How to address Culture in Mergers & Acquisitions Integration
We recently learned that the biopharma deal-making forecast is expected to remain strong in 2020, according to JP Morgan’s annual industry kickoff.
One critical aspect of merging organizations consistently receives far less attention, yet it can be the most significant enabler of deal-making success. That aspect is culture, typically described as the shared values, beliefs and hidden behaviors that determine true reality of how tasks are accomplished.
The data is conclusive and has been around for decades; culture impacts organizational performance. John Kotter and James Heskett provided the first comprehensive study of how the culture of a corporation powerfully influences its economic performance, and it can manifest in both healthy and unhealthy ways.
Larry Senn and Jim Hart describe a great metaphor describing the phenomenon of unhealthy organizational habits in their book, Winning Teams--Winning Cultures: resisting change and “chewing up” improvement processes and initiatives is called “the jaws of culture.” These two organizational culture pioneers did not start out this way. They started by building a process improvement consultancy, driving change initiatives, including merger integration, working heavily with the Fortune 500. They realized, over time, that an organization’s personality or character, particularly dysfunctional organizational habits, could easily stall their efforts.
In Mergers & Acquisitions (M&A) work specifically, these multi-decade experts found that “many acquisitions that looked very promising from a strategic or financial viewpoint in the pre-merger phase fall apart in the implementation phase” due to these cultural barriers. Cultural incompatibility is the largest cause of 1) poor merger performance, 2) departure of key executives, and 3) time-consuming conflicts when trying to integrate organizations.”
I do not believe leaders and deal-makers need more convincing that cultural factors impact corporate performance. In fact, I am confident that leaders and deal-makers actually know this intuitively, having lived the lessons of experience in M&A integrations that have not lived up to their potential, where progress was sluggish, and yet they cannot quite put their finger on the culprit. Usually, it is process improvements and change initiatives, which take longer, cost more, and deliver less than anticipated. For example, a key sign of culture malfunction is when major restructuring somehow does not solve turf issues.
So, why does culture get so little attention when we know it matters? Let’s unpack a few of these reasons, and suggest the path forward:
We need to make culture far more tangible: in a world accustomed to specific financial and synergy targets, culture can be a particularly amorphous concept
There are assessment methods, tools and a roadmap: when people generally understand why culture matters, they don’t know what to do about it
Although difficult, culture can be shaped: people don’t even know IF they can do anything about it
As one of my favorite leadership gurus of all time, Warren Bennis, once said, “Culture is much like the weather - everyone talks about it with the assumption that nothing can be done about it.” Fortunately, organizational culture is not quite so capricious. We are capable of charting a course through rain, sleet, snow and fair weather if we can maintain our sense of direction, understanding the values and behaviors that lie at the core of our organizations.
How do we begin to chart this course?
Most importantly, we must make this amorphous concept of culture more tangible. There are two levels of culture operating in a workplace - the visible and the invisible; this is why culture descriptions sometimes use the image of an iceberg, with the majority of the concept hidden underneath the surface. The visible portion includes behaviors and metrics, while the invisible is about the underlying values, historical assumptions, deep-seated beliefs, and engrained patterns of thinking. The visible factors are far easier to change, and the invisible factors are difficult, but not impossible, to change in order to truly shape healthy, high-performing culture.
When transformation efforts stall, it is an aspect of the invisible that has gone unchecked and undiagnosed. Too many organizations have learned this the hard way by moving forward without an in-depth understanding of the factors below the water, allowing dysfunctional habits to grow.
Let’s discuss an example: Confident that both cultures have been addressed (visible elements on the surface), Company A launches post-merger change initiatives with resolve. Managers are trained. There is modest progress, touts of synergy, and a declaration of victory after the initial integration “rollout.” Then, the unexplainable occurs - momentum begins to slide and implementation targets falter due to unhealthy organizational habits.
Some of the most dysfunctional “invisible” factors included:
· Internal competition between business units - “we/they” attitudes, judgment, lack of respect
· Entitlement mindset and lack of accountability - exposed in excessive blaming or finger-pointing
· Beliefs in being overly polite and conflict avoidance, which lead to hidden agendas and passive-aggressive tendencies
· Overly hierarchical or bureaucratic styles
· Lack of agility or adaptability
These examples of Senn and Hart’s “jaws of culture” phenomenon can destroy change efforts through an organization. Do any of these sound painfully familiar when you think about stalled post-merger integration efforts? Clearly, assessment of cultures in an M&A context must cut deeply enough to reach these invisible and tougher “elephant in the room” elements.
In biopharma’s deal-making environment, it is relatively easy to imagine potential culture clash beyond the factors discussed above. Given strong regulatory requirements, large pharma organizations understandably have a culture which operates with controls, defined processes, and a high degree of discipline. They value order, precision, stability, and they are strong at compliance, obviously critical to success. Cultural psychologist Michele Gelfand calls this a “tight” culture. Strengths also bring limitations, such as less openness to change, and a tendency to impose standards which may stifle innovation. The very qualities they find so appealing in smaller biotechs are necessary to replenish their therapeutic product pipelines.
On the other end of the spectrum, given enormous pressure to innovate, smaller biotechs being acquired are typically more empowering of their employees, have an appetite for risk, and thrive on change. Gelfand calls this a “loose” culture. This culture values autonomy and collaboration over hierarchy, but may lack process discipline, decision rigor and reliability.
I worked at one of the world’s largest biotech companies, first supporting Clinical Development and later working with the Commercial team. There was genuine distaste for “standardization” when we began to attract “big pharma” hires. We knew we needed to become more operationally managed, yet we were quite concerned it would kill the fast, constantly-changing, easygoing, informal, collaborative culture. At the same time, the “input from everyone” style was stifling our ability to make decisions and hold people accountable.
Neither end of the “tight” - “loose” culture continuum is ideal. Simply put, awareness of the continuum is required to transparently determine the right blend of values and behaviors that suit what the business is trying to achieve.
As a necessary first step, before the deal is closed, agendas should include a discussion to informally and simply diagnose culture. Ask Gelfand’s simple, yet profound, diagnostic question to each organization, or within each division: “Is your clinical development group[‘s culture] tight or loose?” Analyze insights from both discussions to map out cultural differences. As described, there is no best culture. However, you can then navigate the deal with a full perspective and fully appreciate Gelfand’s notion that successful negotiation of culture preferences will be a factor in deal success. Such efforts before the deal is closed can yield valuable insights to inform likely employee reaction on both sides, support key messaging, and influence key player selection.
Multiple culture-assessment methodologies and tools are available today which support robust management discussion to comprehensively diagnose and measure culture. Post-merger integration efforts can then transparently build a plan to understand the differences, address critical gaps, and co-define healthy values and behaviors for the companies to win together. The most important aspect of this successful environment is senior leadership in agreement across the board. This may take some self-examination and engagement from that senior leadership, but with the right assessment and outline of the post-merger culture, every stakeholder in the company, large and small, can be ready and excited for the merger’s results.