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People Due Diligence – The exception, not the rule?



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:

  • Product development delays – means missed market launches

  • The talent goes elsewhere – especially the most talented, owing to heightened levels of anxiety and uncertainty and the value of the investment drops significantly

  • Sales productivity drops – often there is confusion as to who is making decisions, and a lack of understanding of who is representing which product in each organisation

  • Customer defection – they are confused from being neglected and are not patient enough to ‘wait around and see’

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:

  • Predictive value of leaders that are being bought – how much value will they add in future, by comparison to reliable benchmarks?

  • Impact on performance of the existing organisation climate(s)– how much will the organisation climate contribute to innovation, risk taking and other key measures, by comparison to benchmarks? How much will be ‘left on the table’ because leaders are not leveraging the climate sufficiently?

  • Level of employee engagement – e.g. how much potential unwanted turnover may result given the measure of engagement, by comparison to benchmarks?

  • Identity/impact of the ‘high leverage’ people – who are they? (Those with a disproportionate value in know-how around R&D, ability in innovation or execution, or relationships with key clients). What is the likelihood that they will stay or go? How well is their value being leveraged?

  • Culture – measure the degree of ‘fit’, the real risk points, by comparison to appropriate benchmarks.

‘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

  • Provide decision makers with guidance in valuing the newly acquired human assets

  • Identify cultural strengths and weaknesses

  • Define key roles and expectations

  • Assess the culture; identify key fit issues

  • Identify key players; assess their capabilities

  • Uncover important HR issues

2. Build a high performance culture

  • New leadership becomes operational

  • Culture and climate goals and monitoring systems are established

  • A customised culture and climate creation tool kit is developed

  • A communications strategy and plan is developed

3. Plan the people merger

  • Define performance metrics for the first two management levels

  • Make leadership appointments for critical roles based on desired climate, culture and competencies

  • Identify critical competencies, capabilities and ‘hot skills’

  • Develop key player retention packages that build buy-in

  • Identify ‘surplus’ resources

  • Create plans for priority issues including organisational design and staffing requirements, core process design, transitional HR programmes, and out placement

4. Implement the people merger

  • Develop and implement communication programmes and a transition strategy for the new organisation design, individual assignments and transitional HR programmes

  • Establish training and development requirements

  • Create and implement a transition tool kit for key external-facing units, including sales, marketing and customer service

  • Make team assignments for redesign of work processes and the final HR programmes

  • Transform the integration team into a problem-solving SWAT team.

5. Measure merger effectiveness

  • Develop on-going measurement architecture

  • Create communications and learning programmes to debrief and capture new ideas

  • Make a smooth handover from integration or transition teams to redesign teams

  • Reassess key appointments

  • Recalibrate culture and climate in light of integration realities

  • Audit and fine tune communications

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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Annie Hayes


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