Credit unions and CUSOs are using their investing powers to be more innovative and entrepreneurial when it comes to technology and new products and services. Many are exploring co-investing with individuals and business founders who are looking for additional capital from credit unions. While these partnerships between credit union investors and individuals generate fresh new ideas, they sometimes face friction as the two cultures collide.

I had the opportunity to speak on this issue with Kirk Drake, CEO of Ongoing Operations and Brian Lauer, Partner at Messick, Lauer & Smith in the panel “Entrepreneurs as Co-Owners of CUSOs – Managing Different Business Styles and Expectationsat the 2017 NACUSO Network Conference in Orlando, Florida.

In a packed breakout session we discussed how credit unions and CUSOs should persuade individuals to work for their organization and how to build a bridge between two different perspectives. One of the most important things credit unions and CUSOs must do is recognize the asymmetry between a highly-regulated credit union environment and a swift, entrepreneurial culture. Recognizing these differences is the first step to understanding how to incentivize entrepreneurs not just from a financial standpoint, but from an emotional and strategic position so that you can grow your organization as a team.

Culture is an important part of an organization, but it can be difficult to define. Unlike other areas, such as finance and operations, which have concrete metrics like revenue, EBITDA, and number of employees, quantitatively measuring culture can be challenging. Leaders often rely on their “gut” to understand another company’s culture, but this leaves an incomplete picture.

When pursuing mergers and acquisitions, fully understanding the seller’s organization, including its culture is critical to your success. Rather than relying on subjective impressions, we use the Cultural Assessment Tool to measure a company’s culture.

We look at about two dozen key areas and scrutinize how the company goes about doing business in each area. For example decision-making: Is it centralized or decentralized? It is fast or is slow? Is the company consensus-building or dictatorial? We use this tool in the first place to look within, and then to analyze a prospective acquisition. For implementation, we use an online questionnaire tool, such as SurveyMonkey, which is easy to deploy and delivers quick results.

The Cultural Assessment Tool

The Cultural Assessment Tool

How we apply the Cultural Assessment Tool depends on the size of the organization. We typically approach the process on four levels: shareholders, executives, managers, and employees in the organization. What we’re looking for is the perspective on the company’s culture at each level, so we can create a crosspollination of views across the organization. What often causes surprise is how differently people at various levels may view the same company culture.

For example, we worked with a company where the shareholders felt the culture was open and transparent, with flexible, nimble decision-making that nurtured innovation. The rank-and-file staff held a diametrically opposite view. They didn’t feel that the mission and operational plan were at all well communicated. In fact, they saw the culture as closed, dictatorial, and averse to consensus-building. It was almost as though we were talking about two different companies.

Using the Cultural Assessment Tool is one way to objectively measure and evaluate your own culture and the seller’s culture during due diligence.

Whenever I am consulting on an integration program, I introduce a critical component I call the 100-Day Plan. I’ve found that when companies get the 100-Day Plan right, the likelihood for a successful integration is extremely high. But if you don’t implement the 100-Day Plan at the beginning, integration generally doesn’t go well.

Why is that? Think about a new employee starting work at your company. What are they like the first day, the first week, the first month? Chances are, they’re pretty agreeable. They’re probably listening and observing as they adapt to their new environment. After all, they’ve got to figure out basic aspects of your company’s culture, like how coworkers prefer to communicate throughout the day or when they typically go to lunch. Is the office quiet or talkative? How will they fit in with the existing workforce?

The same thing is true of the newly acquired company. During the first hundred days, the people at the company are generally going to be in listening mode. They will want to see how much you, the buyer, will be changing their company. In the meantime, they’ll be fairly agreeable.

Now consider your hypothetical employee six months after hiring. At that point, they’re feeling a lot more confident. Maybe they’re inviting coworkers to their choice of restaurant for lunch or taking on a leadership role within their department. They’ve started pushing back when other people are pushing forward.

After about a hundred days, people at the company you acquired will start getting comfortable and begin saying, “No, no. Wait a second. I’m going to push back a little on that.” Your first hundred days are critical in terms of getting people on board, aligning them with what you’re trying to do, and showing them what your vision is for the integrated companies.

This is why the foundation of a successful integration is built on the 100-Day Plan.

Photo Credit: Barn Images with modifications by Capstone

Cultural due diligence is a critical task in the acquisition process. It exposes hidden problems and risks, but also may identify opportunities. However, if you do uncover red flags, you may need to reevaluate the deal. Sometimes you must simply call it off.  We have walked away from a transaction when due diligence revealed a problem.

Huge Ethical Difference

The most obvious reason to back out is when there is a huge difference in ethics or values.  At one meeting with an owner, we asked to see the company’s books and were asked: “Well, which set of books do you want to see?” Of course we wanted to see the accurate ones. More investigation revealed a culture of cutting corners. People weren’t hesitant about stepping over the line in ways that to us were clearly out of bounds. Changing this culture – holding the staff to our ethical standards – was too great a challenge. We had to walk away from the deal.

Incompatibility in the Workforce

An incompatibility in the workforce may raise a different red flag. We found that the employees at another company were not very technologically advanced or trained in automation. Given our client’s highly sophisticated, automated and computer-led environment, upgrading the workforce would have required too drastic a change.

While these examples may help, there’s no clear rule about when to back away. Every strategic acquisition is slightly different and your reasons for saying “no” may vary from ours.

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Culture can often be neglected simply because it is difficult to measure, especially when compared to hard facts such as number of employees or company revenue. After all, what constitutes a “good” culture? Definitions may vary from company to company and even among members of your own acquisition team.

Despite this challenge, company culture should not be ignored; it is an important characteristic of the acquisition target and a significant factor in the success of the transaction.

I have found the best way to measure culture is to use objective criteria and concrete metrics. This way, everyone on your acquisition team will be on the same page when evaluating a potential acquisition target. Below I’ve listed three example criteria to consider:

  1. Communication Style – Observe how employees and management typically communicate during the acquisition process. Is there truly an “open door” policy where all suggestions are welcome? Does it take a long time to come to a decision or does the company make decisions swiftly? Consider this communication style lines up with your own.
  2. Entrepreneurial vs. Mature Company – Is the original owner still at the company or does the seller have a professional management team? Also be sure to take a look at employee turnover, benefits and compensation. These items will give you a better understanding of the target’s culture.
  3. Conflict Resolution – Does the company have a formal process in place? If so, how does it compare to your own process?

There are, of course, other criteria you may wish to consider when evaluating the seller’s organization. And, there is no one right answer when it comes to measuring culture. Your criteria and metrics will be different depending on your strategic rationale for acquisition and you own company’s growth goals.

I’ll be discussing some more tips on measuring company culture my upcoming videocast on “Cultural Due Diligence” this Thursday, November 5. Don’t make the mistake of omitting culture from your M&A process.

 

Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

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Culture clashes can make or break a deal. Just think about a few infamous deals that fell apart, such as the Time Warner-AOL merger in 2001. In Deals from Hell, Robert Bruner analyzes the reasons for failure in depth along, including examples of deals that failed due to cultural issues.

In fact, cultural issues are still cited as one of the top reasons for acquisition failure, which often means the breakdown comes at a late stage in the process. This is hugely wasteful. Clearly, there’s no point in closing a deal only to have it collapse during integration.

With so much at stake, it’s important to ensure a successful integration of the two cultures involved. Here are just some of the questions that arise:

  • How can you avoid culture clashes?
  • Should you only purchase companies that share a similar culture as your own?
  • How can you evaluate the culture of an acquisition prospect before the deal closes?

You don’t have to purchase a company that’s exactly the same as yours. In fact, you may be buying a business specifically for its unique culture. However, you should always conduct cultural due diligence when evaluating a potential acquisition to maximize your chances of success. The place to start that due diligence is on your own turf: Before you even evaluate the culture of a target company, you need to look within.  By understanding your own business culture you’ll be positioned to talk to the right people in the other company, and ask the questions that will give you valuable insights about its culture.

Learn more about what questions to ask and what to do with the information gained during cultural due diligence in my upcoming M&A Express videocast on November 5.

Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

I’ll also be answering any questions you may have at the end of the videocast. I look forward to seeing you there.

 

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People are critical to the success of your company, and it’s no different in the business you are acquiring. But how can you go beyond the surface and find out what employees really think? It is doubtful employees will be completely open and honest when asked point blank, “Do you like your job?”

One of the best sources of information when conducting human resources due diligence are employee satisfaction surveys, especially those conducted by a third party. These surveys are not only telling about employees but also about management and the organization as a whole.

Review historical employee satisfaction survey results and look for key metrics and trends. It’s also wise to look at remediation – how has management responded to complaints in the past? This may provide insight into the management team, working styles and organizational culture.

When we’re consulting on integration, one metric my firm looks at is turnover. Is there high turnover within a department when benchmarked against this industry or the rest of the company? If so, why is this happening? In certain situations of unusually high turnover, we found that the department manager had been there forever but was an ogre to work with. Anyone with any intelligence who came into that department pretty much got run out because the manager felt threatened!

You can also discover “green buckets,” or opportunities, within the survey results. If employees are dissatisfied with their old computers, now may be the time for an upgrade. In one case we noticed employees had really old monitors. We found that the owner had upgraded the computers, but viewed upgrading the monitors or keyboards as unimportant. For our client, it was relatively inexpensive to purchase new monitors and employees were very happy with the upgrade. Look for these opportunities to form a positive relationship with your new employees.

An acquisition can cause anxiety for employees. Anything you do as the buyer that says “We care about you” will help reassure employees and make for a smoother integration process.

How well do you really know your company? If you’re the owner or the CEO, you might say you have a pretty good handle on it. After all, you’ve been there since the beginning and you’re the leader.

While that might be true, you may not really know everything about your organization.

I’ll give you an example. We typically have our clients conduct a cultural assessment in which the acquisition team — the CEO, other C-suite executives and senior-level managers — each are asked to draw an organizational chart.

In one case, the CEO drew a chart depicting a flat hierarchy with everyone one the same level. According to the CEO, the business had open communication and everyone’s opinion was equally valued.

What one of the managers drew was quite different. The top of the paper showed one person labeled “God” and everyone else was way down at the bottom in what looked like a zoo.

Company Culture Diagram

Company Culture: Obviously, the CEO and the manager had very different perspectives about the organization!

Obviously, the CEO and the manager had very different perspectives about the organization!

While this is an extreme case, I tell this story to emphasize the importance of doing a cultural assessment, particularly if you’re the leader of your company. Having a clear and accurate picture of your business’s culture is important as you embark on an acquisition program.

Pubicis and Omnicom have called off their proposed $35 billion merger that would have created the largest advertising agency in the world. According to reports, Publicis CEO Maurice Levy and Omnicom CEO John Wren disagreed over many details, including filling key management positions and corporate structure.

This comes as no surprise to me. Ten months ago when the deal was announced, I suggested cultural integration would be a significant challenge for this cross-border deal between two established companies with strong corporate cultures. After all, acquisition success means integrating two companies into one business that works as a cohesive unit. Talk about the strategic value or synergies of a deal all you want, but if the CEOs can’t come to an agreement, the acquisition is bound to fail.

What surprises me is how far the acquisition progressed. It seems like integration issues were not deeply considered before announcing the merger, and the companies were unpleasantly surprised by the culture clash once it came time to execute the deal.

It’s best to start thinking about and even planning for integration early in the acquisition process. This way you have plenty of time to invent creative solutions to address cultural differences or to realize it’s not a good match. Then you can walk away from the deal before moving too far down the path with a prospect that doesn’t interest you.

Buying the right company is essential, but it is difficult.  It may be easier to eliminate the “wrong” companies – prospects with glaring due diligence issues such as theft or lawsuits, or even more subjective issues like a poor cultural fit. However, the decision is not always so black and white.

How can you know if you’re targeting the wrong company? If you find yourself agreeing with most of these signs it may be time to reevaluate the acquisition:

You’re pursuing the deal to justify the time and effort you have invested in it.

The resources you have spent on the deal are sunk costs whether or not you move forward with the deal. Although lost time pursuing a prospect is disappointing, it makes no sense to continue down a bad road just because you’ve been on it for some time.

If your time and effort invested so far are the only reasons to move this deal forward, stop! These are not good enough reasons. It’s better to accept the sunk costs and move on than to buy the wrong company.

You feel like you need to get this deal done, or else.

It’s easy to get a little obsessed with completing a deal. Take a minute to slow down and ask yourself, “What about this specific deal is so important? Why must it go through?”

Panicked, rash decision-making can lead to disastrous results. Go back to your strategic foundations and calmly and objectively make a decision. After you’ve taken a minute to refocus you may find you have more options than you think.

Maybe you do really want the deal because the target company has a specific capability or technology central to your strategic plan and you think this is your last and only chance to achieve that plan. You may be right, but be careful. Remember, buying the wrong company is an expensive mistake. There are likely other prospects and other ways to fulfill your strategic criteria.

Only the CEO likes the prospect company.

Is the CEO in love with the prospect while the rest of the acquisition team has reservations? While the CEO’s opinions are important, so are the opinions of others. Each team member must have a say, even when that means disagreeing with the boss.

Open and honest discussion among members of the A-Team may shed light on new issues. Should you acquire the prospect it won’t just be the CEO working with the new company – members of both workforces will need to work together. Make sure it’s the right deal for the entire company.

These signs are key indications that you may be pursuing the wrong prospect. I challenge you to take some time to consider your current acquisition prospect. If you find it’s the wrong company, you can always walk away from the deal! Remember, buying the wrong company is an expensive mistake you’ll want to avoid.

 

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Cultural alignment while integrating two companies is a hot topic in the M&A world.  For instance, CFO.com recently quoted Jonathan Chadwick as saying, “The number-one reason I think deals fail is because there was not an agreement or a matching of cultures.”

Should you have any doubts, read about Kidder-Peabody inside of GE. Those cultures did not mesh, and I don’t know if anyone could ever make them work together.

It’s important to assess the cultures of the prospect and your own organization before closing the deal.  That does not necessarily mean only acquiring companies whose cultures are the same as your own. Successfully acquiring a company with a different culture does happen more often than you would think.  In fact, the prospect’s different culture may be the very reason for the deal.

Years ago we were working on an acquisition for a manufacturing company in the Midwest. Our client sought a high energy, visionary and artistic organization to produce a more creative environment.  Together we found a company in California with a radically different culture. . Our client was a coat-and-tie company; the California company was very relaxed. The CEO of the acquisition prospect told us, “I have a hard time getting employees to wear shoes sometimes.”

Obviously integrating the two cultures was a challenge, but we found the right blend. One concept we incorporated from the acquisition prospect was a 9/80 work schedule, where you work 80 hours over nine days and then get every other Friday off. At first, our client thought it would never work; there was no way they could have people out of the office every other Friday.

But, since it was so successful with the California company, our client tried it with a small group of employees. They found absenteeism went way down and morale went way up. Employees scheduled doctor appointments, car repairs, etc. for every other Friday so it didn’t interrupt their work day.

Just because two cultures are different doesn’t mean one is right or the other is wrong. You need to be a good listener—and stay open to the concept that both cultures can work well together.

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