Due Diligence is a phrase that has traditionally been used to reflect the analysis activities that occur during merger and acquisition activities. Recently, the due diligence process has been expanded to include the evaluation of partnership agreements and corporate affiliation.
Due diligence is generally understood as legal due diligence and financial due diligence. At this time, research on financial assets, articles of incorporation, market share, technology, hardware, and business competencies are being examined.
Unfortunately, for business… one plus one doesn’t always equal two, particularly when it comes to culture and “human systems” integration.
Statistics indicate that only 15% to 25% of all mergers and various business combinations meet expectations. 25% to 30% are reported to be outright failures, with the acquired entity liquidating at a loss within 3 to 5 years of acquisition. The remaining 45% to 60% results in little or no apparent benefit to the buyer’s shareholders.
In today’s merger activity, we see an alarming trend of companies paying too much for the organizations they are acquiring. Falling stock prices are creating a disconnect between what owners want for their businesses and what operating companies are willing to pay, whether in rapidly dwindling stocks or in cash they borrow at rising interest rates. Research shows that the last time there was such a disconnect between buyers and sellers was in 2001, the last time the economy went into hibernation. We may be looking at an overvaluation of millions, but the potential losses that can be incurred due to a lack of cultural integration could be even more costly.
Independent studies by Watson Wyatt Research and Vector Group have linked the failure or success of integration efforts as directly related to the attention paid to the culture of affected organizations; however, HR departments H H. and OD are often not involved in the initial research activities surrounding integration efforts.
We recommend that “Cultural Due Diligence” be performed and integrated into the overall Due Diligence process.
So what exactly is cultural due diligence?
Cultural Due Diligence (CDD) is the process of investigating, evaluating, and defining the cultures of two or more distinct business units through a cultural assessment to discover areas of similarity and difference that will impact integration efforts and the achievement of strategic objectives. It should be combined with regular Due Diligence processes in the case of mergers and acquisitions. The results should be used as a fundamental tool for creating integration plans and a baseline for measuring organizational progress in the integration effort over time. This fosters commitment and ensures that the organization is aligned and on track to achieve the strategic goals of human system integration.
The CDD process should be carried out as soon as possible in a negotiation effort. The process can also be used as a benchmarking tool throughout the integration effort to measure progress and confirm that human systems are properly aligning with business objectives.
The Cultural Due Diligence process covers key areas of cultural and organizational effectiveness, including:
- Leadership: vision, mission, values, business strategy development, leadership effectiveness and ethics
- Relations: trust, collaboration, inter and intra-group relations, community and clients
- Communication: feedback, information sharing, employee confidence in information
- Infrastructure: formal procedures, processes, systems, policies, structure and equipment
- Participation and decision making: levels of authority, accountability, expectations and the decision-making process
- Change management: Creativity and innovation, recognition, continuous learning and diversity
- Finance: perception of financial health and the role of the employee and the level of financial understanding and the impact on the business
- Cultural descriptors: a list of default values that can be customized to reflect your organization’s values.
- General climate: open-ended questions that capture employee stories and suggestions.
The result is a cultural curriculum. This document shows the data results of a cultural diagnostic and presents the unique organizational culture of each business unit in a clear message. The cultural curriculum helps stakeholders decide the best approach to move forward and create measurable action plans for shaping cultural integration efforts for those involved. Cultural Due Diligence cannot fix an organization that follows the wrong strategy. What you can do is reduce informal practices, internal politics, lack of trust, resentment, and just plain mismanagement that could undermine the right strategy. Like any evaluation, CDD is only as good as what you make of it, but we think the efforts involved are well worth it.
People are the backbone of any business and are at the center of the integration effort. We hear this all the time: “People are our most important asset”… really? So why are financials reviewed quarterly, customer satisfaction surveys completed quarterly (or more often), and employee satisfaction surveys every 18 months, at best? So really, are people our most important asset?
The skills that people have and their experience constitute an important part of the value of a company. By including and bringing people into the onboarding process, you’ll gain better insights that will foster more engaged employees and better business results in the long run.
Does cultural due diligence work? We believe so!
We work with a large manufacturing company on integration efforts. The organization had made a strategic decision to combine its sales force and its customer service organization. We begin the assessment phase with a review of the typical organization chart, a mapping of the physical location, and an assessment of management styles. The differences between the two organizations were huge and not at all in line with the printed policy manuals. Both functions were audited and the Cultural Due Diligence process was implemented.
Did the end work?
We successfully integrated the two functions under a single management team and saved over $1,000,000 in waste per year. Two dozen layoffs and several poorly managed and outdated policies and procedures were eliminated. In the next two years, customer satisfaction increased 30% and market share grew more than 20%. Most importantly, the effort lasted and exceeded the goals. We beat the odds!
If you’re undertaking an integration effort, here are some helpful tips to keep in mind to improve your potential for success:
- Involve your HR/OD department or an experienced external HR/OD consultant in the integration process from the start.
- Use an appreciative inquiry approach when examining the culture of business units. Focus on finding best practices that support goal achievement rather than show off areas of weakness.
- Use a validated assessment tool that collects both quantitative and qualitative data.
- Include culture as part of your due diligence process and be prepared to address inconsistencies across business units with action.
- Communicate…communicate…communicate! Keep employees informed about the progress of the integration effort.
- Involve employees in the integration effort.
- Allocate dedicated time and resources to the project.
- Measure and report on the progress of the project regularly.
- Communicate results and progress and seek feedback on areas for improvement in what you are doing.
- Share and celebrate successes!
Excerpt from “How to prepare your shift, make sense of organizational culture and change” More questions? Do you need more information about Cultural Due Diligence and how it can improve the potential for success of your integration project? Contact EMERGE International at [email protected] for more information or visit us on the web at www.emergeinternational.com.
About EMERGE International: We believe in creating healthy and productive work environments. In fact, since our inception in 1996, we have been dedicated to it. At EMERGE International, our focus is to ensure that our holistic approach and validated assessment tool, the Cultural Health Indicator™ (CHI), is accessible to the widest range of organizations possible. From self-service models to full-service consulting, we have a range of options to meet all project requirements that are on time, on budget, every time. EMERGE International is a WBENC Certified Woman-Owned Business.