Whether they find their companies in the position of being acquired or their companies are the acquirers, chief learning officers have an important role to play in the success of mergers and acquisitions—even more so today than in the past. And though CLOs often hold additional executive titles with their own challenges (often leading the HR organization), they must devote time and attention to integration specifically influenced by the learning function. What frequent roadblocks to success do companies encounter while going through an acquisition? What can CLOs do to break down these barriers? What can you do to prepare the business for a looming merger or acquisition event?
In 2004, merger and acquisition (M&A) transactions for U.S. companies reached their highest mark since the record year of 2000, as measured by both quantity and value. (See Figure 1.) And although deal flow is down early in 2005, dollar value remains steady. As companies seek to grow market share, expand their technology footprint, improve their geographic reach and create economies of scale, M&A is still perceived by C-level executives and boards as an important option to enable corporate strategies. With relatively low interest rates still available, increased debt availability and growing availability of private and venture capital, it is safe to reason that consolidation through merger and acquisition will continue to thrive. This is not simply a large company or public company experience. In fact, the number of private company transactions jumped 24 percent in 2004 to more than 5,000 (nearly half of all transactions) and activity in mid-market-sized companies continues to increase.
Despite the increase in the number of deals, investors continue to be skeptical of mergers and acquisitions, perhaps because years of data on M&A success rates suggest that these transactions often fail to deliver on expected strategic and financial benefits.
Barriers to Success
It is a common misconception that financial integration and technology integration are the primary reasons for the failure of M&A transactions to reach their full potential. That’s not to suggest that they aren’t important, or that the CLO shouldn’t be thinking about these areas. However, “people issues” such as cultural fit, leadership and poor communication continue to top the list of barriers to success. The May/June 2004 survey conducted by the Economist Intelligence Unit on behalf of Accenture identifies M&A critical success factors as organizational culture and the company’s ability to change, and the role of management and leadership. A second study, the PricewaterhouseCoopers Management Barometer, identifies culture and management practices as a close second (to financials) as a major roadblock to successful value creation from M&A transactions. (See Figure 2.) Your own experience with these types of transactions may confirm the significant impact of people issues on success.
One company is dominant in every M&A transaction, even in a “merger of equals.” Poor communication on the part of the dominant company about the vision for the new entity, the value derived from the acquired company and the future of the employees wreaks havoc on the transaction. Change is naturally disruptive to business, and lack of communication leads to increased uncertainty, which can stymie progress on integration efforts. Many of the expected synergies that come from a merger are based on the contribution of intellectual capital and knowledge from the employees who come with the purchase. In a good job market, disruption and uncertainty both lead to high risk of employee flight.
When new organizations are created or a company is absorbed, the cultures involved evolve. Ideally, the new emerging culture takes on the best characteristics from both parties, but more often than not, little time is spent on the integration of dissimilar cultures. It is frequently the high-performance culture of the company being acquired that is one of its most valued, admired and differentiating qualities. This is especially true when large companies acquire smaller organizations that are usually seen as more adaptive and entrepreneurial and certainly not used to many of the constraints and politics that come with being part of a larger, more bureaucratic entity. Without attention, the prevailing culture will always win out, greatly increasing the potential of stifling the innovation and creativity admired in the acquisition target. This is especially problematic in knowledge-rich industries such as high-tech, life sciences, and professional and business services.
The failure of executive leadership to effectively focus on all aspects of the integration is often blamed, and rightly so, for failed or sub-par acquisitions. Management becomes insular in the pre-merger environment. There is significant focus on financials and on the message to investors and Wall Street. But the lack of availability and visibility to employees is obvious and only compounds the communication and culture-fit challenges faced by the new company—turning skittish and nervous employees into naysayers, when they could be molded into champions.
Making a Positive Impact
The contemporary CLO should take advantage of this tremendous opportunity to play a strategic role in making M&A activity successful. As the custodian for corporate learning and knowledge, you have a unique perspective on the business of M&A and likely a mandate already in place to address many of the roadblocks. Here are a few key areas:
- Clear communication: Crisp, consistent and frequent communication is perhaps the most important best practice to adopt when dealing with acquired companies. Often, this area is underserved and left to corporate communications or public relations professionals to manage. Employees can’t execute to a strategy that they don’t understand, or worse, that isn’t even communicated in the first place. The value and vision of the new company, or at least the express sharing of the dominant player’s view with new co-workers, can and should be articulated from the top and delivered through the learning organization. Information delivered in this way takes on a unique tone that is often perceived as more genuine, more deliberate and part of the culture, rather than a memo or e-mail from a single point of contact. Don’t let your current or new co-workers be distracted. Focus on communicating key information and connect with your counterpart to determine the best method for reaching people. Your corporate communication practices might be unfamiliar or less effective initially, so be sensitive to the use of existing technology and methods. Provide frequent and substantive updates to stay ahead of the rumor mill. Remain focused on fact and not speculation, and whenever possible, respond to rumor with truth.
- Embracing change: There is no better time for fundamental change than during the integration of two companies. Employees expect significant movement and tumult, yet executives are often too timid to act. The CLO should serve as the catalyst for change. With your broad view of the organization, you have a unique perspective on how the many parts fit together and which ones can benefit from some fine-tuning. Look for best practices from the acquired company, then validate and immediately propagate them using your existing mechanisms for distribution. If there are areas in your existing business that are weak, act rapidly to determine whether the company being acquired offers a better approach—and this includes your own learning organization.
- Creating functional teams: An unhealthy malaise can set in as employees react to change, and it is human nature to be concerned about one’s future as the combined business looks for synergy and redundancy. There is often significant productivity loss as employees search online job postings and professional recruiters who smell blood proactively try to pry away top performers. A common best practice for M&A integration is to create teams around specific functional areas. These are typically focused on meeting cost-synergy targets, as those targets are important drivers behind the value in the transaction. The CLO should take the lead on formulating his own team to address the more strategic learning and high-risk issues, such as effective methods for knowledge transfer and retention and quick integration of key learning areas, such as sales training, revenue recognition and customer service, where any lag in execution due to malaise or uncertainty can severely impact revenue targets.
- Leadership commitment: Commensurate with the size of the acquisition, the dominant organization should be prepared to commit significant resources not only from its executive ranks, but also from its middle management. These leaders will serve as champions of the combined firm’s vision and strategy and must act as motivators and honest brokers as new roles, tasks and organizational shape are defined. Today’s organizations are structured to empower leadership at all levels. The learning and human resources functions should be able to quickly identify managers with desirable characteristics, such as superior negotiation and motivational skills. These managers should be quickly trained on expected outcomes and issue handling before being deployed.
- Teaching culture: There is a lot of talk about forging a new corporate culture for combined companies, and there is certainly an element of that in each of the preceding paragraphs. However, the truth is that most transactions involve a dominant player, and it’s that culture that remains intact unless the acquired company continues autonomous operations. Think of it this way: Your task as CLO is to instantly ramp up 100, 1,000, 10,000 or however many new employees as rapidly and effectively as possible. This type of mass orientation is critical, and the curriculum should be tuned to the specific needs of the audience. Pay specific attention to including information about your own company heritage, vision and strategy—perhaps more so than you normally would. Rapidly incorporate information about the acquired company into your training modules. This gesture is more than veneer and can go a long way toward making new employees feel welcome. And don’t forget that learning is a two-way street. Ensure that your legacy employees are educated about their new colleagues and the value that the acquisition brings to the business.
With an understanding of some of the barriers to success and the ways in which CLOs and their organizations can make an impact, what proactive measures can you take to prepare to be the acquirer or acquired? A significant portion of pre-merger planning is tied to operational excellence, and you already have many of the initiatives in place that can help the business run more effectively.
The CLO should understand whether the company, as part of its strategy, views itself as a potential acquirer. Even if you lack a seat at the executive table, companies, particularly public ones, will make their growth and expansion strategies clear. Conduct what-if scenario planning. What if your company acquires an international business? What if your company acquires a company equal to its own size? How do those two different scenarios impact the learning organization, and what can you do to better prepare yourself? Identifying the key tasks, individuals and processes you would likely have to undertake will save significant time on the front end. Codify that plan, share it with your lieutenants and be certain to update it as the market or corporate situations change.
Ensure that job responsibilities are well documented and available to the organization. Even in like-minded companies, a senior network administrator in Company A will have different responsibilities than the same title in Company B. While this seems obvious, the solution is even more so: Document job responsibilities to the task and process level, not just the job description and required competencies. Having this information well organized beforehand will allow for a smoother integration of roles within the two companies, and may even lead to early identification of process improvements if done correctly.
Organize knowledge and information so they can be easily accessed and shared. The first challenge is to document corporate knowledge in a scalable and consistent manner. Structuring knowledge in the context of key business processes creates a more universal and intuitive entry point into the business and will make it easier to locate and understand regardless of differing semantics between organizations.
Churn is inevitable, regardless of acquisition. Learning and knowledge-sharing are the mandates of the CLO, and having a plan in place to capture and distribute expertise is key. This is not simply capturing anecdotes from subject-matter experts or creating communities of practice—both are terribly unstructured, and it is virtually impossible to apply any meaningful metrics. The real goal is to capture information about how best to perform specific tasks and procedures important to the business to a high degree of granularity and then make that available for people to learn from and adopt.
Although no two acquisitions look the same, a lot can be learned from looking at your peer group. Read, research and network with colleagues to understand how they prepare for and have dealt with mergers and acquisitions. Take those best practices and apply them to your own organization as part of your scenario planning process.
Make sure to select technology systems based on open standards that have the flexibility needed to address multiple needs of the business and that are scalable, so when the time comes to expand, it causes as little pain as possible. If you are making technology decisions based on the needs of your business today, there’s a good chance you are already driving in the fast lane on the bumpy road to obsolescence.
The Bottom Line
The merger and acquisition environment is hot once again, and its importance as a strategy for value creation and growth is clear. By anticipating common pitfalls and proactively planning for M&A transactions, CLOs can help their companies achieve the full value of their transactions. As the importance of corporate knowledge and learning continues to rise as a strategic issue, learning executives will find themselves in the unique position of being the experts and leaders in making the most complex part of integration—focused on the people—a success.
David Austin is president and COO of Contextware Inc. He can be reached at firstname.lastname@example.org.Filed under: Learning Delivery, Measurement, Technology