Follow a four-step action plan to assess culture
By all accounts, 2018 is shaping up to be a blockbuster year for mergers and acquisitions, with global M&A transactions reaching more than $2 trillion this year. Organizations of all shapes and sizes are considering M&A growth strategies to remain competitive. Yet, when evaluating potential targets, organizations must look beyond financial spreadsheets and dig deep into the company’s culture to make sure a merger would be a success. Indeed, research has found that cultural differences are an important causal factor in merger failures, representing a key barrier in up to 85% of failed M&A transactions.
Research into the issue of culture and its importance during mergers and integrations reveals some interesting facts including the following:
- Most companies have no clear approach to addressing culture integration. According to Aon Hewitt, 58% percent of companies reported they did not have a specific approach to assessing and integrating culture in a deal.
- While deal activity continues to increase, the rate of deal failure is alarming – over 50% of mergers fail to meet their targets and culture issues have been reported as a primary factor in deal failure.
- A study of 190 CEOs, CFOs and top executives on global acquisitions by Willis Towers found that cultural incompatibility is rated consistently as the greatest barrier to successful integration, but due diligence on corporate cultures is almost negligible.
- Out of 150 deals valued at $500 million or more, about half actually destroyed shareholder value. A study by Aon Hewitt Associates that surveyed executives in 162 organizations who had been involved in at least one merger, found that 69% of the respondents reported the top challenge they faced was integrating two organizational cultures.
While understanding that corporate culture is important, many organizations today still struggle with determining how best to convert an appreciation for cultural differences into a definitive plan of action.
A formal culture audit conducted as part of M&A due diligence is critical to ensure the organization being acquired will be a good fit.
Key reasons to conduct culture audits
While culture audits are important for the M&A due diligence process, you don’t have to be considering a merger to gain value from a cultural assessment. There are a number of key reasons your organization should consider performing a formal culture assessment including:
- To understand if the actual culture aligns to the desired culture
- To experience stronger merger integration results
- To uncover ways to improve talent and customer retention
- To identify areas to improve risk management plans
- To identify issues or problems early
- To prepare for a strategic business transformation
- To help ensure the sustainability of the defined culture
- To understand if subcultures exist that present threats and risks to the organization
Culture audits: Four primary methods
Four methods can be used to effectively assess a culture, a combination of which should be used to gain a well-rounded perspective and unearth meaningful insights. In M&A transactions, this analysis should be completed within both the acquirer’s and target’s organizations.
1. Focus groups and one-on-one interviews
Focus groups are generally one-hour professionally and independently facilitated sessions in which employees can share their views on corporate culture, values and norms. These open and personal forums provide opportunities to express perspectives honestly and without judgment. Sessions are used to compare and contrast perspectives. Typically, eight to 10 standard questions are prepared to capture recurring themes. Examples of open-ended questions leveraged for focus groups and one-on-one interviews may include the following:
- How would you describe the working environment/culture here?
- What excites you about coming to work here?
- What kind of person fits into this organization? What kind of person does not fit?
- What elements of your culture help make your company successful?
- What elements of your culture sometimes get in the way?
- What are your perceptions about the acquirer or target organization?
- What do you think is key to successfully integrating the two companies?
Sharon Whittle, Grant Thornton principal, Human Capital Services, acknowledged that during the assessment process, it is also important to gauge customer perception of the organization. “What does the larger external environment think of the organization from a corporate citizen perspective?” she said. “How is the organization viewed in those communities in which it operates? It’s important to understand what customers and other constituencies think about the organization.”
2. Corporate document review
Reviewing key business documents identifies themes through the use of language, metaphors, corporate stories and success stories. A formal document review includes an analysis of both internally facing messages, such as leadership messages and meeting minutes, and externally facing messages, such as websites and brochures. How are communications used to influence various audiences? Is there an alignment between written messages and the other observable aspects of the culture? What are the kinds of stories included in the company newsletter? What does the CEO communicate? What accomplishments are celebrated? Is there a publication that communicates the corporate vision? Some examples of materials to be evaluated in the document review include the following:
- Vision/Mission/Values statements including documented behavioral norms
- Employee communication examples (newsletters/memos) and communication plan
- Company strategy documentation (annual operating plan key objectives)
- Management reporting (key performance indicators/dashboards)
- Employee policy handbook
- Performance management policy, process and procedures
- Salary administrations (policy, process and timing)
- Turnover data for previous three years by department (separating salary vs hourly)
- Employee reward and recognition (programs, methods, incentives and perks—both formal and informal)
- Job descriptions (examples from each level and sampling of departments)
- Hiring process (external and internal)
- Employee census (name, age, hire date, title, length of service and in current position, salary vs hourly)
- Training plans (description, approach, identification of positions)
- Health and safety programs
- Sales and marketing (product and service promotional materials)
In addition to a formal document review, the culture audit should also evaluate key metrics associated with the organization’s culture. Dr. Tiffany Yates, Grant Thornton senior manager, Organizational Strategy, suggested that the analysis should also include evaluation of employee engagement scores, culture surveys and other culture-related measurement.
“Some larger organizations are fine tuning their culture alignment by aggregating existing data with more nuanced data,” Yates explained. “It’s important to conduct a longitudinal study so that the measurement is not just a one-time event but includes a full aggregation of the data. You’ll be able to see over the course of years any trends or patterns related to your organization’s culture.”
Whittle agreed that collecting data over a period of time will help organizations determine whether their culture is being sustained or going stale. “Is the culture continuing to grow and permeate through the organization without formal initiatives in play?” she suggested. “You can’t discount the importance of gathering data. It’s one of those things that organizations need to pay attention to, including aggregating data over years and including measurements such as results of employee exit interviews.”
She added that it’s important that organizations track the reasons that employees are leaving because many times the cause is tied to culture.
3. Cultural dynamics survey
A cultural dynamics survey provides a quantitative assessment of the organizational culture, which can be charted visually and provide a snapshot of the current culture. The survey provides an opportunity to anonymously source opinions from a wide range of individuals. The data can be broken down to identify subcultures through the use of custom demographic questions. Key cultural dimensions addressed in the survey include:
- Organizational cultural environment
- Independence/decision making
- Teamwork and collaboration
- Change and innovation
- Risk and control
- Rules and procedures
- Leadership and power
- Customer focus and service
- Quality orientation
- Proactivity and empowerment
- Trust and loyalty
- Open communication
4. Observation and shadowing
Observation and shadowing is used to validate the information gathered from the focus groups, interviews and surveys. It serves as an opportunity to gather information in a natural setting about an organization’s espoused values and beliefs, as well as their actual behaviors. Inquiries and observations on elements of the culture can yield insights into what the culture is like throughout the organization and whether the desired organizational culture is what really happens on the front line. Some key tips for the observation phase of the culture audit include the following:
- Keep an ear out for conversations in and around the site—the language and tone used will give an indication of how communication is made in the environment.
- Take an office or site tour to get a feel for the location.
- Observe notice boards, framed corporate wording, office layouts, breakout areas, etc.
- Look for stand-out features---such as trophies or company distinctions.
- Our observation starts from the moment of arrival to the moment of departure---consider the whole.
A combination of these four activities will help to objectively assess the organization’s culture through a variety of lenses and gather a full picture of cultures and subcultures. Key among them are a review around the organization’s people programs to determine whether they are driving the desired behaviors and an analysis of the organization’s strategy to ensure it is driving the desired performance outcomes.
The combination of these four activities helps to objectively look at the organizations through a variety of different lenses and gather a full picture of cultures and subcultures. By consistently tying the culture assessment data points to a culture web we are able to identify behavioral, physical and symbolic manifestations of culture, which provide a meaningful framework for understanding the most influential aspects of the target’s and the acquirer’s culture. We are then able to bring out the cultural dynamics of each organization, the areas of commonality and potential friction points. Further, employees feel engaged in the integration process.
Red flag alert
Once all four phases of the culture audit are complete, it’s critical to carefully evaluate the results and identify any red flags. Whittle suggested one clear flag is mixed messages from the leadership team. “During the due diligence process, you usually have access to two leaders because they are in the know and because the sensitivity of the due diligence precludes access to middle management,” she explained. “If it feels like you’re talking to people who don’t even work for the same company, you know there are culture issues because there should be some consistency based on values, visions and beliefs.”
Yates suggested there are some tactical red flags to be on the lookout for as well. “If it takes a long time to onboard a new employee or find talent to fill a position, the organization might have a culture problem,” she said. “High turnover could also be an indicator of subcultures which could contribute to a misaligned culture.”
Other red flags include ideas that never get executed within the organization, tone at the top which is not aligned and distinct differences between stated values and demonstrated behaviors. “When decision making is really hard or takes too long, then the culture is probably broken in some way because the norms of behavior around decision making haven’t matured,” Yates added.
Five guidelines for effective culture audits
An organization’s culture, by itself, may not break a deal but it can play a significant role in the integration process post-transaction. To ensure that you gather the information you need during the due diligence process to effectively evaluate an organization’s culture, keep these five tips in mind:
- 1. Keep the end goal in mind.
Understand what the future state of the organization is going to be, Yates suggested. “Conduct the audit based on what you’re seeking to achieve rather that attempting to uncover every aspect of the organization’s culture,” she explained. “Create a baseline for the future culture and audit for that.”
- 2. Dig deep and think creatively about data collection.
When collecting data to be aggregated to determine where the culture stands, think creatively about sources of data. For example, consider evaluating employee relations, exit interview results and other information to uncover any subcultures within the organization.
- 3. Quantify the assessment.
While it may be challenging, try to quantify the organization’s culture performance. What is the financial impact of the investment in culture? What tangible gains did the organization experience as a result of its culture commitment? How much is the organization’s culture worth?
- 4. Cultivate a culture lens.
Often times, the due diligence process for potential M&A transactions focuses on financial performance. It’s important that those performing due diligence cultivate a culture lens as well. “Those individuals are on the ground in the work environment and should adopt a culture lens to be intentional about what they’re observing,” Whittle said. “Do people seem happy? How does the environment look? How do they feel about the chain of command? Are employees collaborating? How do people interact with each other?”
- 5. Adopt a holistic approach.
Assess human capital issues alongside other traditional concerns such as finance, operations and IT. Fundamentally, acquirers have to think in terms of what they are taking over – assets, client contacts, people – and assess their value to the organization.
Whether you’re looking to engage in a strategic business transformation, ensure the sustainability of your defined culture or evaluate the culture fit for a merger or acquisition, culture audits provide stakeholders with the information and confidence they need to make important business decisions.
Is your culture paying off or are you looking to evaluate the culture fit of a target organization in an acquisition? Learn how we help clients perform effective culture audits. Reach out to our organizational strategy professionals below.