are on newly integrated teams. Regardless of the measures, they should provide easy means to measure performance around expected behaviors in the changed state.
In areas of underperformance, or where changes are slow to be adopted, corrective actions should be prepared. In general, slow uptake is individually driven and so sponsors or business line managers should consider training, 1-on-1 coaching or other communicative means to help people embrace the change.
Reinforcing with recognition:
Embracing change takes more of a mental and emotional toll than many would assume. Leaders must recognize the propensity for people to revert to what’s easy and known (e.g. old behaviors) and recognize those that have embraced change and redesigned how they work to meet the outcomes set out when the deal was announced. Affirmations and incentives should be public and compelling. They should be meaningful enough for people to pass ‘go’ and start adopting a new way of doing business. Furthermore, they should not be sunset after just a few months. Momentum may wane even a few quarters post deal close. Check in regularly, honor often and ensure that change persists.
Performing the post-mortem:
Given the expanding place of M&A deal making in corporations’ growth strategies, companies must expect that change-management efforts will be constant and ongoing. Acquisitions, spin- offs, other divestitures and merger activities will keep change initiatives front-and-center. To navigate these effectively, companies must schedule periodic reviews of change management plans/processes/playbooks and seek to grow their internal competencies. These questions offer a starting point for review efforts:
- Was our change management planning timeline ideal?
- Where were we over- or under-resourced during the project?
- Was leader sponsorship and engagement sufficient?
- What feedback did we hear from impacted individuals, teams or departments?
- What aspects can we templatize, or otherwise systematize to improve efficiency?
Leaders may call it being people sensitive or culturally cognizant, but, clearly, change management is the guiding discipline that frames how a company prepares, equips and supports employees, partners or stakeholders to successfully adopt change resulting from M&A. It’s often repeated that “organizations don’t change, people do.” This reality must lead M&A practitioners to install a structured approach and strategy for supporting individuals in the organization to move from their current states to future states that promote the new realities and targeted outcomes presented by the merger or acquisition.