The Role of Cultural Due Diligence in Business Integration Efforts

Due Diligence is a phrase that has traditionally been used to reflect the analytical activities that occur during merger and acquisition activities. Recently, the due diligence process has been expanded to include the assessment of business association and affiliation agreements.

Due diligence is generally made up of 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 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 15-25% of all mergers and various business combinations live up to expectations. It is reported that between 25% and 30% are total failures, and the acquired entity is liquidated at a loss within 3 to 5 years after the 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 declining stocks or in cash that they borrow at interest rates in the increase. 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 seeing millions in overvaluation, 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 a direct relationship to the attention paid to the culture of affected organizations; however, HR and OD departments are often not involved in the initial process. research activities around integration efforts.

We recommend that “cultural due diligence” be carried out 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 goals. 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 toward achieving the strategic goals of human system integration.

The CDD process should be carried out as early 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 goals.

The Cultural Due Diligence process covers key domains of organizational and cultural effectiveness including:

• Leadership: vision, mission, values, business strategy development, effectiveness and leadership ethics
• Relations: trust, collaboration, inter / intragroup relations, community and clients
• Communication: feedback, information exchange, employee confidence in the information
• Infrastructure: formal procedures, processes, systems, policies, structure and teams
• Participation and decision making: levels of authority, responsibility, 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 impact on the business.
• Cultural descriptors: a list of default values ​​that can be customized to reflect your organization’s values.
• General climate: Open questions that capture employee stories and suggestions.

The result is a cultural resume. This document shows the data results of a cultural diagnosis and sets out the unique organizational culture of each business unit in a clear message. Cultural Resume helps stakeholders decide the best approach in the future and create measurable action plans for shaping cultural integration efforts for those involved. Cultural due diligence cannot fix an organization that is following the wrong strategy. What you can do is cut back on informal practices, domestic politics, lack of trust, resentment, and just plain mismanagement that could sink the right strategy. Like any evaluation, CDD is only as good as what you do with it, but we think the efforts involved are worth it.

People are the backbone of any business and are at the heart of the integration effort. We hear this all the time: “People are our most important asset” … really? So why are finances reviewed quarterly, customer satisfaction surveys completed quarterly (or more frequently), and employee satisfaction surveys conducted every 18 months at best? So 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 incorporating people into the onboarding process, you will gain better information that will foster more engaged employees and better long-term business results.

Does cultural due diligence work? We believe it!

We work with a large manufacturing company on integration efforts. The organization had made a strategic decision to combine its sales force and customer service organization. We begin the evaluation phase with a review of the typical organization chart, a mapping of the physical location, and an evaluation of management styles. The differences between the two organizations were huge and not at all consistent with the printed policy manuals. The two functions were audited and we implemented the Cultural Due Diligence process.

Did the ending work out?

We successfully integrate the two functions into a single management team and save more than $ 1,000,000 in waste per year. Two dozen layoffs and several outdated and poorly managed policies and procedures were eliminated. In the next two years, customer satisfaction increased by 30% and market share grew by more than 20%. The most important thing is that the effort lasted and exceeded the objectives. We beat the odds!

If you’re making an integration effort, here are some helpful tips to consider and improve your potential for success:

1. Involve your HR / OD department or an experienced external HR / OD consultant in the onboarding process from the start.
2. Use an appreciative inquiry approach when examining the culture of business units. Focus on finding best practices that support achieving goals rather than flaunting areas of weakness.
3. Use a validated assessment tool that collects both quantitative and qualitative data.
4. Include culture as part of your due diligence process and be prepared to address inconsistencies between business units with action.
5. Communicate … communicate … communicate! Keep employees informed of the progress of the integration effort.
6. Involve employees in the integration effort.
7. Allocate dedicated time and resources to the project.
8. Measure and report on project progress regularly.
9. Communicate results and progress and seek information on areas for improvement in what you are doing.
10. Share and celebrate the successes!

Excerpt from “Working together on your shift, making sense of organizational culture and change” Any more questions? Need more information on cultural due diligence and how you 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 approach is to ensure that our holistic approach and validated assessment tool, Cultural Health Indicator ™ (CHI), is accessible to as many organizations as possible. From self-service models to full-service consulting, we have a range of options to meet each project’s requirements that are met on time, on budget, at all times. EMERGE International is a WBENC certified women-owned company.