A recent rereading of The Rational Optimist by British author Matt Ridley revived my belief in “cultural optimization” when it comes to accounting firm acquisitions. Ridley’s perspective is quite simple – over the millennium, human cultures have only progressed when the interaction between societies was collaborative. People are better-off today because of the ancestral exchange and integration of ideas, language, beliefs, skills, customs, habits, technology and social structure; rather than as a result of isolation or cultural dominance and extinction. While Ridley’s notion of optimizing cultural differences makes perfect sense, it does not seem to be regularly applied in the context of accounting firm M&A activity.
Vae victis – Woe to the Acquired
Although they might want to say otherwise, acquiring firms frequently attempts to impose nearly all of its culture on the acquired firm, regardless of whether elements of the seller’s culture are objectively superior to the buyer’s. This is largely true for two reasons.
First, there is a presumption that the acquiring organization is more successful and more capable than the one being acquired. The acquirer’s leadership, management, strategies, execution, personnel, market presence, client base, practices and policies, alliances, and influences must simply be stronger. After all, it does have the financial and organizational capacity to do the buying. In addition, the acquiring firm truly believes it can remove the impediments to the success of the acquired firm, improve its overall quality and personality, and make the transaction a triumph for everyone. Oddly enough, the initial sheen of a very attractive target usually becomes dulled in the eyes of the buyer.
The second reason is, in a word, laziness. It is perceived to be far easier to impose the acquirer’s culture on the acquired firm than it is to do the hard work of identifying synergies, openings for cooperation and exchange, and adopting the acquired firm’s better practices. The process of basic integration (i.e. payroll, email, telecommunications, time and billing systems, etc.) is difficult enough. The prospects of melding the best of both cultures can be exhausting. It is simply easier for the acquirer to supplant the acquired firm’s culture with its own. Unfortunately, this lack of energy often leads to missed opportunity.
Exploring New Worlds
Buyers should aspire to be entrepreneurs rather than imperialists. There is nothing wrong with self-interest provided that it is enlighten self-interest; which lies in cooperation, mutual goals, fairness and respect. Acquiring firms should use a merger as a vehicle to evaluate and refresh its own infrastructure, operations and expertise by studying the acquired firm’s practices and skills, and looking for places where they are superior. In particular, a transaction provides a window to expand and refine specialization, the allocation of the work, and the elimination of inefficiencies and redundancy – a key to successful cultures. Finally, exploring, recognizing and acknowledging the special and incremental value of the acquired firms helps reduce the feeling of being culturally threatened (a.k.a. “the conquered”), contributes to an “esprit de corps,” and builds trust.
The initial exploration stage of a potential acquisition includes the exchange of a lot of basic information – largely neutral and mechanical – such as financial metrics, key client groups and services, firm personnel profile, market strategies, potential deal structure, and the like. If the transaction moves forward, due diligence typically proceeds. Due diligence is usually a “deeper dive” into the firm’s operations and management; most often forensic in nature and designed to uncover problems. Although it is important to understand the potential risks lying beneath the surface, it is equally critical to uncover the hidden gems that make the target unique and highly valuable. When structured properly, due diligence can provide an effective process for exploring synergies between the two organizations, and opportunities to cooperate, be collectively entrepreneurial, and culturally additive. Furthermore, due diligence should strive to identify skills, practices and values of the acquired firm that, when adopted and integrated by the acquirer, can enhance and renew it, as well as make the deal far richer than originally thought. It is unlikely that traditional methods of due diligence will reveal the hidden value of a firm. These insights will not lie in the spreadsheets and documents, but in the knowledge, perspectives, attitudes and aspirations of the target’s personnel.
Setting the Sails
Good things rarely happen simply because they should. Successfully leveraging the strong cultural attributes of an acquired firm requires purposeful actions. In addition to an opportunistic approach to due diligence, two more steps immediately come to mind. First, creating incentives tied to compensation which strongly and clearly encourage collaboration and integration. These goals and rewards are best imbedded in the acquisition agreement, performance management system, key performance indicators (“KPI”), annual plan and budget, or anyplace else the incentives might fit. To the extent that these goals can be reflected in quantifiable metrics, all the better. Joint proposals, engagements and cross-referrals, revenue growth and expanded services to existing clients, cost reductions and improved efficiencies, client acceptance, retention and risk management, and talent recruitment and development are just a sample of areas where two organizations can collaborate, find collective solutions, make an acquisition more valuable, and achieve integration that is more synergistic and permanent.
The importance of having an integration plan as a gateway to optimizing a merger is universally recognized, but infrequently prepared and implemented. It’s hard work and there is a flawed belief that the pieces will naturally fall into place. The fundaments – technology, time and billing, salaries and personnel practices, quality assurance – are difficult enough to get right; and a detailed, practical and actionable plan is essential and axiomatic. Often overlooked, however, is a “combining cultures” integration plan. The first step is understanding where the two cultures are already aligned, followed by an inventory of where there are gaps to be bridged and real opportunities to optimize. Next is a solid change management strategy and plan; which may not be so obvious and urgent as the immediate need to address the continuity of operations and quality of client service. It is, nonetheless, critical for the long term and sustainable success of the transaction; and likely calls for a new way of thinking and approaching merger integration – greater peer-to-peer interaction, for instance. It must also be coupled with a heavy dose of investment, patience, processes and tolerance for ambiguity. In the end, a commitment to combining cultures will maximize the return on any merger transaction – on both sides of the ledger.
Ideally, there should be no end to the merger journey. Once reached, each horizon is replaced with the next one – new opportunities created and discovered. Untapped clients, services, markets, industries and talent. A unique culture built on and evolved from the strengths of the preceding firms; reflective and respectful of the legacy, but not restrained by it. In a word – cultural optimization.