Making mergers meaningful

Mergers and acquisitions represent one of the greatest challenges a human resources department can face. But, as Neil Davey discovers, with proper planning and preparation, integration needn't be such a headache.

Mergers and acquisitions are part and parcel of big business, and billion dollar deals – such as the recent merger between Sears and Kmart – regularly dominate the business pages. Yet research by Bain & Company suggests that around 70 percent of mergers fail to create meaningful shareholder value, often because the combined organization has been unable to integrate quickly and achieve the rapid capture of identified synergies. M&As have huge internal ramifications for staff and it is no exaggeration to say that many mergers and acquisitions live or die according to the integrative actions of the human resources teams.

But M&As carry quite a burden for HR. As well as getting its own house in order – integrating HR programs, reconciling redundant HR functions and working through two service and technology strategies – it must also support and help other departments through their own individual transitions. As such, while the integration of the HR function, its systems and people programs is integral to a successful merger, it is often in danger of being neglected during the whirlwind of M&A activity. HR is there to help everybody else, but who is there to help HR?

David Billingham, an Associate Partner in the Atos Consulting People & Change practice, has extensive experience of leading HR teams through mergers and acquisitions as well as in building the HR capability needed to successfully support businesses going through change. Balancing departmental demands during a merger, he suggests, is a major challenge. “HR is faced with the twin challenges of determining the best approach to managing its own approach to post-merger service delivery at the same time as providing support to the integration process, particularly during the critical first 100-day period,” Billingham explains. “This is a period when the capability and capacity of the HR function are most severely tested, yet all of the evidence suggests that insufficient planning goes into either.”

Outside of its own department, HR teams are faced with a myriad of merger-related issues to address. The two companies are likely to have different work styles and cultures that must be respected while developing a new set of values for the new company. Employee terms and conditions are also likely to be different in each business and the process of harmonizing terms and conditions needs to be fair and equitable for all staff. Then there are numerous matters pertaining to pay, such as paydays and bonus-related issues.

Elsewhere, uncertainty is often rife about the way forward during any merger. “There will almost inevitably be employee turnover associated with a merger,” suggests Daniel Naftalin, a Partner of the Employment Team at law firm Mishcon de Rey. “It could be because of duplication or underperformance, because the merger is the catalyst for employees who were thinking of leaving anyway to depart, or because parts of the business might be divested. This is likely to lead to a deep sense of insecurity that needs to be appreciated and properly managed. Also, because of the many merger-related issues that need to be dealt with by HR, there can be a neglect of the many day-to-day HR-related issues with all the associated problems that will arise from that.”

Window of time
For this reason, HR teams need to get their own department in order as quickly as possible to ensure that they can offer optimal assistance to other departments. “The most compelling issue is to do it very quickly – probably in advance of the rest of the organization,” stresses Brett Walsh, a Partner in consulting at Deloitte. “When a merger or acquisition is unveiled, it is very important to announce the top team quickly to create some clarity for the rest of the organization. But HR also needs to be involved in that process, announcing who is going to be leading HR, because they need to sort out their own backyard to be able to support the rest of the organization. When an acquisition or merger is announced, the one function that really has its work cut out – possibly for the next three months – is HR. So announcing the top person is as important at that stage as announcing the major business leaders and top executive board roles, if only because they need to be getting on with a large amount of work and a lack of clarity amongst their own group will impede rapid progress for the rest of the organization.”

Clearly, thinking ahead is key. “The more work that can be done in advance of the merger being completed, the better – speed is important,” agrees Nigel Perks, Group HR director of LogicaCMG. “There is a window of time following a merger (about three to six months) when staff expect to see that progress is being made. Key priorities from the outset should include clarity of communication, establishing a common framework, ensuring openness and equality, building a new set of values for the company, and identifying key individuals in the senior management and HR team.

“The next stage is to put an agreed central plan in place to provide top-level milestones and activities. This should be underpinned by regional plans dealing with the detail of each location. For a multinational company, this ensures that integration is not limited by the speed of the slowest or most complex country, yet provides a common framework. It’s important to deliver clear, consistent multi-channel communications throughout the merger process.”

To ensure this consistent communication, organizations should employ not only their traditional channels, such as newsletters and meetings, but also the newer channels such as intranet and e-mail. IT systems such as these present their own set of challenges in an impending merger, however. “It is very unusual that the companies have the same platform, so a decision will need to be taken within the first 100 days as to which platform is going to be scaled,” advises Walsh. “However, you shouldn’t embark on a new technology implementation immediately after the acquisition. If technology can’t be scaled, you need to run with parallel systems until you decide what the right platform is; if it does require an upgrade, you should try and defer that until at least two or three months after the acquisition so that you can overcome some of the integration issues first. But technology becomes very helpful when a decision is made to scale up one of the companies’ platforms and it is able to absorb the information and data from the other platform, and indeed technology can be used to upgrade the overall capability of HR.”

Indeed, irrespective of the problems associated with technologies during M&As, IT can also often provide solutions. “Technology provides a critical role by providing a common set of information and processes for the new organization,” says Perks. “At LogicaCMG, we redesigned our website so that on day one of the new company there was a video message from our CEO as well as an update on progress. Technology also enabled us to establish a self-service framework in the post integration phase of our merger. This ensured that we made the new career architecture, performance management system and other HR processes such as benefit management available to all staff.”

“Technology remains a key enabler,” agrees Billingham. “Common technology platforms can and do provide a real bridge between different operating environments as well a providing a basis for managing integration. For example, technology now enables organizations to quickly deploy flexible benefits arrangements that can provide a powerful vehicle for integrating the terms and conditions of differing groups quickly and cost-effectively.”

Business process outsourcing
Nevertheless, despite IT assistance, many organizations recognize that the integration of two businesses is not something their own organization has the capacity to handle – and, as such, many firms frequently look for outside assistance. In many cases, instead of attempting to merge two separate HR departments into one unit, they will outsource HR administration so that a new HR organization evolves to serve the merged firm. In such a business process outsourcing arrangement, the integrated delivery and operation of several HR processes is outsourced to a service provider, often encompassing such areas as payroll, benefits, recruitment and selection, training and development, performance management and information management. Estimates by firms such as Hewitt Associates suggest that business process outsourcing in an M&A situation can immediately reduce an organization’s HR administration costs by 15-30 percent while also minimizing execution risk.

“Outsourcing HR administrative processes such as benefits management and payroll means that you can concentrate on the strategic elements of managing the merger,” agrees Perks. “In general, most CEOs and CFOs want HR to focus on activities that make the organization more competitive. Yet HR departments are bogged down by organizational clutter. HR outsourcing provides immediate access to best-in-class technology and means that administrative processes are handled by a domain expert at a lower cost. Companies find that outsourcing processes can help HR to concentrate on more strategic issues such as human capital skills development, team building and employee recognition. They also find they build greater employee satisfaction through better service – self-service has been found to help reduce absenteeism by 18 percent, for example.”

Walsh, however, suggests that as with a technology integration undertaking, the HR team should not consider outsourcing immediately after an acquisition or merger due to the risk of getting fatally sidetracked from the main objective. “It is too much of a distraction for the HR function, because it is almost as large an issue to manage as the acquisition itself,” he explains. “It would just be too much given that outsourcing is quite labor-intensive for the HR function. You need to ensure you manage the integration on behalf of the combined organizations and get it to a point of ‘business as usual’ after around 100-200 days. And it only really begins to settle down after approximately 200 days, on average. Then, certainly, you should have an organizational structure within HR that is understood, an understanding of the platforms that you are operating on and of the people and the technology that you have got. Then you can start making decisions about whether you want shared services or outsourced capabilities.”

Currently, over 40 percent of mergers and acquisitions fail to reach their bottom line improvement objectives and do not deliver the business benefits they were targeted to accomplish, according to estimates by Fairplace. If the HR team takes its eye off the ball then the chances of their project being one of that 40 percent will rise significantly. The resounding expert opinion is that while HR teams carry an enormous burden during a merger or acquisition, appropriate focus, preparation, technology application and organization mean an HR department can not only successfully preside over its own transition period, but also support the transition of the entire business. “HR comes under a lot of stress during this time,” concludes Walsh. “It is a mammoth project to be able to support the integration of two organizations. But they have also got to overcome their own concerns and get their own house in order very quickly to get it up and running. Ultimately, HR must be a beacon for the rest of the organization.”

In practice
In December 2002, Logica and CMG completed a merger that created one of the largest IT services companies in the world. Nigel Perks, Group HR director of LogicaCMG, details his company’s merger and the demands on his HR team through the process.

“Logica and CMG competed for business head-to-head and both prided themselves on the quality of their highly skilled, well qualified software development professionals, consultants and analysts. There were already synergies in place that would help to achieve a successful merger. The merger presented an opportunity to undertake an objective review of HR policy and services across the newly created business, and establish best practice. More importantly, it provided a chance to implement HR initiatives that would enable motivational and productive working environments across all operations, regardless of location.

The first decision to make was around leadership of the HR element of the M&A program. Obviously there were two HR directors in the new company and Ian Taylor (from CMG) was appointed HR director of LogicaCMG. This allowed me to shadow Ian for a year until his retirement and my promotion into the role (an approach that has led to our current succession planning strategy). We also established a small group that would develop an overall plan and set of policies, not just for the merger but for the company moving forward. Before communicating any new processes or procedures we undertook a rebranding exercise to create a common identity and establish a way to embody the principles on which LogicaCMG’s success would rest.

Building on the strengths of both Logica and CMG, we established a new set of principles and values. These would be used to help existing employees as well as new joiners to assimilate into the new company and understand our mission, our values, the HR support services and initiatives. We were particularly sensitive to the risks associated with the merger. These included the risk of an ‘us and them’ culture, the risk of losing good people if we didn’t communicate plans quickly enough and the risk of not managing communications properly. Our CEO Martin Read was involved from the beginning, and provided a video briefing together with Cor Stutterheim, the new company chairman. This communicated their commitment to the future as well as expressing pride in the past.

We prepared communications tool kits for managers and supported them with an internet site that was up and running from day one. We identified the key managers/champions across the business who would communicate the changes in HR policy at a local level. The tool kits also meant that the HR team had space and time to get on with strategy and devise the next tranche of communications. Every employee was clear about who to ask about what was happening and what would happen next. During this time we ran a series of employee surveys to gauge sentiment and morale. The findings fed into the development of Pathways, a new career architecture matrix that includes coaching and mentoring program. This formed the basis of the Performance Management System that allows individuals to manage their own skills and training program.

One of the boldest moves was to appoint one of its top MDs as director of coaching. With the support of HR and the board, an approach to coaching was taken that was designed to deliver benefits to the bottom line. Using a newly developed competency framework future leaders were selected for the coaching program. Using professional, accredited external coaches meant we were able to get to the hearts as well as the minds of individuals and create goal-oriented plans that would not just move them onto new levels of competency, but would also help the business move forward.

Today LogicaCMG employs around 21,000 people across 34 countries and delivers IT management, consultancy, system integration and outsourcing services to customers in industries such as telecoms, transport, utilities and financial services as well as the public sector.”

Managing change
Cindy Mahoney, Head of Talent Management at Fairplace, highlights the most important areas of support an HR team should provide through times of change.

• It is important for everyone in the business to know what it is the acquisition is looking to achieve. Do they want to buy the brand, the product or the customer book? This will ensure everyone is aware of what needs to be changed and what needs to be left untouched.
• It is important for the senior leadership team to communicate where the acquisition fits in with the business vision.
• It is vital to match the pace of change and get the pace right. HRs need to engender a culture that is fast-paced and action orientated.
• Integrate talent quickly as a matter of priority. If talented people are undervalued or not engaged, they are more likely to leave a business quickly. It is vital to network with talent in acquiring organizations. Employees must feel valued and their services needed within the business.
• Businesses need to ensure handling acquisitions is within their HRs skill-set. If not the HR team need to be supported and developed to enable them to do a good job.

Deals derailed
Bain & Company examined over 50 case studies, analyzed 15 years of M&A data and surveyed 250 CEOs and senior executives about real-world successes and failures. It found that the top three reasons deals derailed were:

• Ignored potential integration challenges (67 percent)
• Overestimated synergies (66 percent)
• Problems integrating management teams and/or retaining key managers (61 percent)