The Role of Cultural Due Diligence in Business Integration Efforts
by Debbie Imboden
Due Diligence is a phrase that has been traditionally used to reflect the analysis activities that occur during merger and acquisition activities. Recently the due diligence process has been extended to include the evaluation of business affiliation and partnership agreements.
Due Diligence is generally comprised of legal due diligence and financial due diligence. At this time, research into financial assets, articles of incorporation, market share, technology, hardware and business competencies are examined.
Unfortunately, for business...one plus one, does not always equal two, particularly when it comes to culture and integrating "human systems".
Statistics indicate only 15% to 25% of all mergers and various business combinations live up to expectations. 25% to 30% are reported to be outright failures, with the acquired entity being liquidated at a loss within 3 to 5 years of acquisition. The remaining 45% to 60% result in little or no apparent benefit to the buyer's shareholders.
In today's merger activity, we see an alarming trend of companies paying too much for the organizations they are acquiring. Declining equity prices are creating a disconnect between what owners want for their businesses and what operating companies are willing to pay, whether in rapidly declining stock or cash they borrow at escalating interest rates. Research shows that the last time there was such a disconnect between buyers and sellers was in 2001, the last time the economy went into hibernation. We may be looking at millions in over-valuation but the potential losses that may be incurred due to lack of cultural integration could be even costlier.
Independent studies by Watson Wyatt Research and the Vector Group, have linked the failure and or success of integration efforts as being directly relational to the attention paid to the culture of the impacted organizations - yet still HR and OD departments are frequently not involved in the initial investigation activities surrounding integration efforts.
We recommend that "Cultural Due Diligence" be conducted and integrated into the overall Due Diligence process.
So what exactly is Cultural Due Diligence? Cultural Due Diligence (CDD) is the process of investigating, assessing and defining the cultures of two or more distinct business units through a cultural assessment to discover areas of similarity and difference that will impact integration efforts and achievement of strategic objectives. It should be combined with regular Due Diligence processes in the case of M&A. The results should be used as a foundational tool for creating integration plans and a baseline for measuring organizational progress in the integration effort over time. This encourages engagement and ensures the organization is aligned and on-track with achieving strategic, human system integration objectives.
The CDD process should be conducted as early into a deal effort as possible. The process can also be used as a benchmarking tool throughout the integration effort to measure progress and confirm human systems are being aligned to business objectives correctly.
The Cultural Due Diligence process covers key cultural and organizational effectiveness domains including:
Leadership: vision, mission, values, business strategy development, leadership effectiveness and ethics Relationships: trust, collaboration, inter/intra group relationships, community and customers Communication: feedback, information sharing, employee trust in information Infrastructure: formal procedures, processes, systems, policies, structure and teams Involvement & Decision Making: authority levels, accountability, expectations and the decision making process Change Management: creativity, innovation, recognition, continuous learning and diversity Finance: perception of financial health and the role of the employee and the level of financial comprehension and impact on the business Cultural Descriptors: a list of predetermined values which can be customized to reflect the organization's values. General Climate: open-ended questions that capture the stories and suggestions from employees. The outcome is a Cultural Resume. This document shows the data results of a cultural diagnostic and lays out the unique organizational culture of each business unit into one clear message. The Cultural Resume helps the stakeholders decide the best approach going forward and creating measurable action plans for the formation of cultural integration efforts for those involved. Cultural Due Diligence can't fix an organization that is pursuing the wrong strategy. What it can do is cut down on informal practices, internal politics, lack of trust, resentment and just plain bad management that might sink the right strategy. Like any assessment, CDD is only as good as what you do with it, but we think the efforts involved are well worth it.
People are the backbone of any business and are at the heart of integration effort. We hear this all the time - "People are our most important asset"...really? Then why are financials reviewed every quarter, customer satisfaction surveys completed every quarter (or more frequently) and employee satisfaction surveys are conducted every 18 months, at best? So really, are people our most important asset?
The skills people have and their experience make up a significant portion of a company's value. By including and bringing people into the integration process you will get better information that will foster more engaged employees and better business results long-term.
Does Cultural Due Diligence Work? We believe so!
We worked with a large manufacturing company on integration efforts. The organization had made a strategic decision to combine its sales force and customer service organization. We began the assessment phase with a typical organizational chart review, physical location mapping and management styles evaluation. The differences between the two organizations were vast and did not match the printed policy manuals at all. The two functions were audited and we implemented the Cultural Due Diligence process.
The end result?
We successfully integrated the two functions under one management team and saved over $1,000,000 in waste per year. Two dozen redundancies and several mismanaged and outdated policies and procedures were eliminated. In the next two years, customer satisfaction rose by 30% and market share grew by over 20%. Most importantly, the effort lasted and outperformed objectives. We beat the odds!
If you are undergoing an integration effort, here are some helpful hints to keep in mind and improve your potential of success:
Involve your HR/OD department or an external consultant with an HR/OD background in the integration process from the beginning. Use an appreciative inquiry approach when examining the culture of business units. Focus on finding the best practices that support the achievement of objectives rather than parading areas of weakness. Use a validated assessment tool that collects both quantitative and qualitative data. Include culture as part of your due diligence process and be prepared to address the incongruencies between business units with action. Communicate...communicate...communicate! Keep employees in the loop about to the progress of the integration effort. Involve employees in the integration effort. Allocate dedicated time and resources for the project. Measure and report on project progress regularly. Communicate results and progress and seek input on areas of improvement on what you are doing. Share and celebrate successes! Excerpt from "Getting Your Shift Together, Making Sense of Organizational Culture and Change"More questions? Need further information on Cultural Due Diligence and how you can improve your integration project's potential of success? Contact EMERGE International at info@emergeinternational.com for more information or visit us on the web at www.emergeinternational.com.
About EMERGE International:We believe in creating healthy and productive work environments. In fact, since our inception in 1996, we've dedicated ourselves to it. At EMERGE International our focus is to ensure that our holistic approach and validated assessment tool, the Cultural Health Indicator™ (CHI) is accessible to the widest range or organizations possible. From self-service models to full-service consulting, we have a range of options to meet every project requirement that are on time, on budget, every time. EMERGE International is a WBENC certified woman-owned business.
About the Author
Debbie Maynard-Imboden, Vice President Sales & Marketing - EMERGE International