The VectorView on Why a Dealmaker Really Oughta Wanna Know About Cultural Due Diligence (CDD)

June 1st, 2017   •   no comments   

On February 2nd, Vector Group Founding Partner Bob Carleton and I presented at the Association for Mergers & Acquisitions (AM&AA) Winter Conference on a topic of interest to Dealmakers in the middle market concerned with mergers and acquisitions. The title for our presentation was Beating the Odds: Building a Deal-Maker’s Credibility by Ensuring a Quickly Successful Deal with Legs for the Longer-Term.

Admittedly, the title was a bit long but we wanted to get a clear message across that dealmaker’s in the Middle Market “really oughta wanna” learn more about organizational or corporate culture and its effect on their deals. We always allude to the often-quoted statistic(s) that upwards of 90% (80% or 70%) of deals fail or never deliver on expected financial results. The lament around this statistic remains unimpeded despite the overwhelming evidence that the culprit of “culture clash” is totally preventable.

We began our session with the question of “What are the risks for you when you close a deal knowing that its long-term success could be in jeopardy?” We could hear a perceptible sigh from many in the audience as they pondered that question with its range of implications. We contend that a dealmaker who knows about organizational culture and takes a preventative course of action to reduce the inevitability of what we refer to as dysfunctional culture clash, will build credibility around doing deals that work.

In the overview of our session we focused on:

• The M&A failure rate and impediments to success
• Demystifying “culture”
• The Criticality of engaging in Cultural Due Diligence (CDD)
• How we can help Dealmakers enable their clients to avoid the biggest cause of failure

We then discussed M&A trends from Deloitte’s M&A Trends End-of-Year Report (2016):

• 75 percent of all respondents expect deal activity to increase
• 64 percent of corporate survey respondents expect deal size to increase
• Respondents consider effective integration planning as the number one factor in ensuring deal success

With all that good news comes a dose of reality:

• 75% of all respondents said that their deals fell short of expectations
• 83% said that the biggest impediment to deal success was improper target identification
• 88% pointed to insufficient due diligence process
• 78% of respondents said that deal failure was due to failure to effectively integrate

What is “Culture Clash?”

As I blogged last year in a post about our M&A Roadmap for Success, we define culture clash as disagreement between people in the merged or acquired organizations concerning how to go about engaging in and managing the business. These types of clashes consume increasing amounts of energy and time to get things done and turn the focus of significant parts of the organization from doing the business to arguing about how it should or should not be done. Internal issues/arguments consume ever more resources leaving less and less focused upon the customer and performing the work. (Craig, 2015)

These disagreements leading to culture clash encompass differences in opinions and assumptions as to the “proper” manner and behaviors involved in pursuing the business plan and when two (or more) groups have different beliefs about:

• What is important
• What should be measured
• How to make decisions
• How to supervise, manage and lead
• How and when to communicate
• Who the customer is and how to best serve the customer

These are all critical activities and ways of doing business. Disagreements happen because organizational members (people) care. Most care deeply about doing a good job and invest themselves in doing the best they can to work with others to achieve organizational results however defined.

We say this often but in our 30+ years of dealing with M&A’s globally we have yet to see two organizational cultures that cannot successfully align and integrate. M&A failure due to culture clash is just another way of describing management negligence, arrogance, ignorance or some mix of the three. We gain traction each time we say that to new audiences. In short, dysfunctional culture clash need never occur.

Making the Deal Work in the Long-Term

Improving the odds for success centers on just a few crucial things including taking a systems view of the organization, figuring out where alignment or lack of alignment exists among the people involved in the integration and developing a robust, targeted post-merger/alliance “people” integration plan which reflects behavioral expectations. That is the essence of culture: behavior.

Back to the Dealmakers, why should a Dealmaker care about any of this? We know that many Dealmakers simply care about closing the deal and moving on to the next deal. We also know that some Dealmakers care about ensuring successful deals that last. This not only enhances their credibility but boosts their reputation for being “serially successful” in putting deals together and ultimately, builds better relationships with clients for repeat business.

Admittedly, we come to the party with different perspectives, different knowledge, different talents, skills, experience and language. We talk in terms of collective behavior, living systems, interventions, qualitative and quantitative data gathering, cultural assessment, patterns, alignment, integration, norms and the human side of change.

When I attended my first AM&AA Summer Conference in Chicago last year, I served on a panel but also attended several sessions; I told many that I thought I landed on another planet. Speakers regaled those of us in the audience with terms like restrained multiples, aggregates, re-caps, largely agnostic, verticals, dry powder, pitch activities and teasers. I had no clue…. still don’t.

We explained “culture as a system” to our audience by showing several slides starting with one individual having knowledge and skills entering an organization then moving to some sort of input/output process and getting paid. The slides continued demonstrating how that individual worked with groups of people and those groups of people worked with other groups. Then several groups working within the four walls of an organization had to deal with the market, customers, stakeholders and shareholders. Add in more factors like products, government, management, technology, economy and the rest, real complexity lives within the four walls of that one organization. Now combine that with another organization in a merger or acquisition and what will we have?

Keep in mind that an organization is a complex system of individuals, jobs, processes, functions and management. When we look at organizational performance or results, we look at how well these interdependent components align and work toward clearly specified results. We now have complexity that we say is not complicated.

Getting back to the perceived language barrier, we could make things worse by quoting Edgar Schein (an expert and a pioneer in our field) who defines culture as a pattern of basic assumptions – invented, discovered or developed by a given group as it learns to cope with its problems of external adaptation and internal integration – that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems or we could simply describe it as W. Warner Burke and George Litwin (two other experts in our field) as:

The way we do things around here.

When it comes to managing the organizational culture, it is not about an identifiable subsystem—it is a summation of the total system. Cultural dynamics relate to the size of the organization. Behaviors cluster around organizations of less than 300 employees, 300 to 1000 employees and over 1000 employees. Formal and informal management and leadership are central. Effectively managing organizational culture requires abnormally rich communication flowing both downwards and upwards; this usually results in enhanced relations between management and workers.

In Ernst & Young’s Complete Management Guide to Mergers and Acquisitions, they pose four key questions for performing due diligence that the Dealmaker should consider:

1. Does the company truly fit?
2. Is it indeed as attractive as it initially appeared to be?
3. Can we manage the company successfully and achieve the benefits we identified?
4. Will the company’s managers (and people) support our objectives?

Conducting the Cultural Due Diligence

The purpose of Cultural Due Diligence or CDD is the gathering of the basic data to enable the organization to effectively lead and manage the human aspects of the company following a merger or acquisition. The outcome provides the foundation for an intervention into any dysfunctional aspects of organizational behavior that lead to conflict either open or hidden to any degree that prevents the new organization from delivering results (financial or otherwise). Our take is that the process is complex but most definitely not complicated and very measurable.

CDD is not a flawless or perfect process; there are inherent issues and challenges depending on how a consultant (the generic for an adviser, an expert or a specialist) conducts the cultural assessment. Challenges could include limited definitions of culture or the use of attributional culture models. Each organization is unique with subtle nuances and distinctive characteristics; forcing a culture into one quadrant of a four-box model, for example, does not work.

Due to its systemic nature, culture cannot be dealt with in isolation and non-system approaches will not work either. Adding the rigors of behavioral research brings another dimension of possibly flawed data leading to flawed decisions or outcomes. The caveat here is that the consultant must be highly skilled in interviewing and facilitation techniques while maintaining a totally neutral position of inquiry. Additionally, experience conducting social research into group dynamics and value systems is extremely helpful.

Other issues and outcomes include highlighting the typical “gap” between executive level understanding and awareness of issues and the reality at the front line. The very nature of the data brings the “airing of dirty laundry” perspective along with legal limitations during the search process, deposition possibilities in contested acquisitions and uncomfortable data for executives.

Understandably, questions rise as to when to conduct the CDD. In a word? Anytime. This can be when considering an acquisition strategy, when selecting a target company, after signing the Letter of Intent, in the post-merger or post-acquisition or even when interceding in full-blown culture clash.

CDD Deliverables

Concerns about costs and time involvement should not be a showstopper. Drivers for time and cost in a CDD depend on the numbers and type of people involved and the number of locations. Data gathering and report preparation should take no more than 30 business days, and usually less, in most instances. A quality CDD requires unfettered access to a cross section of functions and levels across both organizations. Implementation of the plan can, and often should, be done with the combined organization’s management and internal resources

From our perspective, a minimalist CDD effort brings the following:

• Narrative description of two or more organizational cultures providing context for the alignment activities
• Prioritized list of misalignments, and particularly “value laden” misalignments, between the cultures
• Basic intervention/alignment plan including details of the first 30 days and general plan for the first year.
• A written report [This may or may not be advisable}

What Our CDD Will Do for the Dealmaker

Our CDD provides an actionable report that enables the Dealmaker’s client to effectively and successfully align and integrate both organizations. The report includes description of both cultures and pinpoints areas of alignment and non-alignment offering a detailed outline of what needs to happen to align/integrate people quickly and successfully. We can also provide tools, approaches, methodologies, tactics for the Dealmaker’s resources or the Dealmaker can contract with us to do the work. This allows the Dealmaker to focus on the “rest” of the business and not worry about the “people issues.”

The people aspects of any potential deal should not be considered a “go, no go” point in the decision-making. Cultural Due Diligence (CDD) and an alignment intervention can be done as part of the deal closing or at any time later should problems arise. Again, our experience says it is never too late to intervene and achieve highly successful people alignment.

Remember just three things. The Dealmaker can build credibility by ensuring the success of deals with the people side. There is no reason that “culture clash” should spoil a deal. We have abundant tools, tactics and methods to help the Dealmaker’s clients successfully integrate and the resources to support and help as necessary.

We invite you to contact us at info@vectorgroupinc.com for a free copy of our M&A Roadmap for Success (This is a process tool that provides a guide from Target Identification to the first 30 days and the first year of alignment/integration.)

Gary W. Craig is Managing Partner for Vector Group, Inc., a global consulting firm that helps organizations identify and resolve priority business issues. Vector Group specializes in systematic organizational diagnosis and interventions to ensure that corporate strategy, culture, and infrastructure align to achieve breakthrough success. Contact him at gcraig@vectorgroupinc.com for further information. Please visit our website at http://www.vectorgroupinc.com.

 

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