Coronavirus massively disrupted how we do business. It forced most of us, if not all of us, to change how we do our jobs. We are now back in a variety of ways of working. Meanwhile, there is “the great resignation,” the highest rates of inflation since the 70s, and bursting economic bubbles all around us.
Some of our clients have had people working remotely for years; for others, this is still relatively new and not everyone is sold. Most companies have had to learn to get work done with fewer meetings, most with the use of videoconferences. Companies have had to learn new ways to track, monitor and trust how employees are being productive. Managers have had to learn to manage differently. Colleagues have had to learn to collaborate from a distance. Some will be relieved when we can go back to how we used to do things, although the likelihood of things being as they once were is very low. But now we also have the added economic uncertainty, labor constraints and inflation.
Organizations need to operate with high productivity. The interconnectivity of people and technology will be at the center of successful approaches to this. Technology is no longer just a way of replacing labor, it is the way to improve labor productivity. But technology alone is not sufficient. We need to create ways of working that make people more productive and more effective, not just drive out cost. It isn’t the technology that is key, it is changing ways of working culture.
In deal scenarios this is truer than ever. An ever-increasing number of deals are predicated on value that that does not show up on the balance sheet as a capital asset. Instead, value is based on assumptions of performance of the people that buyers are acquiring. Inevitably, the deal process through close and beyond distracts and delays people from acting, and destroys value. Ways of working, or culture, is as critical as any other aspect in a deal, yet we tend to do little about this and that must change in order to manage financial risk in M&A.
In deals, failing to address culture will delay operations and impact financial results. According to our research, 30% of deals fail to meet financial objectives due to culture issues. Why is that? In the wake of a transaction, employees are wondering, How is my day-to-day work impacted? Will my pay be affected? Will my role or title change? When a deal is announced, these are the first unknowns clarified for executives so that they can focus on strategy and execution. The rest of the organization is left to wonder. This lack of clarity results in costly derailments of business outcomes, such as productivity loss, flight of key talent, delayed synergies and, ultimately, customer disruption.
This certainly applies to our current environment. An old axiom about change in organizations is that you must first unfreeze the organization, make a change and then refreeze it. As we now operate in this new “normal,” the pieces aren’t likely to fit together as they did before and this is our opportunity to proactively manage culture, motivated employees and drive business outcomes. Leaders need to be intentional about the changes we want to institutionalize into a lasting transformation of how we do business.
More than 80% of culture change efforts fail. They fail because the efforts are too broad, too theoretical, too vague and too complicated — and they take too long. Moreover, people are often quick to change what they say but slow to change what they do. Which raises the question: Have the recent culture changes in our organizations been successful ones? Time will tell, but it will require tactical work to drive lasting change if that’s the intention.
Talk about culture causes many people’s eyes to glaze over. In this respect, culture is like the weather. We all like to talk about it and blame it for our problems, but we don’t really know what to do about it. Consequently, through our experiences and work with our clients, Mercer has adopted a different way of thinking about, talking about, defining and changing culture.
At Mercer, we don’t even say culture. Instead, we say operating environment — how things get done around here and what people do day in and day out. It’s the pattern of behavior, learned over time that helps people achieve success in a given environment.
Starting with the fast-moving world of mergers and acquisitions, we’ve created an approach that addresses those problems — one that’s focused, pragmatic and action-oriented.
What three or four patterns of behavior will have the greatest impact on your ability to adapt to the current environment and execute your strategy? At Mercer, we call these the critical few. This is the basis of your culture story — not your mission or vision, but how you operate.
In a deal setting, culture due diligence is an efficient way to identify the critical few pertaining to the deal thesis for the transaction and the key drivers needed to operationalize the change.
In light of the external environment, two drivers must now shape priority actions: your strategy and the changes in the external environment.
Ask yourself how you will need to operate differently in a year or two to execute your strategy and deliver expected results.
For many of our clients, the current environment has highlighted the critical components of their cultures that are driving or hindering their ability to sustain success.
Leaders need to consider strategies and also the changes around us — in labor markets, safety expectations, transportation limitations and shareholder expectations. It’s more important than ever to have a clear view of where to focus and what to retain as part of the hybrid-work or overall work environment and aligned business strategy.
For example, one defense and aerospace organization has identified its critical few as dependence on the timely execution of stringent work approval processes and clear, frequent communications from local management on programming and regulation guidance. Experiences and key learnings from recent years have narrowed the focus to what ultimately matters most in getting work done.
This step has two parts — one is about hearts and minds, the other about systems and processes. Employees have learned from millions of observational data points what behavior is expected and valued and what is not. Expecting them to change their behavior just because someone tells them to simply isn’t enough, and it is also irrational. Leaders have to make the change inevitable and the case for it undeniable.
The organization mentioned above saw this as a time to act on process improvement by exposing the broader issues and articulating the plan, roles and responsibilities in a way that moved from disruption to clarity. Leaders who are driving this improvement down to local levels are being celebrated and rewarded in an intentional way to demonstrate the organization’s willingness and ability to make necessary changes and shift the culture.
Many think of this step as a communication campaign. And, yes, consistent, clear, concrete and relentless communication is critical. Leaders need to tell stories that illustrate to people what is expected and what won’t be tolerated.
Ultimately, however, the most powerful driver of culture is leadership behavior. In and out of transactions, the most significant cultural disruptor is a difference between what leaders say and what they do. Leaders must make the new expectations unambiguous and nonnegotiable.
We need leaders to consistently communicate, model and reinforce the expected behavior.
Communicating, modeling and reinforcing expected performance only goes so far. Leaders and organizations need to change processes and systems to support the new behavior and make maintaining the old behavior more difficult.
Based on Mercer’s research, the second most powerful driver of culture is governance and decision-making — how decisions are made and by whom. If leaders want to change how an organization and its people operate, but the same people make the same decisions as always based on the same information, everyone knows that it’s all just talk.
For our client above, the assessment results showed that not only were approval processes bulky and misaligned, but there were also significant concerns about who owned decisions at what level and why. But it was “how things had always been done.” This excuse is simply no longer acceptable. As part of the broader process improvement effort and communication, decision-making rights and rationale were clearly articulated and upheld. Demonstrating how decisions will be made by operationalizing one or two examples will support longer-term and broader efforts in the pending rebound.
Clarity in decision-making and governance is critical. Establishing clarity is usually one of the most significant pain points in business and culture transformation efforts. In the current environment, leaders can change how decisions are made and how that information is communicated (by email, video, social media). Where these conventions have been difficult to disrupt or formalize due to old habits, clarity can facilitate a major shift into aligning expectations and driving transparency throughout the organization.
To reinforce the expected behavior, leaders need to align a range of drivers beyond just leadership behavior and decision-making. Such drivers include rewards, communication, processes, structure, talent management practices and more.
We’ve all heard that culture change takes three years, or even as many as seven. In transactions, regardless of the integration strategy, certain cultural components must be integrated within the first 100 days, or there’s a good chance that deal value will be lost.
But you may not have even that long. Instead of spending months creating complex, multiyear cultural transformation roadmaps, Mercer recommends a two-part approach:
Identify the actions you can take in the next 100 days to “move the needle” on the key drivers of the critical few behaviors — this is sprint one. Establish unambiguous accountability for executing those changes. Loudly and frequently, publish details of 1) progress on those key drivers, 2) the impact it’s having and 3) recognition of individuals who are modeling the expected behavior.
After 45–60 days into sprint one, plan for sprint two. Continue to execute until the key drivers have been aligned and you have evidence of widespread, sustainable adoption of the change.
Taking immediate action is crucial, but as with agile development, organizations also need longer-term roadmaps that let us plan, resource and execute more complicated improvements that can not be achieved in 100 days.
Views on alternative working models, the new relationship between personal lives and employers, and the impact on the employee value proposition cannot be left to chance. We can no longer avoid addressing the pace of change, the move to digital transformation, the intersection of people and technology, and how we manage those changes. For integrations, this is even truer. Groups that were physically siloed or were used to working in different ways and via different platforms are now prime for a culture integration. Now is the time to drive critical culture initiatives to sustain the organization for today and optimize ways of working for tomorrow.
Brent Heslop is Mercer’s Global Business Transformation Leader. He has worked with business leaders for more than 25 years in both consulting and corporate leadership roles across multiple industries to develop, design and implement organizational structure and change critical to driving sustained performance, including numerous M&A transactions.
Carly McCoy is an M&A Advisory Services consultant and the Director of Mercer’s Mitigating Culture Risk in M&A Research (2019). She previously served as Chief of Staff of Mercer’s Multinational Client Group and its When Women Thrive initiative. Carly has worked on projects in more than 40 countries and has particular expertise in culture and engagement