Cross-border integration: the human factor (Corporate Dealmaker)

Cross-border integration: the human factor

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Human resource issues are always a key consideration in mergers and acquisitions, and the more dissimilar the combining companies, the more those issues tend to matter. Now, with 2006 shaping up as a banner year for major cross-border acquisitions, HR concerns are coming to dominate a large number of already far-reaching post-merger integration agendas.

You've noticed the headline deals, such as the pending combination of Alcatel SA with Lucent Technologies Inc. and that of Arcelor SA with Mittal Steel Co. NV. But there's much more going on. In the first half of this year, cross-border deals accounted for 36% of M&A activity, according to Dealogic, which also reports that for the same period, there were more than 2,700 cross-border deals involving European companies. An unprecedented number of firms are struggling to integrate into single efficient organizations thousands of employees from countries with varying languages and customs, not to mention labor laws. According to our research, by far the most common reason for failure of post-merger integration, or PMI, is lack of sufficient attention to human resources issues.

All companies have multiple cultures and differing goals: The manufacturing culture in a global U.S. company will differ from the R&D culture in the same company. When you overlay these in-house differences with a variety of nationalities and corporate styles, plus a number of past acquisitions that have put their individual stamps on the culture, it becomes all the more clear that the only way to bring people together is to reinforce, clearly and often, what the common culture and company goals are to be. A simple test: If midlevel managers can't articulate the merger rationale and value drivers in crisp, unambiguous language, you have a huge problem, because the managers are the ones who must make the deal work.

In fact, the integration process itself is a great opportunity to model the ways in which the combined company cultures can work together. Consider the fact that it takes about as many man-hours to carry out a large global PMI as it does to build 15 Airbus A380s. The intense work period is the perfect time and setting to model the kind of decision making and delegation of responsibility that the acquirer wants to instill in the combined companies. A large banking client used this strategy when it acquired another company and faced a huge cross-border PMI. The acquirer's own company was one in which accountability was highly valued, so it went out of its way to instill that value in the minds of the integration team leaders who made it operational throughout the PMI process. In the rest of this article, we look at five aspects of a cross-border PMI in which human resources issues are crucial to the success of the effort.

Appointing executives and managers

Before -- or immediately after -- the acquisition, the acquiring group must assess all of the top executives in the company it seeks to acquire and identify the people it wants to retain. Hiring decisions can be extremely subjective, but in a cross-border PMI involving an unfamiliar culture, going by intuition can be particularly risky. To be sure, many American executives would claim they need only a five-minute interview and a two-minute résumé scan to get a good sense of the abilities of another American. But few would feel equally as competent if asked to assess the potential of a Chinese executive.

Choosing the executive team is, of course, the most delicate step in the integration process. It will help to know early on how the selection will be handled -- and that will depend on the nature of the PMI. We have identified three kinds of PMIs according to degree of change to be instilled and the relationship of the partners (see table, page 38). In a "tuck-in" PMI where the acquirer's organizational models will prevail, new executives can and should be chosen quickly. When the merger involves partners of equal power (and little change in operating models) or there is to be a total transformation of both entities (high amount of change), then a more systematic assessment of executives is called for, with the objective of retaining the best from the cultures of both companies.

To further complicate the task, many large mergers have elements of all three types of integration. In a recent cross-border deal with a U.S. parent, the G&A functions were "absorbed" to save costs, the R&D function was "merged" to benefit from both capability sets, and the sales forces were "transformed" to enhance the go-to-market strategies of the much larger organization. Therefore, the executive selection approach varied across the company.

Of course, appointing executives is much more difficult when working across several cultures. We've found that a management audit can be useful in helping foreign acquirers identify the people in the target who are creating the most value. Audits can also spot informal networks and the people who know how to use them.

A Latin American company we worked with employed an audit when it acquired a European firm and had to assess the top executives, who were in various countries throughout Europe. It hired an outside executive search firm familiar with the corporate and national cultures of the acquired company, which interviewed and assessed the top 70 executives and made recommendations. The PMI team then used these recommendations as one of its key assessment tools. There was also a side benefit to those interviews: The executives who had been interviewed felt more confident with the process and their comfort facilitated the dialogue with the company's top management when it came time for the final selection. In fact, the services of an external assessment firm are probably more useful when there is an air of mistrust or hostility between companies in a merger than in situations in which trust is high.

Talent retention

The overriding goal of a post-merger integration is to minimize the disruptive effect of the integration process on the business. Tasks need to be segregated from the core business, and the PMI should have its own organization, responsible executives and faster-than-normal governance and decision-making processes. That means several talented executives will be distracted from their day-to-day responsibilities while they dedicate themselves to the integration. It is often the strongest people whom you can least afford to lose who are the best candidates to lead integrations. Needless to say, career issues will arise as ambitious, strong performers step out of their day jobs to perform a critical corporate task. The firm should be clear about its future commitments; otherwise, integration teams will not be appropriately staffed, and integration success will be at risk.

A handy rule of thumb in both the merger and transformation models of PMIs is that it takes six days to appoint a top-level executive team, establish a road map and communicate this information. It takes six weeks to appoint a second circle of executives and to refine the overall project. And it takes six months to detail the organization plan, business plan, action plans and milestones. Keeping to this pace is the best way to retain talent since the biggest issue for people in these situations is uncertainty. Communication with individuals is, in fact, the best retention tool you have. If cross-border mergers make that goal all the more challenging, it is also all the more necessary.

Of course, throughout this process, the company must ensure the core business' smooth functioning in all parts of the world in which it operates. We recommend an early-warning tracking system to monitor emerging revenue trends, special temporary incentives to ensure continuity of staff performance and strategies to make sure that valuable employees with soon-to-expire contracts aren't poached by competitors.

And speaking of competitors: On the first day of a merger announcement, your first threat won't come from your traditional competitors -- it will come from the headhunters. In a matter of minutes, they will be calling your best people and fanning the flames of anxiety. They can be especially persuasive if you are a foreign acquirer, since many of your executives are bound to be feeling some insecurity about their ability to fit in with the new organization.

What makes corporate cultures different?

Illustrative plotting of two merger partners, Company A and Company B

Role of center

Integrated

Decentralized

Hierarchy

Formal

Loosely defined

Decision making norms

Structured & fast

Long & consensual

Meeting dynamics

Structured

Free-form

Oral communications

Direct

Subtle

Written communications

Pragmatic & short

Comprehensive

Performance management

Selective/short-term

Not selective

Career management

Few levels, Short term

Long term

Market view

Customer centric

Product oriented

Risk approach

Innovation

Proven methods

Cost control

Financials driven

Accounting driven

Growth priority

Top-line

Bottom-line

Geographic emphasis

International

National culture prevails

Business unit Autonomy

Forced coordination

Autonomous

Ethics

Explicit

Implicit

Source: Boston Consulting Group

Three models for integration
Typical integration characteristics for different deal types. Large integrations often involve elements of all three.
Integration model	Typical characteristics
Tuck-in	• Larger company absorbs smaller • Operating model and organization structure largely decided in advance • Line integrates (with strong coordination) • Emphasis on validating strong assumptions
Merge	• Similarly-sized companies • Aim to combine best of both operating models • Separate integration structure • Emphasis on jointly developing and validating new design
Transform	• Existing operating models inadequate • Significant strategic change needed • Emphasis on stabilizing rapidly via interim organization to allow full-scale redesign to start immediately
Source: Boston Consulting Group

Obviously, you must reassure your best people of their importance to the firm and the fairness of the process. But that doesn't mean it's a good idea to sweeten their reassurances with retention bonuses unattached to any requirements for performance. We've known many situations in which millions were wasted on bonuses to retain top people, only to have them leave eventually. Expecting -- even outright asking for -- such bonuses is standard practice in the U.S. and U.K., but not as common in the rest of world. (That has led to some thorny misunderstandings, especially when a non-U.S. acquirer has acquired a U.S. firm.) Fortunately, the practice is not spreading, and where it is most common, in the U.S., it is usually limited to specific employee groups, such as the sales force. In Europe, retention bonuses are most often targeted to individuals, such as key R&D people, IT professionals working on a specific project or executives who have been asked to lead the transition and then exit the company. Where retention bonuses are necessary, we recommend linking clear performance requirements to payouts. Properly structured and managed, retention bonuses can be an effective PMI tool.

Synergies and social stakes

We've now arrived at the complex and delicate issue of work force restructuring. Most cross-border mergers require some form of organizational change and new competencies. If the cultures are very different, it can be hard to achieve global understanding on these crucial matters. For example, in the U.S., downsizing, although never easy, can generally be accomplished with good communication and severance pay. To some extent, that's also the case in the U.K. and Spain. But in Germany and France, it's a very different story.

In France, a complex structure of unions, politicians, regulations, authorities and employee groups (such as work groups or local unions, as opposed to national unions) makes it necessary to develop detailed and long-range social engineering plans to achieve goals. In Germany, extensive dialogue with unions can't be avoided.

One German company we worked with was committed to realizing massive reductions in costs, including a 40% reduction in head count, within three years. Layoffs were possible, but regulations required a complex process that included seven different work councils to communicate with and no overarching body. Furthermore, the work force was already highly mistrustful because of numerous unsuccessful cost reduction initiatives in the past. The company finally achieved its cost savings when the employees agreed to pay cuts as a result of the plausible threat of layoffs. Of course, this took considerable time. Although timelines vary from country to country, ranging from a few months in some countries to more than a year in others, work force reduction almost always takes much longer than planned.

To focus on the right risks and tradeoffs in restructuring, we recommend an acquirer first assess the degree of difficulty by looking at the acquired company's experience with work force reduction over the past five years. This information gathering should also include an assessment of trade unions' strength and the nature of the social climate, as gleaned from press articles and public opinion. It should also identify the legal constraints and assess how much restructuring will be needed or is possible, taking into account such issues as natural turnover, number of short-term contracts and average compensation.

Most companies have three levers with which to reduce labor costs: compensation, work time and head count, in that order of difficulty. Severance is not the only available option and often not the best. We've found that a plan for voluntary departures is sometimes the best practice. It is often faster and causes less social disruption.

Downsizing is one of the most difficult challenges in cross-border integrations because it can have a telling impact on communication, motivation, synergies and financial markets. Careful planning and communication is crucial. There have been many instances where cross-border acquisitions have incited strikes, political censure and public protest. American managers in particular need to understand that a different mix of tools may be necessary to achieve the same goals in certain overseas markets.

Integration leadership and staffing

Adequate staffing with the right lines of authority for the PMI process will be absolutely crucial. The first task is to set up a separate PMI leadership team with dedicated resources. That usually includes:

• A central team (PMO or integration office) staffed with business and functions executives

• Business unit teams, each headed by a business unit leader (with at least 20% dedication) and supported by corporate development team members

The next task is to instill a cross-functional perspective and an HR focus, so that all function plans and issues are examined and brought together by the PMI process. For example, if a company plans to make many cross-border executive appointments, then international mobility policies become an urgent issue, requiring immediate provisional guidelines (whereas in a normal situation, the HR function might take months to sort out the issues). That is why we like to organize the integration around functional platforms. The functional tasks that are needed to support the PMI process should be under PMI process authority. And different task forces should be established for building the future function, just like any other working group.

The third task is to make sure that team members, as well as leaders, represent the various cultures of the integrated companies. That is the only way to make sure that the right balance of attention is given to the regulatory and governmental issues of different countries and regions. It is also a way to encourage cooperation between teams from different countries. In a recent consumer goods PMI, for example, involving French and U.S. teams, we made sure our consulting team represented all the cultures involved, with the U.S. team supported by French consultants and vice versa. That enabled us to avoid the "Stockholm syndrome," in which consultants sometimes develop a bias for their own team, and it considerably helped to ground the dialogue in facts.

The fourth task is to make sure the pace of the PMI is aligned with the complexity of cross-border relationships. There are physical barriers to frequent face-to-face meetings and not every culture is accustomed to conference calls. You could end up in a meeting in which some people speak no English and others, who might speak French, Italian and English, end up having to translate everything. Needless to say, misunderstandings are frequent. And even when everyone is more or less fluent in a single language, the problems don't go away -- as in a situation where a "yes" in one country doesn't necessarily mean what it does in another. Slowing down the pace at such times often helps to resolve those issues. It also ensures that meetings occur in different languages with rapid follow-up on action items, so that everyone can understand what he or she just agreed to.

The marriage of corporate cultures

Differences between country and corporate cultures can inhibit a PMI in any number of areas. The fast track for reaching the top in one company, for instance, might be finance or research, whereas in another it can be sales or the human resources function. Companies can operate in many different ways: Some groups value performance whereas others emphasize the quality of relationships. There can be a perceived lack of homogeneity between hierarchical levels, or a clash between centralized and decentralized cultures, or a preference for long meetings in one company and quick decision making in another.

Take the example of a Danish company in a merger with a U.S. company. The sticking point happened to be meeting dynamics. The Danish group liked to meet to debate issues, offer opinions and then go back and write memos to each other expanding on their points of view. In contrast, the American company favored direct, even blunt, exchanges and rapid decision making. After the first joint meeting of the two entities, the Americans went away believing that the issues on the table had been sufficiently discussed and settled. So they were surprised, and soon very frustrated, when the same issues kept coming up for discussion over and over again in subsequent meetings. In the Danes' minds, of course, nothing had been decided, and the issues were still being hammered out.

Different management styles can also create a lot of anxiety and distrust between integrating companies. When a U.S. company recently acquired a French company, the American company had a performance-based management system in which people were given clear objectives and accountabilities. The French company reflected its culture in having a highly centralized organization with authority residing, at least at first, in just one person. Although the right people were communicating with each other across the two entities, there was a total misunderstanding of what could be done. The American company felt that the French company was inefficient and slow to react when speed was necessary. The French company felt that the Americans didn't go through proper channels and bypassed authority. The companies eventually resolved the standoff when the acquirer restated (much more clearly, this second time around) how the integration was going to proceed and reduced the number of work groups to enable closer control and autonomy.

The chart on page 37 illustrates some of the more important areas in which companies can differ and how a company can chart where it stands along a range of behaviors. A critical step in the PMI process is to make these differences apparent and force discussion on how the combined company will behave (rather than just assuming that the acquirer will dominate).

Finally, managers shouldn't underestimate the degree to which a good PMI process can relieve anxiety. We worked on a music industry merger recently between companies from different countries and with very different notions about charters and objectives. The managers of the PMI knew that the process could make or break the deal, so they spent considerable effort installing rigorous program management tools and a kind of "meta" work plan that created its own language. In the end, having this "language of the plan" in common went a long way to helping people work together.

PMI is a complex change process that reknits the human fabric of the organization. Executive careers are on the line. PMI leaders have to identify and retain key talent and persuade the two organizations that they have a better future together than they would have apart. And all this must be done in an environment of uncertainty and anxiety. In cross-border PMI, this "soft stuff" is often the hardest to get right. - Jean-Michel Caye and Dan Jansen

Jean-Michel Caye (caye.jean-michel@bcg.com) is a vice president and director in the Paris office of the Boston Consulting Group and leads the firm's European PMI practice. Dan Jansen (jansen.dan@bcg.com) is a vice president and director in the Los Angeles office and leads the firm's Americas PMI practice.

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