Integrity Managment And Cultural Due Diligence Ppt

HR Due Diligence in Acquiring a Business - Integration Management Visit hrmba.blogspot.com for more presentations, project reports, notes etc.

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Topics covered  Mergers and Acquisitions: Importance and Reasons for Failure  People related problems that led to Financial underperformance  Due Diligence  What to look for in Due Diligence  Why are people neglected during M&A ?  HR integration - Stages, challenges and Solution  Case Study – DaimlerChrysler

HR Due Diligence

Mergers & Acquisitions Mergers and acquisitions represent the coming together of companies for financial, market, technology and other considerations. In a merger, two companies come together and create a new entity. In an acquisition, one company buys another one and manages it consistent with the acquirer’s needs.

HR Due Diligence

Importance of Mergers & Acquisitions  Horizontal mergers for market dominance; economies of scale  Vertical mergers for channel control  Hybrid mergers for risk spreading, cost cutting, synergies, defensive drivers  Growth for world class leadership and global reach  Survival; sales maximization  Acquisition of cash, deferred taxes, and excess debt capacity  Move quickly and inexpensively  Flexibility; leverage  Adopt potentially disruptive technologies  Financial gain and personal power  Gaining a core competence to do more combinations HR Due Diligence

HR Due Diligence

When Mergers fail …

HR Due Diligence

Reasons for Failure  Expectations are unrealistic  Hastily constructed strategy, poor planning, unskilled execution  Failure/inability to unify behind a single macro message  Talent is lost or mismanaged  Power and politics are the driving forces, rather than productive objectives HR Due Diligence

Reasons for failure  Culture clashes between the 2 entities go unchecked  Transition management fails  The underestimation of transition costs  Defensive motivation  Focus of executives is distracted from the core business HR Due Diligence

Reasons for Financial underperformance Source/Study Cited Drivers of M&A Underperformance Merger Integration: Why the Soft • Compared to the sector index, share price performance was Issues Matter Most, Bain & Co, 5.1% ahead of average price in deals where management 2003 proactively addressed culture. • Compared to the sector index, shared price performance was -4.4% in deals where companies failed to address cultural issues. Success Factors in Acquisitions, PricewaterhouseCoopers, EBF, • Acquisitions that ought to have been successful according to 2001 business criteria failed because of neglect of the human factors involved. • Failure to tackle the people issues, such as retaining top talent and communicating effectively with the workforce, is one of the reasons why the majority of deals fail to meet expectations.

“Tying the Corporate KnotMerging companies with markedly different HR practices were Effects of Mergers and three times more likely to have significant productivity and Acquisitions”, American Mgmt turnover problems. HR Due Diligence Association, 1989

Reasons for Financial Underperformance

Source/Study

Cited Drivers of M&A Underperformance • 85% of respondents asserted that people problems were more "Merger Mania: Reshaping the likely to affect a merger's long term success than financial Telecom Industry," Rural problems. Telecommunications, 1997 The 2 top most reasons cited for the underperformance of mergers and acquisitions were

Acquisitions Horizons study, 1980s, cited in Price Pritchett, After the Merger: Managing the 1) management talent in the acquired company was not as Shockwaves deep as expected 2) key talent left the firm. Delivering the Benefits of Mergers and Acquisitions, Coopers & Lybrand,1996.

• 85% of mergers and acquisitions underperformed due to differing management attitudes and culture. • 80% of mergers and acquisitions underperformed due to a lack of integration and planning. • 45% of mergers and acquisitions underperformed as a result of poor management practices at the acquired company.

HR Due Diligence

The DNA of an Organization

HR Due Diligence

HR Due Diligence

What is Due Diligence  Pre-cursor to actual announcement of merger  Comprises of Cultural Due Diligence and HR Due Diligence

 Involves consideration of differences in the corporate culture of the companies and identifying issues critical to integration

HR Due Diligence

What is Due Diligence  Helps management plan necessary actions for resolving them before the merger is announced

 Wider the cultural gap, more difficult will be the merger and more crucial will be the diligence phase HR Due Diligence

Issues to watch out for Cultural and Talent Indicators Workforce Assessment Remuneration Employment Agreements & Legal Compliance Risks in Due Diligence HR Due Diligence

Cultural and Talent Indicators  Speak to key personnel about staff behavior.  Get feedback from key clients about services quality, staff attitude, reliability.  Get turnover data, compare it with industry standards and look for potential problems.  Get staff retention details  Identify the key talent needed to be retained.

HR Due Diligence

Workforce Assessment  Obtain headcount allocations for each category.  Is the organization structure efficient or flabby.  What is the headcount requirement of the merged organization for each job category.  Do a skills requirement study. For example: Technical qualifications for trade or technical organization. Soft skills for service oriented organization. HR Due Diligence

Remuneration  Critical, because large amount of time and money is expended.  Obtain remuneration data and compare with the labor market position for the industry.  Underpaid staff need to be brought to industry standards, not possible at one go  Overpaid staff need to be realigned sensitively.  Bonus schemes: Realign criteria for incentives in the new entity. HR Due Diligence

Employment Agreements & Legal Compliances  Check out for redundancy liabilities like transfers, leaves, trade unions, health & safety.  Do not overrate the value of complying with the law. It is important but not more than skill and behavior assessment.  Maintain a balance between time and efforts spent in alignment of people and skills versus drafting elaborate compliance procedures. HR Due Diligence

Major Risks in Due Diligence  Insufficient remuneration analysis could lead to loss of key personnel.  Minimal analysis of labor relations could ignore history of labor conflicts.  A new management team could be required if target company’s management team is not very forward looking or dynamic.  Target company’s management team could have troubles adjusted to constraining culture if it is more entrepreneurial than acquiring company. HR Due Diligence

Major Risks in Due Diligence  If target company has more organizational layers, trimming could be required and initially committed promise of not downsizing will be breached, leading to an atmosphere of mistrust.  If analysis of compensation practice is insufficient and target company has generous packages, there could be a post merger exodus of talent.  If target company’s management practices and culture is not analyzed adequately, the acquirer may be unprepared for the extent of effort required for the cultural integration exercise.

HR Due Diligence

HR Due Diligence

People issues are critical, yet neglected Possible reasons include:  The belief that they are too soft, and, therefore, hard to manage  Lack of awareness or consensus that people issues are critical  No spokesperson to articulate these issues  No model or framework that can serve as a tool to systematically understand and manage the people issues; and therefore  The focus of attention in M & A activity is on other activities such as finance, accounting, and manufacturing HR Due Diligence

HR Integration: Stages, Challenges and Solution  The experiences of companies in merger and acquisition activity suggest a model of M & A activity that has three stages: Stage 1: Pre-combination Stage 2: Combination - Integration of the partners Stage 3: Solidification and advancement - the new entity HR Due Diligence

Stage 1- Pre-Combination HR Issues

HR Implications and Actions

Identifying reasons for the M & A

Knowledge and understanding need to be disseminated

Forming M & A team/leader

Leadership needs to be in place

Searching for potential partners

Composition of team impacts success

Selecting a partner

Systematic and extensive pre-selection and selection are essential Planning for managing the process of the M Conducting thorough due diligence of all areas is vital and/or A Planning to learn from the process Cultural assessment Planning for combination minimizes problems later Creating practices for learning and knowledge transfer

HR Due Diligence

Stage 2: Combination: Integration of the Co. HR Issues

HR Implications and Actions

Selecting the integration manager

Selecting the appropriate candidate

Designing/implementing teams

Creating team design and selection are critical for transition and combination success

Creating the new structure/strategies/ leadership

Communicating is essential

Retaining key employees

Deciding on who stays and goes

Motivating the employees

Establishing a new culture, structure, and HR policies and practices is essential

Managing the change process Communicating to and involving stakeholders Deciding on the HR policies and practices

HR Due Diligence

What is Change Management  Structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.  The current definition of Change Management includes both organizational change management processes and individual change management models, which together are used to manage the people side of change.

HR Due Diligence

Change Management Styles Individual Change Management    

Unfreeze – Change – Refreeze Kubler-Ross Formula for change ADKAR

Organizational change management  Dynamic conservatism  The role of the management  The constructionist principle (reflection, advocacy, inquiry)  Scenario Planning  Theory U of Otto Scharmer

HR Due Diligence

Pitfalls of Poor Integration

 Productivity drops by 50%  Leadership attrition soars 47% within 3 years  Employee satisfaction drops 14%  90% of high-tech mergers fail to deliver expected increases  80% of employees begin to feel management cares more about financials than product quality or people

HR Due Diligence

Stage 3: Solidification and Assessment HR Issues

HR Implications and Actions

Solidifying leadership and staffing

Elective leadership and staffing of the new entity are essential

Assessing the new strategies and structures Assessing the new culture

Creating and evaluating a new structure Melding two cultures needs assessment revision

Assessing the new HR P & P

The concerns of all stakeholders need to be addressed and satisfied Assessing the concerns of stakeholders The new entity must learn

Revising as needed Learning from the process

HR Due Diligence

Role of HR Department in M&A activity  Research indicates that only 35% of senior HR executives are involved in M & A activities.  80% of combinations fail at the implementation stage as a result of the following factors  an inadequate road map  senior HR professionals brought in too little, too late;  senior HR professionals lacking in either/both business/global experience;  an inadequate skills base overall; and ultimately, failed organizational change HR Due Diligence

Major activities to be performed by HR  Developing key strategies for a company's M & A activities.  Managing the soft due diligence activity  Providing input into managing the process of change  Advising top management on the merged company’s new organizational structure HR Due Diligence

Major activities to be performed by HR Creating transition teams Overseeing the communications Managing the learning processes Re-casting the HR department itself HR Due Diligence

New roles for the HR leader  Partnership  Change Facilitator  Strategy Implementor  Strategy Formulator  Innovator  Collaborator HR Due Diligence

Identifying and developing new competencies of HR leader Business competencies Leadership competencies

Change and knowledge management competencies

Industry knowledge

Strategic analysis

Consulting and communicating

Competitor understanding

Managing cultural diversity

Group process facilitation

Financial understanding

Creator of learning culture

Global perspective/knowledge

Planning skills

Designing and working in flexible structure Partnering and parenting

Strategic visioning

Adaptability

Negotiating

Partner orientation

Learning facilitator

Network building

Multiple stakeholder sensitivity

Value shaper

HR alignment

Merger and acquisition knowledge

HR Due Diligence

HR Due Diligence

HR Due Diligence

Synergies were expected in different areas.  Complementary geographical markets  Unique Portfolio  Cost synergies in     

Purchasing Integration & Financial Services R&D Sales & Distribution Infrastructure Higher Sales

 Benchmarking each other and mutual learning processes  Lean ways for Daimler  Engineering skills for Chrysler HR Due Diligence

 The German part dominated the post-merger integration structure of the DaimlerChrysler AG.  Both companies prepared themselves for a merger.  Pre-merger preparations:    

First negotiations in 1995 PEOPLE: Chairmen, because of different expectations POWER: Chances at Daimler vs. Fears at Chrysler PURPOSE: maintain strength in technology vs. R&D investments and new markets

 The Integration Structure had a major German influence.  Common Board with 18 members (10:8 for Daimler - 2 nonautomotive businesses)  Real power base Integration Council  October 1999 there was a 2:1 majority for Daimler on the board  Absorption Mode by Daimler

HR Due Diligence

Post Merger Scenario  Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler.  The merged group reported a loss of 12 million Euros  Culture clash  Ideology Clash

HR Due Diligence

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The crucial point in the cultural differences was the Business Culture.

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National Culture influence e.g. attitudes to work, authority and equality. • Working late hours vs. Working on deadlines • Command lower-levels vs. Discuss with lower-levels

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Business Culture was what was critical, which was different in terms of organization structures, working styles, compensation schemes etc. • STORIES: Rich successful engineering heritage vs. Self-made upcoming company • SYMBOLS: Executive assistants vs. No convention, equality • POWER: Chairman vs. Charismatic Executives • ORGANIZATION: Hierarchic, bureaucratic Holding vs. Intuitive cross-functional • structure • CONTROL: Compensation schemes • ROUTINES & RITUALS: Late hours vs. Deadlines; formal vs. informal

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It evolved to the dominant German culture. • German Engineering vs. Cowboy Independence • Compromises instead of digital decision • Pick a spot in the middle

HR Due Diligence

 The revolutionary strategic change was managed by an interventional / directional approach.  REVOLUTION as style of strategic change.  Transformation  Big Bang.  Daimler tried an interventional approach although it was a directive managing style right from the beginning.  Intervention, Stallkamp as change agent  Fear of manipulation & resistance  Direction, Hold on  Crisis became obvious HR Due Diligence

Recommendation No announcement as “merger of equals”. Beware of national differences which can effect the business culture. Observing business cultures better and digital decision right from the beginning.

HR Due Diligence

In the long run… “It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine.” - Daniel Vasella, CEO,

Novartis

HR Due Diligence

HR +

= HR Rocks

Visit hrmba.blogspot.com for more presentations, project reports, notes etc. HR Due HR Diligence Rocks !!!

HR Due Diligence