Reorganizations can be a useful management tool for finding new value and are often essential as part of a merger or acquisition integration. Getting this type of reorganization right allows business units from the merging companies to be brought together smoothly, corporate activities to be standardized and streamlined, people to be aligned behind desired outcomes, and integration synergies to be delivered quickly.
But, according to McKinsey research, only 16% of merger reorgs fully deliver their objectives in the planned time, 41% take longer than expected, and in 10% of cases, the reorg actually harms the newly-formed organization. Common pitfalls are a lack of cultural understanding between the integrating parties, poor integration leadership, and a focus on the wrong activity set or the wrong targets.
To help maximize the value and minimize the misery of reorgs, we have developed a five-step process for running them. The steps apply to all reorgs generally and our survey data shows that companies using this process are three times likelier than others to achieve their desired results. In this article we will show specifically how they apply to M&A-driven reorgs. In efficient M&A situations, steps 1-3 would be considered in detail before deal closure, with steps 4 and 5 executed post-close.
Step 1: Develop a Profit and Loss Statement
As a part of your M&A plan, you should consider the benefits, costs, and timing of the reorg. Remember that the costs are not just those of the employees, consultants, lawyers and bankers involved: they also include the human cost of change and the disruption it can wreak on the businesses involved. Business performance can suffer and key employees can start to look for opportunities elsewhere. It may seem like common sense to weigh these costs and benefits along with the merger, but according to McKinsey research, only 15% of executives set detailed business targets for their reorgs.
In the case of an international utility company, consideration of reorg practicalities allowed the acquiring company to focus strategically. Early in the deal process, the challenge of reorganizing European businesses (due to regulatory and legal considerations) was recognized and the merger of this part of the business was delayed by 12 months. The company recognized that this would delay the merger’s full impact by a year or two. At the same time, this realization enabled them to focus on the the work of reorganizing head offices and to realize growth.
Step 2: Understand Current Weaknesses and Strengths
In an M&A situation, the true strengths of each organization can be hidden or poorly understood, and even damaged by a reckless drive to achieve immediate cost synergies.
It may be difficult to get a sense of the strengths and weaknesses before the deal is closed. However, you can get some insights from due-diligence inquiries, interviews with former members of the company (including those in your own organization), or the internet— whether through the company’s own publications or sites such as LinkedIn, which enable you to profile individual managers. How you go about this step is also dependent on whether this a takeover (where the default position is that the acquired organization will largely be absorbed) or a true merger, where you may be looking for a “best-of-both” approach from across the companies, in terms of organization and personnel.
In the case of two merging service companies, internal and external views on each business were sought prior to close and a prioritized list of focus areas across people, process and structural dimensions created. Post-closure, managers from both businesses shared their views through interviews and electronic submissions. These observations were compared to the initial hypotheses and the list of focus areas updated. This highlighted strengths in customer responsiveness, but a joint failing in the creation and dispatch of maintenance teams. Resolving this issue within the new organization helped to streamline the resource allocation process, resulting in reduced cost and improved customer service levels.
Step 3: Consider Multiple Options
A common mistake is to focus on what the organization looks like (its reporting structure, for instance) and forget about how it works (management and business processes and systems; the numbers, capabilities, mindsets, and behaviors of its people). In our experience, the latter is usually more important.
In the M&A context, it is possible, even before the deal closes, to develop a strong hypothesis for what the new organization structure will look like (by definition, you will have to choose one structure that integrates the two companies). There is usually a focus on people: both the numbers needed (as some of the synergies will clearly come from staff efficiencies) and the shared culture that needs to be created within the new company. However, as noted above, it is important not to forget processes: companies normally go about their processes (whether they are deciding on strategy, launching a product or process, or running day-to-day operations) and allocation of tasks along each process in very different ways. Confusion around these processes and the allocation of activities post-merger is a frequent problem.
In developing organizational solutions, we believe that explicitly choosing from a number of options is the best approach. No solution will perfectly fit all future possibilities and every solution will have its downsides: only by weighing alternatives will you see what you might gain and what you might lose. In an M&A situation, the two merging companies, will present two different ways of organizing, so these, plus a combination of the best of both, provide three obvious options.
This approach was used during the integration of two mining companies. The acquiring company wished to retain its operating approach and replicate it within the newly acquired business. This helped inform initial design discussions and narrow down the choices open to the new leadership team. To test more detailed options, alternative solutions for the technology organization, investment processes and safety delegations were presented to the newly appointed leadership team. They envisaged themselves in each of the options and provided feedback: “that’s not a role I would want to do,” “how would we agree on decisions given the competing interests of these roles,” and “that’s a bit of a convoluted process.” This flushed out unattractive options and helped them come to consensus on the organizational design.
Step 4: Get the Plumbing and Wiring Right
After step 3, most executives stand back, trusting their teams to handle the details of the new organization and the transition plan. External consultants usually clock off at this point as well. Yet we’ve repeatedly found — and a McKinsey survey in 2014 confirmed — that step 4 is the hardest part of the reorg to get right.
In M&A situations this is further complicated by the fact that detailed information becomes available only relatively late in the process. Some planning and even quite detailed designs are possible before deal close. However, when the deal is done, you must quickly circle back on the hypotheses from previous steps — the assumptions on synergies (step 1), the understanding of the acquired company’s strengths and weaknesses (step 2), and the concept design (step 3) — to confirm that they are sound and, where necessary, refine them.
In a recent oil and gas merger, a large integration team was formed, with members from both organizations and across different business areas, to coordinate integration efforts. Transition leads were appointed to help manage day-to-day integration activities within each business area; some leaders were given early oversight of the areas they would be responsible for post “go-live” of the new organization design. Each part of the integration team was given its synergy target, expectations for process and cultural alignment and clear responsibility for people integration within their defined boundaries. The leaders of these integration teams reported directly to the CEO and Board. This enabled the teams to escalate issues that they found quickly – for example, the need to drive even deeper cost reductions in a tougher external environment. This prompted the company to make some changes to the design and to drive for additional synergy benefits learning from the leaner approach used in the acquired business.
Step 5: Launch, Learn, and Course Correct
No matter how much thought and preparation you put into a reorg, it’s unrealistic to expect that it will work perfectly from the beginning. This is the case with all reorgs, but it applies even more when two organizations, with completely different cultures, are being crashed together. That doesn’t mean you need to do a 180-degree flip-flop in the design as soon as you encounter a problem. But you do need to encourage everyone to point out the new organization’s teething problems, openly debate solutions, and implement the appropriate fixes as soon as possible, in line with the logic of your original plans. Following an M&A integration, a formal assessment is also essential. We find that it is best to do this after one to two cycles of financial reporting, so you can assess where the financials are, and are not, meeting expectations and relate this to the organizational set up. And if you plan to do more M&As, capturing the results of your experience for the next time round is critical.
Returning to our utility example, the organization was required to report progress in implementing the new organization as part of its normal results cycle and was fielding an ever-increasing range of questions from works councils as to how change would be implemented in Europe. The leadership team assessed integration progress, based on this feedback, and considered where additional refinements could be made. Issues in the commercial and trading businesses were identified and new solutions proposed. In addition, some back-office activities (mainly HR), were further consolidated, bringing additional cost savings into the mix.
If you’re contemplating an M&A-driven reorganization, you owe it to your shareholders and employees to follow a rigorous process rather than winging it, as so many leaders do. You’ll make better decisions, keep your employees more involved and engaged, and capture more value.