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Despite popular beliefs to the contrary, the single greatest barrier to business success is the one erected by culture
Edward T. Hall and Mildred Reed Hall

Cultural Due Diligence
Most companies undertaking acquisitions focus more on the deal than on the subsequent integration of the companies. This may explain, at least in part, why most of them fail….
By Mary van der Boon
(this article first appeared on www.expatica.com/hr)

How important is culture in an organisation? In recent years it has been acknowledged as being as significant a factor in international business as the bottom line. While the M&A boom has slowed somewhat in 2002, the percentage of acquisitions across borders has continued to increase, expected to reach 50% of all M&A activity by 2003. According to the International Labour Organisation 70% of mergers and acquisitions worldwide fail to meet their strategic objectives within two years. International consultants KPMG revealed in a recent study that "the overwhelming cause for failure of M&As is the people and the cultural differences." Meaning that in the majority of instances these business ventures run aground due to organisational culture conflicts.

Since knowledge is power, the obvious approach is for the acquiring party to perform a cultural due diligence before making the final decision, to determine if there is cultural synergy between the partners. This is often rejected by the company being investigated, however, since it requires allowing the (as yet uncommitted) outside faction full access to HR policy and company personnel. Few companies are willing to reveal themselves to such outside scrutiny. For that matter, very few organisations ever bother to analyse their own company cultures, perhaps fearing what they will discover. According to a Hay
Group study conducted of CEOs presently involved in mergers, only 28% said they had actually conducted an objective assessment of the culture of the companies involved.

International consultant Elizabeth Marx, author of Breaking Through Culture Shock, says "research on cross-border acquisitions has shown that differences in management style have a negative effect on company performance. Sadly, very few companies consider the softer, cultural factors of mergers, which may be a significant contributor to their subsequent failures."

"Far too few companies even begin to consider the effects on staff or the human implications of a merger", adds Dr. Marx.

It is essential to remember that the culture shock is just as great in the acquiring, or host, company as it is in the one being targeted. The cultural due diligence process must therefore be performed on BOTH companies, so that the leading partner also has a clear picture of their own corporate culture.

Once the green light has been given by both companies to be investigated, what then? How does one go about assessing an organisation’s culture?

Human resource departments play a key role in cultural assessment. They are ideally positioned to determine whether the two cultures will mesh and also to identify individuals within their own organisation who can provide the most insight into their corporate culture. HR’s most important role, however, may be in selling the concept to their own top management.

The most popular corporate culture assessment models, such as the one used by Dutch management consultants global tmc and unique sources recommend an analysis of seven different cultural elements:
  • organisational strategy (goals, mission statement)
    What really matters around here?
  • organisational structure (hierarchy)
    Is initiative and entrepreneurship encouraged and rewarded?
  • leadership style (the ‘linking pin’)
    Who has the most power?
    communication (interaction with others)
    What may never be said in your organisation?
  • organisational membership (characteristics of personnel)
    Do your colleagues really care about the business?
    general organisational characteristics (historical context)
    Who was the founder of the organisation?
  • environment (physical and economic context)
    What is your present market position?

San Diego State University professor Stephen P. Robbins, author of Organizational Behavior: Concepts, Controversies, and Applications, says that in cultural due diligence the valid and reliable information tends to come from asking the same questions of many people (to see how closely their responses align) and by talking with boundary spanners (employees whose work links them to the external environment, such as HR interviewers or company lawyers). He recommends the following questions to give insight into organisational processes and practices:

  • What is the background of the founders?
  • What is the background of current senior managers? What are their functional specializations? Were they promoted from within or hired from outside?
  • How does the organisation integrate new employees? Is there an orientation program? Training? If so, could you describe these features?
  • How does your boss define his or her job success? (Amount of profit? Serving customers? Meeting deadlines? Acquiring budget increases?)
  • How would you define fairness in terms of reward allocations?
  • Can you identify someone who seems to be considered a deviant in the organisation? How has the organisation responded to this person?
  • Can you describe a decision that someone made here that was well received?
  • Can you describe a decision that didn’t work out well? What were the consequences for the decision-maker?
  • Could you describe a crisis or critical event that has occurred recently in the organisation? How did top management respond? What was learned from this experience?

Once these questions have been answered, a thorough analysis of the results will reveal where the fit and friction lie between the two organisations and a strategy can be devised to deal with these differences before they become points of contention within the newly merged organisation.

See next month: Accepting the Truth – the attitude of a company’s CEO is crucial to the success of acquisitions. But how do you tell the CEO that the real problem is his or her own company? Bridging the gap between the mission statement and reality.