I have observed both the pitfalls and successes spearheading mergers and acquisitions in healthcare. Studies put the M&A failure rate somewhere between 70% and 90%, according to Harvard Business Review. This statistic remains unchanged and in our current complex and dynamic environment, the stakes are higher than ever.
From my experience, culture is a pivotal factor determining the success or failure of a M&A, yet it is often treated as an afterthought and doesn’t receive the attention it deserves compared to other more tangible outcomes in such transactions. Culture is challenging to define and holds varied meanings for different stakeholders, making it less tangible than revenue. However, it is essential to ensure alignment and seamless integration of all the components following a merger.
What is culture?
An organization’s culture is both abstract and intangible but palpable. It can be best described as the nervous system of the organization. It can either facilitate or inhibit the speed and reliability with which information is transmitted within an organization, and it determines how well information is understood and integrated into its environment. When there is a breakdown in information transmission during a M&A, the result is unclear communication from the core, misaligned purpose, inadequate support for both leaders and staff and ultimately a failed and costly outcome.
So why is this happening?
Too much emphasis is placed in M&A on the tangible outcomes, such as financial performance, and not enough on culture. Yet, history is littered with examples of deals that failed because of culture.
According to McKinsey & Company, in mergers the likelihood of meeting cost and revenue synergy targets is substantially higher if culture is effectively managed during post-deal integration.
In the initial courting phase of a M&A, it is critical to assess the organizational culture and the “soft” areas of due diligence. There is a desire in this phase to make it work with a belief both parties value the same things. This is the phase to have these discussions and determine if you are culturally aligned and can identify with one another.
Here are four principles to achieve cultural alignment and ensure a successful merger and acquisition.
1. Communicate early and often.
Develop a communication plan and messaging to help stakeholders understand why the M&A is needed and why this change is important.
- Keep communication simple and frequent. Repeat the core message. Frame it positively. Focus on stories that celebrate progress and model the behavior.
- Proactively engage multiple audiences and disseminate communication from leadership to key stakeholders and all of who influence and are affected by the change.
- Provide clarity on the decision-making process. For example, in a M&A between health systems, a significant portion of the value stems from integrating various systems (IT, legal, supply chain, revenue cycle, etc.). At the local level, determine the extent of control and decision making vested in the local administration concerning day-to-day operations as centralization occurs.
- Actively listen to others and acknowledge their input. Use tools to get feedback about what is (or is not) working and share information; these include employee engagement surveys, one-on-one interviews with physicians, nurses and other front line staff and town halls.
When in a time of uncertainty you cannot communicate enough. Sometimes, the false consensus effect occurs-meaning we often overestimate the extent to which others share the same attitudes, beliefs, and opinions, even if not the case.
Communication eliminates this.
2. Build a shared purpose.
Understand “the why” behind the change and role model the values.
- Focus on purpose and shared values of the organization so it connects to something bigger and motivates both leaders and staff to act in alignment with the desired change.
- A leader’s words and actions are magnified during change and have an impact on those they manage. As a leader it is important to openly share your own story and emotions and to acknowledge the emotional effects of the change on your staff. Share what is known and unknown and give context. Foster an understanding of what is being asked of staff and communicate why it is important to the organization.
3. Align the people, structure and processes of the organization.
- Conduct soft due diligence early in the process to assess people skills and organizational capabilities, values, ethics etc. There are tools with lots of data points I have developed as a part of M&A playbook to assess the culture framework that includes interviews, focus groups, surveys and gathering information from public and informal sources. This informs where there are similarities and differences and gauges the degree of differences and if they can be overcome.
- Consider the cultural elements most important to the deal rationale and prioritize where the focus needs to be in due diligence. For example, in a past M&A a core element was service line centralization. I prepared our service line leaders to meet with the teams of the organization to be acquired to determine what an aligned service line looks like and together present plans to the steering committee overseeing the M&A. This enabled us to quickly surmise how we fit together and if we operated around the same set of principles in approach.
- Build a development plan to support leaders and their staff that includes coaching to lead through transitions and develop opportunities for staff to develop new skills where there are gaps.
Ernst and Young suggests that 75 percent of people in key roles quit within three years, on average, post-merger.
A merger and the prospect of change can be overpowering for staff, leading to a feeling of limited control and autonomy. Coaching my clients through this change instills a sense of control and competence, and encourages proactive efforts for improvement.
4. Create a program to support the culture you strive to build.
- Analyze what aspects of the culture are working and enable the organization to perform well and what aspects are not working and inhibit its ability to act in the way aligned with the purpose of the M&A.
- Apply organization-wide culture-building objectives, strategies, and key results to the context of a group or function. A strategy can include group and individual coaching to cultivate engagement and facilitate the changes needed to achieve the desired culture.
- Engage influencers who can be culture carriers, those who demonstrate the desired behaviors of the culture the organization is striving to emulate and have them cross-seed desired behaviors into each business. People mimic individuals and groups around them.
- Reward and incentivize leaders and colleagues who role model and behave in line with the desired culture.
The same rigor that is applied to thinking about financial outcomes needs to be applied to culture when planning a M&A and in integration. This set of principles and approaches are best practices that successfully create positive outcomes, build alignment and buy-in during a M&A. Start the cultural assessment early in the due diligence phase and leverage the opportunity to create the culture you want to cultivate. We all want to be part of an organization that recognizes and values us and our work. Great cultures are built and reinforced by its people, so pay attention to it.
A word of caution – history repeats itself.
Whether you are the acquirer or being acquired, do your due diligence, examine past behaviors and actions of the partners in previous transactions. For example, if the acquirer overhauls and changes the acquired entity’s name, chances are they will repeat this behavior – it is their cultural approach. Recognize these kinds of issues upfront and address them or be prepared to accept them.
I leave you with one of my favorite Irish (Gaelic) sayings:
Tús maith, leath na hoibre (“A good start is half the work”).
