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A client recently described industry approaches to people due diligence as a bit like the prevalence of pre-nuptial contract agreements before two people get married.


The idea has some merit, but hardly anyone does it unless they have already suffered the financial agonies of a bad divorce settlement. Even then, the capacity of individuals to repeat the same mistakes when looking for a life-long partner is depressingly substantial.

The high failure costs of ignoring people and culture
Within Hay Group, we have substantial experience of being brought in to deal with the aftermath of poorly thought out, or poorly executed acquisitions. The statistics are persistently bad. Depending on what research you look at, the failure of mergers and acquisitions (M&As) to deliver on their anticipated business aspirations can be as high as 75%. Overwhelmingly, the research tends to suggest that the most common and frequent reason for M&A failure are the people and cultural issues. These people challenges can have a severe financial impact on the consequences of the ‘deal’ such as:

As with marriages, there is no shortage of good advice about just how vital it is to carry out effective people due diligence. In the UK in 2003, the Chartered Institute of Personnel and Development (CIPD) issued a comprehensive checklist of eight guiding principles, based on the hard won experience of companies who had made mistakes in M&As. None of these principles were rocket science – essentially they were based on the age old adage that ‘prevention is better than cure’.

‘If you can’t measure it, you can’t value it’
So why are deal makers so reluctant to advise on the need for people due diligence, and why is it carried out so infrequently and often so badly? One often quoted reason is that you cannot measure the people aspects as easily as the financials when assessing the appropriateness of a prospective deal.

It is also suggested that gaining access to the people and cultural ‘intelligence’ can be very difficult prior to the deal. This may have been true in the past, but increasingly this is not the case. In the UK in 2004, the Department of Trade and Industry launched its plans to make an Operating and Financial Review (OFR) a statutory requirement of company reporting. Much work has been done on creating a robust framework for human capital reporting, and there has been a strong push from many quarters for this to be a compulsory item.

It is, therefore, somewhat disappointing that the DTI announcement of the OFR, which was implemented in April 2005, does not mention human capital management and people issues. It will be left to UK listed companies to decide whether they provide information about employees.

Nevertheless, there are examples of excellent practice. For example, the Royal Bank of Scotland launched a human capital strategy three years ago to find out exactly what impact its people management policies were having on the business. In January 2005, it introduced a human capital toolkit to 1,000 of its HR staff, mainly in the UK.

It is certainly true that it is much easier to gain access to the data and undertake the necessary analysis post the deal. But this is an excuse – not a reason – for failure to do any people due diligence. If deal makers were really motivated to gather this essential information, there are plenty of ways of collecting perspectives and opinions, including solid data, without directly involving the management of the target company.

What and how to measure people and culture
There are many examples of professional service organisations – including Hay Group – who have developed approaches to the measurement of human capital, and specifically, the measurement of the risks and opportunities inherent in a potential M&A. All of these approaches should enable the acquiring management to know both what and how to focus on maximising the probability of successful integration and execution post the deal. Such approaches typically include the following elements:

‘Love is blind’ – how emotions get in the way
Another common reason for not pursuing people due diligence relates to the emotional mind-set of the deal makers. As in ‘arranged’ marriages, the parties get excited at the prospect of the marriage event itself and often fail to think about how they will make the marriage actually work.

Even worse, some commentators will take the cynical view that too many of the people involved in the actual deal are really only interested in just that – the deal – and not in how, or even if this marriage stands any chance of success.

Attempts to incentivise the deal makers and advisors on the consequences in terms of clear business measures of subsequent success are fraught with difficulties. It is what some commentators refer to as the ‘Casanova Effect’ – consummation is all, and then the deal makers lose interest and move on to their next conquest.

Removing the emotional blind-folds
Even where the two organisations recognise the need to exchange an honest view of each other’s strengths and weaknesses, their preferences and foibles, there is an overwhelming tendency to emotional blindness. Accurate self-awareness should be a highly valued capability in any leader or organisation. However, like people involved in an internet ‘speed dating’ process, each party tries to pretend they are better than the reality.

Hay Group has worked with several merging organisations to help them remove the emotional blind-folds and paint an accurate picture of their organisational competencies, the degree of cultural and managerial ‘fit’, and their readiness for change.

In a recent example, two international foods companies used a number of simple diagnostic tools to get real clarity about their differing management philosophies, the areas of commonality, difference in their cultures and the capacity to handle significant organisation change. As a result, the integration plans were more robust and contributed to the successful and rapid delivery of the essential business benefits of the merger.

The five steps to better, faster and sustained M&A success through people
Based on research into successful and failed M&As on both sides of the Atlantic, Hay Group offers the following recipe. It might be seen as common sense, but as this article suggests, common sense is not that common during an M&A!

1. Undertake people due diligence


2. Build a high performance culture

3. Plan the people merger

4. Implement the people merger

5. Measure merger effectiveness

Paying attention to people due diligence will make the difference between an M&A that works and one that does not. Due diligence should become the rule rather than the exception.

Brian Langham is a Director at the Hay Group

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