Beating the Odds: Why Most Mergers and Acquisitions Fail

If you’ve lived through a few mergers, you probably know why up to 70 percent of mergers and acquisitions transactions don’t achieve the expected financial and strategic results. Flawed assumptions, insufficient planning, poor execution and cultural conflict leave the business landscape littered with deals gone bad. However, some firms consistently do this kind of growth very well. How do they succeed where others fail?

Successful companies begin by recognizing that people-related decisions present the most difficult variables in almost any transaction and pose the greatest risks, such as turnover up to 60 percent, or lingering cultural issues that cripple productivity. They beat the odds by carefully managing human capital to transform two groups of people into one functioning company.

More than any other asset, human capital underlies what a company is and does, and the long-term human capital life cycle animates its evolution and growth. Any M&A event is hugely and lastingly disruptive to this life cycle. And yet, the success of the deal depends on sustaining and directing it.

Most transactions are intended to generate a return on the investment through acquiring and expanding customer relationships, generating new channels for the combined offerings, creating unique new capabilities, products and services, and gaining operational efficiencies and synergies.

What drives all of these is human capital. In the merged sales and marketing teams, in product development and in running the organization, putting the right people in the right places is the key to making the combined efforts pay off.

A Disciplined Approach
To get the people element right, firms that succeed at growth by acquisition tend to apply the same kind of disciplined, data-driven approach to human capital that they use in other areas of M&A activity. In place of financial and operational metrics, they use talent analytics — predictive, scientifically proven measures of human performance. Based on detailed competencies, these can accurately predict each person’s ability to perform well in a given role. With these tools in hand, leaders blend art and science to craft a complete people strategy.

Like most aspects of business, doing M&A well is part art and part science. Mastering “the art of the deal” takes strategic insight, negotiation, leadership and deep experience. These skills are often personal, subtle ones. They take years to learn and can’t easily be analyzed or quantified.

On the other hand, the “science” of understanding and managing quantitative information is also essential. From due diligence through integration, making sense of the financial, operational and customer data can demand a great deal of work. Those tasks, however challenging, are at least well-understood.

What’s missing from this sketch? When a deal doesn’t live up to expectations, you’ll often hear executives explain failure by saying “we didn’t do a good job on the people side,” or “it was difficult to merge the two cultures.” What they really mean is they didn’t manage the two companies’ human capital as well as they did the financial and organizational assets.

Specifically, they didn’t anticipate disruptions to the human capital life cycle accurately and manage them aggressively. More often than not, the underlying reason is that leaders understood the art but not the science of human capital.

It Really Is a Science
What these decision-makers don’t realize is that human capital can be measured and analyzed with great rigor and precision. The science of talent analytics has helped drive staffing decisions in the enterprise for years. It’s been particularly effective in high-turnover areas such as customer service and sales, as well as in leadership development at much higher levels of the organization. Tools and expertise for managing talent scientifically are widely available at all levels and for companies of any size.

In an M&A situation, talent analytics can help the transition team assess and manage the human capital involved much as they would any other key asset. Doing so helps them deploy the merged companies’ employees efficiently and productively. When the right people feel they’re in the right jobs, they have a fighting chance to create the synergies they’re expected to produce.

The alternative is probably all too familiar. Faced with little objective information available about an unknown workforce, those in charge rely heavily on employees whom they or their managers already know. Even if those people aren’t the best-performing, “the devil you know” is usually better than someone you don’t. In a very collaborative deal, the same thing happens in reverse: The transition team trusts the other company’s opinions about staffing, which may turn out to be just as limited as their own.

Issues of scale often aggravate the problem. In a smaller company, senior leaders often know most of their employees personally. Making decisions informally works just fine — in fact, hands-on, personal management can be a point of pride. But as a company grows this approach doesn’t make sense anymore. Of all the growing pains successful companies face, learning to manage human capital more rationally is often one of the most difficult. The sudden demands of integration simply make the challenge more urgent.

Scientific human capital management has another important benefit in the fluid environment of an acquisition or merger. Where uncertainty and fear can wreak havoc, a focus on objective, unbiased information, placed at the center of a well-publicized plan, can help take some of the emotion out of staffing decisions.

Competencies at the Core
So what exactly do talent analytics measure? Predictive, scientifically validated psychometric assessments provide the raw data. What makes it useful is an understanding of core competencies, the skills and behaviors essential to success in a given job.

Step one in a merger environment is to define a competency model that describes at a high level what the merged workforce will look like. Then comes the heavy lifting: expanding detailed competency sets down to the level of individual roles. As the integration goes forward, these become a road map for people to understand the part they play in the integration process.

Leaders might expect to simply inherit the best talents from an acquired or merged company, minus a few “poor fits.” In reality, merging roles across two companies takes a smart, detailed analysis of competencies and careful transition of them into the blended organization. The result of all this analysis is a workforce that’s custom-built for the task at hand — both during the transition and long afterward.

Culture may be both the most critical factor in a merger and the most difficult to pin down. We know intuitively that culture is the glue that holds a company together. It’s the rules of the game, the between-the-lines meaning of things, that drives how the organization works and how work gets done. But even here talent analytics can offer new perspectives.

A competency-based approach can assess not simply skills or knowledge but also the attitudes, interests and motivations that add up to success on the job. Will the merged culture stress close collaboration or independent thinking? Methodical planning and development, or rapid implementation and iteration? Should you ask for permission first, or beg for forgiveness later? By framing the culture at the level of detailed behavioral competencies, leadership can show people exactly what they need to do not just to survive, but to thrive in the new environment.

This experience can still be highly disruptive and distressing for the people involved. Wrapping a formal change management program around the technical process is critical to help them understand what is happening and why, to anticipate and address their concerns, and to give them the support they need to remain engaged. It’s not all about damage control, however. An M&A event can also be an opportunity to address long-standing performance or cultural issues through an organization-wide “reboot.”

The Art of Science
Used well, talent analytics can ensure lower-risk, fact-based staffing decisions. These put the best resources in place to deliver the benefits envisioned from the deal, and the return on investment expected of it. Like most new tools, they also pose some significant challenges.

Analytics generate huge amounts of data that must be manipulated, analyzed and put to work in a complex human environment. This takes advanced scientific and technical expertise and long experience. But making sense of the data also takes a deep and nuanced understanding of how people work within organizations.

Ultimately, the people side of an M&A event is about people, not data. Getting it right demands careful planning, thorough analysis and an awareness that applying scientific principles to human experience will always call for a measure of art.

Ken Carroll is CEO of advisory firm Chally Group Worldwide. He can be reached at editor@talentmgt.com.