Feature

posted 15 Dec 2005 in Volume 8 Issue 7

A marriage made in heaven?

The nebulous quality of culture in merger discussion can mean it is all too easily overlooked. But leaving cultural compatibility to a later date is a recipe for disaster.

By David Lewis, regional managing partner, Weightmans

In October 2005 I had the pleasure of attending a presentation in London by David Maister, renowned consultant to professional-service firms and author of a series of inspirational, insightful and informative titles aimed at those who manage or interact with them.

Disarmingly, Maister accepts his views are unencumbered by false modesty; but they are delivered with passion and humour and, reflecting as they do his vast experience and extensive research, offer cause for reflection. As a result, one should hesitate before dismissing too readily his snorted public riposte to the innocent question I posed that day: When and why do mergers work best? To which he responded: “Mergers are always a stupid idea. They are an excuse for those who are too gutless to manage!”

Leaving aside the possible inference that this response was itself a gutless excuse to avoid answering the question constructively, it may, more charitably, be seen as illustrative of the fact that crude hyperbole can be an effective means of ensuring the essence of a message reaches the otherwise deaf ears of its target audience.

With pending regulatory reforms presenting previously unforeseen threats and opportunities, many firms are becoming increasingly conscious of the need to adapt and evolve to meet their changing environment. The grapevine suggests that some consider rapid growth to be essential for mere survival, let alone to deliver ongoing competitive advantage. Fearing that time constraints mean that this cannot be achieved organically, some firms are being drawn instinctively towards merger, seeing this as a feasible opportunity to climb the ladder either to escape a hole or reach new heights. But, if Maister is right, this instinct may be wrong.

Since becoming an articled clerk with my firm in 1985, we have undertaken two true mergers and one ‘acquisition’, which amounted to the same thing. In addition, we have considered a number of propositions and proposals, having been either the instigator or recipient of flattering and flirtatious first moves. In some instances, such advances have been unwelcome, but others have been rather exciting dalliances before a parting of the ways.

My own experience suggests Maister is wrong – but I do know what he means. There can be good reasons for merger – they can work. But there can also be good reasons for walking away, which are all too often ignored. To merge for the wrong reasons, or without proper preparation, planning and perseverance, has much in common with marriage following a whirlwind romance – perhaps initiated by a lost soul desperate not to be left on the shelf; or somebody keen to acquire the lifestyle of their dreams by marrying into money; or simply by an enthusiastic couple who woke to face the unintended consequences of sharing a few glasses too many the night before. Sure enough, it can work, but…

Whatever the reason for getting together, I fear that many firms see merger as the most effective route (let’s call it their strategy, just for fun) to get from A (where they are today) to B (the land of their goals and aspiration).

But often, they embark upon the journey ill-prepared, having plotted A incorrectly on the map. Others set off without assessing properly the capacity and motivation of their travelling companions, and without ensuring that they all really want to make the trip, or know what to expect when they get there. Many make favourable assumptions about the proximity of B, and its prevailing climate, and few seem to conduct any real assessment of the terrain that will need to be crossed, together, along the way.

In theory

There must be a theory to any business – its raison d’etre that serves as the rationale, even if unarticulated, for its creation or continued existence, direction, culture and style.

In 1994, management guru Peter Drucker argued that the established theory of any business is the result of assumptions made about the organisation’s environment (which defines what it is paid for), mission (which defines what it considers meaningful results) and core competencies (which define where it must excel to maintain competitive advantage)1. These must all fit reality, fit together, be known and understood throughout the business, and be tested constantly.

Frankly, I have never found Drucker’s theory particularly accessible or easy to apply. To assist my own understanding, I have often simplified this to ask two questions: ‘Why are we here?’ and ‘how do we want it to feel?’.

Firms may or may not have attempted to directly apply Drucker’s theory (or any equivalent management model) to assist in understanding and developing business. But my perception is that most firms appreciate that the partners are in business together or there are, at least, common views on what might be summarised loosely as ‘vision and values’.

In applying these labels of convenience, I take vision to be the factors that answer the question ‘why are we here?’ – being the reasonably consistent and compatible aims, goals and aspirations of partners in matters such as reputation and standing; market position and quality of work; financial stability and returns; business sustainability and durability.

In this context, I use values to answer the question ‘how do we want it to feel?’ – the answer being reflected in the norms that develop from partner attitudes to environmental and cultural issues surrounding behaviour, style, mood, work ethic, decision making, autonomy, authority, risk and change.

Rather more neatly, perhaps, in 2005, Professor Stephen Mayson used the term ‘normative environment’ to encapsulate these concepts – describing this as the “framework for thoughts, actions and legitimacy in the firm”, which arises from the purpose, culture and climate of the organisation².

Vision and values (or the normative environment) are likely to determine and shape the deliberate strategic direction adopted by any business.

It seems to me that any strategic preferences can only be determined by reference to these. However, recognising that strategy is a matching operation³, in which the firm’s resources and capabilities must suit its trading environment, long-term choice may be restricted, unless and until changes can be made.

Any strategic choice needs to link up with the organisation’s ability to deliver upon and fulfil its intended value propositions. That means assessing how a firm’s unique know-how mix (supported by operational structures, policies and procedures) will allow it to achieve and sustain competitive advantage⁴.

Where a gap exists between the strategic preference of the organisation and the limited resources or choices available to it, there are two options: stick or twist.

As Mayson noted in Making Sense of Law Firms⁵, a firm in this position may either try to compete only in those areas to which its current resources are apparently suited (which I would regard as sticking, and rather defeatist if that is not what the partners truly aspire to); or it may attempt to gear up those resources in order to compete in the environment and market it prefers (in my language this is twisting, as it is reflective of an ambitious ‘architect mentality’, where there is a common will to build a future, rather than accept current limitations). Mayson suggests that the outcome of the choice is likely to depend upon the degree of entrepreneurialism within the business (itself an element of the normative environment) – or, if translated back into my ‘pontoon-speak’, whether or not those making the decision are gamblers.

It can be seen from this cursory glance at strategic planning that merger, although not in itself a strategic option, can be a legitimate means of implementing a strategic choice and developing the resources required to deliver upon a value proposition. It can be an effective way to attract otherwise elusive expertise or to add an additional location, for example. And either of these may be essential elements in fulfilling the strategic goals of the business. Indeed, merger may well be the only feasible means of executing the firm’s strategic choice within the time constraints available – and as time-horizons are crucial in achieving and maintaining competitive advantage, there may be no other route available.

This is why I think that on this occasion Maister’s one-size-fits-all answer misses the point. His view is justified in so far as it describes those that choose merger as an expedient way out of having to make tough decisions within their own business – where they might otherwise have tackled under-performers; introduced improved measures for addressing financial discipline; or adopted revised processes, procedures and technology to create more efficient methods of working. What is neither gutless nor (necessarily) a stupid idea, however, is acting upon the benefits of having sufficient self-awareness and honesty: to appreciate the constraints created by the limited human and financial capital currently available to the business (including, specifically, the managerial acumen of those presently charged with leading it); and

to identify and act upon an opportunity to acquire and exploit the additional resources that will deliver sustainable competitive advantage.

In practice…

To dismiss merger as a stupid and gutless approach may be an overstatement – but personal experience has shown that many traps exist for the unwary that, although infinitely varied, tend to share common roots.

Merger can result from a conscious and planned decision (consistent with the underlying theory of the business) based on a considered, deliberate strategy; or, as a necessary step to secure the future of the business in the face of adverse financial and market indicators from which, within the given time constraints, it could not otherwise emerge intact. Less attractively, as Maister implies, merger can be driven by a lily-livered cop-out by clueless managers; from herd instinct and mimicry of others; or even because the approach made by another is so very flattering per se that it simply cannot be resisted.

In any of these instances, the most likely indicator of failure in the merger will be if the participants imagine that the process is about putting together two businesses, when it is actually about bringing together two groups of people.

Tension and conflict are human characteristics. Money does not fall out with money; systems do not have aspirations; policies do not have needs. But people fall out, have aspirations and needs, and can easily get agitated about them all.

The most common post-merger problems arise because, during their pre-merger discussions, the parties preferred to turn blind eyes to the scope for conflict or to the glimpses they catch of unattractive characteristics and flaws in each other.

Whether the potential for tension arises from differing approaches to profit-sharing or key-performance indicators, communication structures, the role of professional managers or whatever – the list is not exhaustive – the underlying problem will be the conflicting attitudes of the people concerned. Their present environment is likely to have attracted them because of (or created expectations within them about) issues such as the degree of autonomy they might enjoy; their exposure to factors that motivate them; the rewards for their labours; their involvement in decision making;

working hours and the work-life balance; and so on. Any or all of these may be subject to change as a result of the revised expectations within the new firm post-merger, but the ability of individuals or groups to accept and adapt to the changes should not and need not come as a devastating surprise after the event.

In Organizational Culture and Leadership, author Ed Schein noted that due-diligence exercises tend to focus upon checks of financial strength and other concrete aspects of the strength of the proposed merger partner – but rarely upon cultural aspects such as philosophy and style, mission and ambition. In other words, the key aspects of vision and values (or normative environment) tend not to be assessed for compatibility. Yet these are essential components in determining the ongoing theory of the business and its strategic direction, and thus likely determinants of the new organisation’s mood and method, processes and procedures, which shape and reflect the day-to-day experiences of the people who work there.

I share Schein’s view that cultural analysis should be central to merger planning. Moreover, I would say that paying lip-service to this area is arguably worse than doing nothing at all. To proceed on just a half-hearted review of compatibility, amounts to making a tacit endorsement of the merger partner’s current approach, including any aspects that cannot be tolerated and will need to be addressed.

Bold and confident leadership is crucial if the process is to be handled correctly and firms must be willing to walk away for the right reasons, if and when:

Areas of incompatibility are identified;
Frank and realistic discussion reveals that such areas cannot or should not be ignored;
The parties do not agree on the need to change, the process for such change or what a shared future might look like.

Returning to the relationship analogy, it is surely far better to walk away before the wedding. The alternative is to risk a messy and painful divorce or, for the sake of the children (aka the clients), remaining in a relationship that is a daily struggle.

In Organizational Culture and Leadership Schein suggests that leaders have four essential tasks to perform:

To understand their own business well enough to be able to identify the possible areas of incompatibility;
To decipher the other organisation’s culture, and engage in activities to facilitate that culture;
To articulate the synergies and incompatibilities in a way that promotes genuine understanding of the position;
To persuade others to take the cultural issue seriously.

My own experience suggests the importance of this exercise is misunderstood. It is easily derided as being too touchy-feely, and a potential impediment to a meaningful business decision – typically by those who would be most resistant to change themselves.

Consequently, it can be difficult for leaders to tackle these issues openly, for fear of appearing to lack either the hard-headed business brains to see beyond such concerns that are dismissed as trivial by the hawks, or the managerial skills to effectively address any annoying people issues post-merger. In practice, of course, those very issues tend to become more irksome and embarrassing after merger, and the incentive for anybody to agree to change their ways (to their own perceived disadvantage) once the deal has been done is naturally diminished.

In the professional-services environment, where those handling the negotiations are likely to be partners elected to office by their peers, the instinct for self-preservation and popularity (ahead of the next round of elections) can be a further inhibitor. To stand again for office, having turned down or relinquished an ostensibly attractive business proposition on grounds as nebulous as having incongruous visions and values, may reasonably be considered about as effective an election strategy as placing an X alongside a rival candidate’s name.

Conditions for successful merger

The decision to merge may be right or wrong. It is unlikely to prove to be right if made for the wrong reasons. If the parties considering the opportunity to merge do not share a consistent vision of life in the new firm – why they want to be there, and how they want it to feel – the prospects for success and happiness will be limited.

My own answer to the question I posed to David Maister would have been that mergers work best when all parties (a) share the same preponderant vision and values and describe the normative environment they wish to develop in similar terms; and, thus, (b) have agreed upon (and ideally articulated) their theory of the business – the foundation upon which they can work together to build the necessary structures, procedures and policies, within a culture and climate that sustains them.

These same conditions are most likely to lead to success in practice (as defined subjectively by the organisation in question). Establishing and sustaining these conditions – through a combination of open communication and effective leadership that supports and demands joined-up thinking in all aspects of management of the firm – is far from easy. It is fair to say that merger will rarely improve the prospects of reaching this state in the short term, but provided it is consistent with a shared theory of the business (properly reflecting the normative environment) and the execution of existing strategy, it may offer the best prospects of reaching the ultimate destination within the time frame allowed.

References:

Drucker, P.F., ‘The Theory of the Business’, published by Harvard Business Review, September/October 1994
Mayson, S., ‘Strategy and Strategic Options’, Working Paper for Nottingham Law School, 2005
Grant, R.M., Contemporary Strategy Analysis, second edition, published by Blackwell, 1995
Mayson, S ‘Strategy and Competitive Advantage’, Working Paper for Nottingham Law School, 2005
Mayson, S. Making Sense of Law Firms, published by Blackstone Press Limited, 1997
Schein, E.H., Organizational Culture and Leadership, published by Jossey-Bass, San Francisco, 1992
As above, p384-5

David Lewis is the regional office managing partner at Weightmans in Liverpool, and a group tutor and presenter on Nottingham Law School’s PgD in the management of legal practice.