Organization Design: Right Structure, Roles, and Leaders for the Future

Organization design addresses the question of whether the right roles are filled with the right people who have the right skill set who will make the right decisions with the right information at the right time—all in support of the new operating model.¹

Most leadership teams have never engaged in organization design at this scale—and almost certainly not with their own and their colleagues’ jobs on the line. As a consequence, organization design can be political, emotional, and disruptive, even in the best of circumstances. If done poorly, it can be paralyzing and demoralizing, ruining the best intentions of the deal. This personal factor (“me”—the first two letters of “merger”) can be hard to overcome. Organization design is fundamentally about allocating power and influence in the new organization, so IMO leadership should be prepared for politically charged discussions.

In an effort to avoid these issues (and others, including legal compliance), four things should be in place before design thinking begins: the enterprise operating model, named L1 leaders (direct reports to CEO), synergy targets that have both headcount and associated dollars at the functional or business level, and the functional and business operating model choices (for businesses impacted by the deal). That may sound ambitious, but remember you already have a business case, diligence findings, and a valuation model that have made most of these assumptions. Some acquirer executives say they don’t want to assign targets because they think their teams will come back with more—but they never do. Without specific targets you will almost certainly create frustration and additional remedial work later.

Where the enterprise operating model and L1 leadership are established by the CEO’s vision for the new company, it is the L1 leadership—the functional and senior business leaders—who determine their operating model, which sets the parameters for the design of their organizations. For example, the chief human resources officer (CHRO), along with their integration planning leaders, would put in place the new HR model at a functional level. The parameters of the functional operating model must flow through consistent with the philosophy and choices made at the enterprise level, whether those involve shared services or outsourcing, for example, and enable the function to achieve its assigned synergy target. Absent such guidance up front, leaders will create organization structures they think make sense but that are unlikely to meet synergy targets or accomplish transformational goals.

It is almost inevitable that several things that “worked” for the old organizations won’t be ideal for the new operating model. There’s a real tension here, which is why the clarity of the deal strategy and the supporting operating model, and required synergies, are so important. If a centralized rather than business-based accounting and finance function makes the most sense for the combined organization, then make it happen even if the target preferred having business-based support before. But the rationale must be clear and easy to communicate because many will feel “if it’s not broke, don’t fix it.”

The CEO’s direct reports—L1 leaders—should be revealed at or shortly after announcement so that those leaders can have meaningful impact on integration planning and decisions. Acquirers may choose to delay some L1 announcements so that it appears that sufficient time and thought have been given to senior talent from the target. Yet such decisions can’t take so long that the leaders who will not be involved in organization design decisions might have an impact. Appointments for the next levels of executives, L2 and possibly L3, should be announced just before close (for some companies immediately after) so the rest of the organization understands the senior leadership team.² For large mergers with multiple business units that are combining, we find it very helpful to have L3 leaders identified by Day 1, time permitting, to give the employees clearer direction by knowing who their leaders will be.³

This necessarily means that a small group of leaders will be involved at this stage. Newly formed leadership teams, who may have previously been competitors, can take time and dedicated effort to find a common true north. Teams may struggle on alignment of business strategy, priorities, and timeline, which only slows organization design efforts. There is a constant push and pull among short- and long-term objectives, balancing the desire to build a transformative organization against the need to “keep the trains running on time.” The IMO has to manage that tension and this emphasizes the need to get alignment on the new operating model quickly.

Amid the grand plans for organization design, the heart of your organization—the rest of the workforce—can be full of fear and anxiety. One of the most effective ways to reduce workforce anxiety is through transparency and organizational honesty—not simply communicating company strategy and vision, but the hard truths about job reductions, changing roles, location changes, and other life-altering personal impacts. Until leaders can fully address individuals’ personal emotions, and how changes will directly impact people’s jobs, employees will likely experience high uncertainty, which can lead to productivity dips and retention risks. (Larger workforce initiatives will take place before and after close, and we’ll address them later in this chapter and in chapter 8.)

Leaders should focus on communicating information about the organization design process in the absence of final decisions, telling employees about the new operating model, the organization design timeline, how roles are developed and how appointment and selection decisions are being made—and when employees can expect to hear more. A bit of clarity on the topic can produce far better results than a black hole of silence.

Synergy Planning: The Devil Is in the Details

Synergies were central to the deal thesis and the justification of the premium paid to the target’s shareholders. They were also presented to the board, investors, and employees. Integration planning and execution is the time to make them real: defendable, achievable, aggressive. The work acquirers did during the due diligence phase should be in the forefront, and a strong connection must exist between the diligence team and the synergy team. Without the specific assumptions developed during diligence, the synergy team will be flying blind, or worse, reinventing the wheel.

The synergy leadership team should comprise an executive finance sponsor with sufficient gravitas for setting targets, financial planning and analysis (FP&A) people from both sides who understand the cost structure and accounting systems, and someone from corporate development who can serve as the link between the synergy team and the original diligence team—a person who can make clear what was assumed in the deal.

Synergies are easy to talk about, but let’s not forget what they really are: operating gains over stand-alone expectations. Acquirers must generate performance improvements that exceed the growth value embedded in the shares of both companies. And remember, synergies don’t come for free; nearly every synergy has a cost to achieve. Think of this as the “synergy-matching principle,” where we consider the cost to achieve each benefit.

Synergies take the form of cost savings—labor and non-labor—or revenue enhancements, and there is often a tension between the two. Revenue synergies typically involve more risk than cost synergies because they depend on introducing new offers into an uncertain environment. Will customers appreciate it, want it, and be willing to pay for it? Will competitors react with a comparable offer with similar value at a lower cost? Can the sales force really cross-sell products they don’t know? Any new offer is introduced into a world of “ifs.” Further, those growth synergies will often arise from new offerings and “co-specialization”—that is, the result of combining distinct capabilities from both companies. Leakage here will come from a failure of the companies to effectively collaborate in the marketplace post-Day 1.

Cost savings on the other hand are largely under the acquirer’s control and as a consequence are much easier to estimate and develop. Although some potential cost synergies, like procurement or real estate synergies, may require negotiation and executive alignment, acquirers will still have a clear view of the data required to zone in on potential savings. This is where clean rooms and clean teams can yield synergy plans that can be effected immediately after closing, particularly on procurement savings or immediate cross-sell opportunities.

All acquirers will face a “fact of life” regarding synergies: leakage. What is leakage? It’s when you thought you were going to get “X dollars” of synergy but there’s a perfectly good reason why you can’t. For instance, in one deal, the acquirer planned to sell some real estate in Germany (and had counted on both the revenue and savings from the real estate deals) only to discover unexploded ordinance from World War II in the basement of the building, squelching the real estate plan. While you might not find British bombs in your basement, some of the synergies you were counting on will be difficult or impossible to realize.

Everyone will have reasons they can’t achieve synergies, so the synergy process should stress test whether the reasons are real or not. More important, synergy targets will need to significantly exceed those built into the deal model. Beyond allowing for leakage, aggressive targets will force the workstream owners to think about a portfolio of projects with a range of risks that will collectively allow them to achieve aggressive targets. They’ll have to get creative to find both low-risk, low-hanging fruit and high-risk, high-reward projects, which they might have chosen to avoid with lower targets.

Communications and Employee Experience: Reducing Uncertainty, Preparing for Change

Stakeholder communications and employee experience are most emphatically not about having more cake. You already had a chance to celebrate on Announcement Day and will again on Day 1. What stakeholders really want is reduced uncertainty and clear expectations—and engagement. As one of our colleagues says, “You are borrowing trust you have not yet earned,” so start earning it now—and happy talk about a “merger of equals” won’t do it.

Communications for all stakeholders—employees, unions, retirees, customers, vendors, contractors, and of course investors—must be intentionally crafted. Create the messaging for each group of stakeholders aiming for transparency and frankness. If answers for their questions don’t exist, let the group know when they will. Think of the communication plan around Day 1 preparations as akin to those of Announcement Day: coordinated, calendarized, diligently rehearsed, and informative. Remember: Everyone sees through fluffy emails.

While clarity is essential in all communications about plans pertaining to the integration, employee experience focuses solely on the needs of the employees and includes everything from the nitty-gritty of defining new roles to the change management planning and leadership required to reach the new organizational structure. It’s much more than just communications: It encompasses all of the enterprise-wide changes across all departments in both companies, which will have large-scale, cross-functional impacts. It should live as a workstream managed by the IMO rather than with functional leaders. It’s a vital part of the integration: It stabilizes the organization, helps employees understand the new strategy and fosters excitement about their roles within it, and creates a strong and consistent feedback and communication loop. (See the sidebar, “Employee Experience Vision.”)

There is also the potential for real conflict arising from profound choices on culture and employee experience—and employees know it. If the acquirer talks about “family,” “trust,” “teamwork, and “togetherness,” while the target says they “get shit done by being nimble, agile, and breaking stuff” while privately telling its employees, “If you want warm and fuzzy, you’d better get yourself a dog”—well, you’ve probably got some work to do. You won’t be able to establish a new culture—how work gets done, shared values and norms, and what gets rewarded—until you know what already exists. Before Day 1, leaders need to begin to grasp how the cultures of the organizations are similar and different, and establish how to work together so the organizations can operate successfully post-close (we discuss more on change and culture in chapter 8).

Even without a profound culture clash, the changes that inevitably accompany a merger can trigger an emotional response. Mergers turn employees’ worlds upside down, bumping them down to the bottom of their hierarchy of needs. They’ve gone from being concerned about self-actualization in their work and their life to worrying about their physiological and safety needs: if they have a job, if they are secure, where their next paycheck is coming from. It can be terrifying. The merger will also make new demands on employees’ time, and potentially disrupt their day-to-day experience. The job of the employee experience team is to “get ahead of the pain,” not to downplay or eliminate it, so that employees feel that your plan is thoughtful and authentic.

As a result, the charge of the employee experience team during sign to close comes down to three things:

1. Identifying what changes are forthcoming
2. Planning for what the new organization will do to support the changes
3. Confirming that employees are ready for the changes throughout the life cycle of the deal

The employee experience team will define the changes for every stakeholder group on a timeline, and plan accordingly. Once they’ve identified the changes that are coming, they should start developing a thoughtfully orchestrated set of words and actions by leaders, and a curated set of experiences that may include learning or rotational programs. Employees should also be offered options to participate in learning experiences, in the normal course of their day, that will help prepare them for Day 1 and beyond.

For instance, a customer service rep may have 15 major changes over the next 12–18 months, with a cadence of changes associated with sunsetting old systems and implementing new ones, learning new products and new scripts, and finding out where to get answers to frequently asked questions. Some teams will also have interim operating models as they transition from the old way to the new way (e.g., navigating ERP systems that will be consolidated over the course of a year).

On Day 1, both systems will be running, but the teams should know how the transition will take place. If Sergio managed the old ERP system and knows he will be transitioned out, he must know why he should continue to help and how he will be rewarded for staying and putting in effort when he knows that he will be obsolete within the year. There will be other transitional functions as well across the organization. Successful employee experience management is predicated on identifying all of the “Sergios” in the organization and managing each.

Remember, not all functions or businesses will be impacted in the same way, so it’s necessary to understand how different employee groups with different needs will have unique experiences—and to craft the appropriate experience for each. For example, finance may be cut substantially while sales will get to hire aggressively. Such seeming disparities will require serious conversations with each function so that employees understand what is changing, what isn’t, and why.

Managers from both sides with new cross-reporting relationships will need to be equipped with procedures to follow when they have to manage these new employees. You don’t want someone to walk in one morning bemoaning, “I’ve got another 45 people reporting to me in different locations. What do I do? I don’t even have job descriptions!” Give them tools to deal with the fast-moving situation.

With a complete picture for the whole of the organization, the employee experience team will determine how to help each group through each of the changes. How are we going to support them? When will we need leaders to talk with them? When will we send messages that make them feel supported? How do we get their feedback? How will we reward them? This is the essence of getting ahead of the pain—knowing and anticipating those often minute, sometimes large, but always meaningful changes to employees’ lives.

Clearly, employee experience cannot just be another email—or series of emails. Knowing what will change (and what won’t) means the employee experience team can plot the change experiences over time based on anticipating the employees’ needs. The team must understand not only the integration plans but how this transformational effort will impact employees over the lifecycle of the integration. This includes knowing the workforce and broad personas (including their exits, new roles, cross-selling assignments, and other changes over each functional area’s life cycle) and working to craft their experience and smooth the impact. Day 1 should reveal a clear line of sight to the end state, which means that a big part of the pre-close work is developing that vision.

First is anticipating all of the processes that are a predictable part of everyday work life that will change because of the merger. These include basics such as providing training in new processes and procedures where work will be done differently (e.g., travel planning and per diems). Basics like this affect an employee’s day-to-day work.

But this evaluation goes deeper than basic processes. It also means evaluating which functional areas and teams require leadership site visits, and assessing how employees will feel about major events and who should have the conversations to help guide them. But more generally, once the changes are known, the next step is to plan what the new organization will do to support each group of employees through the changes.

In one particularly successful merger, the acquirer actually visited the target’s product R&D team—and turned the visit into an event. The target set up tents on the corporate campus, had a barbecue, and had their R&D team show off what they were most proud of. The team put their top 5 products in the spotlight during a “gallery walk” and talked about their “babies” with an air of celebration—and why they were proud.

While this event made everyone feel good, it also demonstrated to the target’s team the commitment of the acquirer in getting to know them and respecting their accomplishments. Both groups could share their history, talk about what motivated them, and exchange knowledge of the products and their future collaboration. It allowed them to develop a sense of camaraderie. But this isn’t just about making people feel good—such exchanges also enhance the ability to better cross-sell and achieve revenue synergy targets.

Not every merger will have a carnival-like celebration on the home campus, but crafting employee experience with the same level of care is an absolute necessity. If employees don’t feel taken care of, they’re not going to be taking care of customers. As with the other integration workstreams that are sprinting toward Day 1, planning the overall employee experience is imperative. That planning should reflect core principles of the integration approach, and include a calendar for coordinated timing of training and resources for those who are doing the messaging, including, for example, customized decks for executives, and prep sessions for all-hands meetings on Day 1.

No matter how well you plan and execute, you will need to confirm that employees have the tools they need for their new jobs and that they have acquired the necessary knowledge or know where to find it when they need it, and that employees feel ready for the change. During sign to close, a readiness assessment is typically done through a survey. The employee experience team uses the results to identify pockets of risk and coordinates with the IMO to address each prior to Day 1. Often, this takes the form of a readiness team being deployed to teams that are least prepared in the days leading up to Day 1.

Day 1 Readiness: From Planning to Execution

Day 1 may seem like a daunting milestone, and readiness for that milestone can seem like a never-ending list of complex decisions and integration activities. But getting to and successfully executing Day 1 is less about boiling the ocean and more about placing laser focus on a small number of bare-minimum and non-negotiable tasks. Some companies do much more on Day 1, announcing new initiatives or bold new programs. It could be good to go big—especially if you have extra time. But meeting the bare necessities is a must.

Here’s the short version: You want to close as fast you can. Avoid regulatory scrutiny and be prepared to achieve synergies fast. The goals of Day 1 are to minimize what can go wrong—especially something that could land someone in jail—and to preserve business continuity. A great Day 1 also includes ensuring that everyone is excited about such a big milestone—the first day of the new organization. Keep the lights on, prepare for a new mode of operating, and have the plans in place to launch the combined company (to “rock ’n’ roll,” as one of our colleagues puts it).

While Day 1 readiness may only amount to a handful of activities, it is by no means simple. The consequences of achieving anything short of perfection can be deadly. Failure to achieve Day 1 readiness can destroy a deal overnight as operations at the target and acquirer are disrupted and market cap is destroyed. Anything short of a flawless Day 1 can also complicate post-close execution as internal (employees and the board) and external (customers and suppliers) perceptions of the deal sour while disruptions are highlighted in the media and the narrative around management’s ability to execute on integration sours. Moreover, lack of Day 1 readiness delays post-close execution, leading to leakage of synergy value and jeopardizing customer relationships.

One of our colleagues likes to say, “Day 1 is like a baby. It’s going to come, you know the due date, but you don’t know exactly when it will happen.” Have a plan for what you must accomplish if it comes sooner than expected and what more you can get done if Day 1 pushes out later. One way to add “nice to haves” is to ask if a goal is core to the deal strategy. If the answer is yes, you can further ask if it is practical to complete and if it is scoped appropriately to achieve by Day 1. If you can answer yes to both, it can stay on the list.

What does “minimal” mean? Tasks for Day 1 focus on enabling acquirer and target to transact business after close without any interruption. Achieving these necessary goals means ensuring legal and regulatory approvals across all geographies, receiving the required authorizations for employees and vendors to continue operations and receive payment, and confirming safety-related operations remain in place. Missing the mark in these three areas not only disrupts operations but, in the extreme, could lead to legal consequences. As such, Day 1 perfection must be viewed as a table stake for any successful deal. Day 1, like a baby, could come early, in which case the bare minimums become even more important.

As a result, Day 1 is a prioritization exercise—and what you want to prioritize are those goals that are core to closing the deal and creating the most value. You can create a closing conditions checklist to close on time, including mitigation plans for what happens if you miss a certain goal. If there are items on your list that aren’t for Day 1, then they’re for the end state. That’s not to say that they’re unimportant; it’s just that they’re not necessary for Day 1. This may include decisions that require more data (e.g., those related to customer behavior). And that’s why Day 1 requires a laser-like focus on what you need to close the deal without negative legal consequences.

Ecolab prepared carefully for its Day 1, creating blueprints and dashboards to ensure that the new Ecolab would run smoothly, that regulators would be satisfied, that customers would be delighted, and that employees would be ready and able to take care of customers and excited to get on with the business of the day. Remember, Christophe Beck aimed to make this “the best integration ever” and wanted to deliver on that promise.

Central to this effort was the creation of four command centers around the globe that were central points of contact across Ecolab and Nalco, empowering regions to resolve issues at the local level. The command centers were designed to respond rapidly to resolve any outstanding issues. They identified common risks and shared mitigation strategies, and provided real-time executive leadership visibility. Rather than create something new, they used existing business processes (e.g., HR help desk, IT service desk) to surface issues and share progress.

The IMO created timelines to prepare both leaders and employees. Leaders named in the L2 and L3 leadership communications received the announcement, organization chart, and talking points prior to the all-employee announcement on November 21, eight days before Day 1. A week later, the Ecolab and Nalco executive teams were invited to attend a webcast to prepare them to deliver key messages and understand their role on Day 1. After the webcast, Ecolab E-level leaders and Nalco directors and above received the “Leader and Employee Day 1 Guides.” After the all-hands webcast on Day 1, those same leaders received customizable slides to use with their teams. Employee preparations followed a similar path.

Ecolab also identified six essentials for Day 1: Day 1 certification for systems (HR, ERP, IT, and so on), synergies, organization design, communication plans, 2012 priorities, and implementation governance. These were presented to the IMO for approval and sign-off.

Ecolab’s Day 1 was a major success. At headquarters, they rented out the St. Paul Convention Center, complete with a massive balloon arch in Ecolab’s colors, for an all-employee celebration where the go-forward strategy and the new purpose, mission, and values were shared. Similar events where held around the world. Further, part of Ecolab’s and Nalco’s culture—valued by employees—was giving pins to celebrate milestones at 5, 10, and 15 years, and so on. On Day 1, everyone received a newly designed Ecolab pin representing their respective tenure.

Ecolab also rolled out its new safety program and its go-to-market plan for cross-selling and approaching customers as a combined company in the first week post-close. Day 1 built massive momentum for post-close success through being laser-focused on taking care of customers and employees.

Carve-Outs and Transition Services Agreements

Coming out of due diligence, buyers will have estimated the one-time and run-rate costs for standing up the divested business. Now buyers must also develop a complete view of the true operating expenses to run the business on Day 1 with transition services that will be provided by the seller.

This interim state will create additional costs because the buyer is relying on TSAs from the seller before they can begin to realize the synergies. Deal teams and lawyers from both sides typically have agreed to a high-level legal framework (e.g., a non-binding term sheet) for what services the seller will provide for business continuity. The term sheet provides a mechanism for both sides to continue their negotiations on TSAs even after signing the deal regarding exactly what services will be provided, for how long, and at what cost. At signing, the term sheet mechanism is useful because the buyer will be worried about being overcharged without understanding all of the service details from the seller. As a result, there will often be a negotiated cost ceiling included: “Thou shall not charge me more than the current cost allocation for the divested business from the parent.”

During the due diligence phase, the seller will be the buyer’s best friend. But once the deal is signed, interests diverge immediately. The seller doesn’t want the business anymore; it wasn’t a core business, so they don’t want to spend any more time or money. There is no incentive for the seller to provide the TSAs other than to get the deal done. The seller now has stranded costs from shared infrastructure, services, and procurement deals with the divested business. Their focus will be on removing those costs as soon as possible versus supporting the buyer. So, they may not give the buyer their best people, and they will likely play hardball on the duration and scope of the TSAs. This dynamic is important to recognize because the buyer will want more time to open the hood and understand what people, processes, and systems they are actually getting, and may need to demand more time and flexibility so they can make an educated decision on TSA scope, pricing, and duration.

During sign to close, TSAs must be defined, costed, and negotiated in a coordinated, cross-functional manner. Typically, the integration leader, who has that cross-functional view and operational knowledge and expertise, can serve as the central point of contact to negotiate with the seller. Timing of TSA exits presents a unique functional interdependency beyond buying a company outright. For example, exiting HR TSAs for payroll, benefits, and performance management systems (HRIS) may be highly dependent on the IT integration timeline and related HR systems. Until the buyer can exit the IT TSAs they will have to continue paying for those HR TSAs, meaning those TSAs may turn out to be much more costly than first imagined.

Day 1 implications for carve-outs are also unique. TSAs will provide business continuity where the seller has not disentangled the business by Day 1. That said, there will be areas where separation will happen, and those must be thoroughly pressure tested by the buyer. For example, the seller will need to transfer the business as a legal operating entity, and this will require separation of things such as bank accounts, legal employee transitions, federal and state tax IDs, and third-party contracts. Developing a comprehensive separation plan with the seller is the first step for an issue-free Day 1. Actively participating in Day 1 readiness activities, including dress rehearsals (dry runs) leading up to legal entity cutovers, will help pressure test that the seller is ready to flip the switch and hand over a fully functional business.

Conclusion

Integrations used to look different. They were about templates and bureaucracy. A CEO would have a binder from a consulting firm with the two companies’ logos on the front. In it was a playbook—and a pretty static one. The binder would have pages that laid out the IMO team, guiding principles, charters, Day 1 readiness, synergy communications, post-close vision, the names of the workstreams, and so on. The consultants would gather everyone for a kickoff and give them the templates that they would inevitably struggle with. Worse, they would make the leads feel juvenile, forced to comply with status reports and roadmaps that they had no control over or investment in. And this was followed by months of positioning and posturing.

The approach we’ve laid out in chapters 6 and 7 gets investment and buy-in up front, where leaders can make many of the major decisions together. Instead of getting the IT teams together to fight it out over the major choices over six months, those leaders can make facilitated decisions right up front. That provides the right structure and frame for the teams to proceed with their planning and provide clear guidelines to employees and those reporting to the head of the IMO.

This level of integration planning prepares the new organization to immediately deliver on pre-close planning operational decisions, achieve early wins on synergies, and complete the post-close planning for the end-state vision.

In chapter 8, we’ll discuss how this massive amount of planning moves from the transitional state of planning to becoming post-Day 1 business as usual, fulfilling the promise of the deal thesis.