Talent selection

Talent selection—led by the organization design team—is more than just about picking the right talent. It’s fundamentally about who remains and who departs from either company, and who gets which role. Further, it’s also about the faithful application of agreed and prioritized selection criteria—relevant experience; skills; compensation (cost); performance ratings; geographic location; diversity, equity, and inclusion (DEI) targets; and so on. By Day 1, L0 through L2 (or possibly L3) leaders have been chosen at the top of the house and announced—important signals for the future direction of the combined company. The job now is to select, notify, and transition L3 or L4 leaders and below—a much larger workforce.

Now is the time to execute on whichever option you chose during the pre-close planning process described in chapter 7: option 1 (where each selected leader designs their organization and roles and then selects their people, layer by layer) or option 2 (typically L3 leaders design their structure and roles from the top all the way down to the ground, and talent selection follows). Either approach will be guided by the synergy targets for each impacted function or business, where it is much easier to achieve synergy targets at the more expensive top of the house (L1–L4) than digging for savings deeper in the organization.

Whichever option you chose, though, the task now is to match the open positions to be filled to the pool of candidates—the candidate slate. The organization design and HR teams must ensure that the business leaders who are selecting talent are familiar with agreed criteria and that they apply those criteria consistently (and that the right people are considered). There will almost always be tension between fit, criteria, and cost in either option.

Option 1 can offer leaders on both sides the opportunity to give input on talent, which can be priceless given their historical knowledge. That said, this option can be influenced by the relationships that leaders have with candidates. Option 1 is prone to “hallway campaigning” because it is done layer by layer. This can lead to biased outcomes because it becomes harder, perhaps unintentionally, to apply the agreed talent criteria clearly and fairly. We all have coworkers we regard highly enough to imagine they can do virtually any job even if they don’t have the “right” background.

But option 1 has advantages too. Namely, the cost of each layer can be sanity checked to ensure that it is tracking to synergy targets before proceeding to the next layer. Problems arise because there can be the temptation to keep higher-priced talent (often the most productive) that leaders believe they just can’t live without, but then cuts must be found in subsequent layers—and that can lead to another case of “death by a thousand cuts.”

Let’s play this out: Mark is chosen as an L2 leader, a divisional executive vice president, and one of the direct reports he chooses is Ami. Mark notifies Ami and installs her, then Ami designs roles and picks her people and notifies and installs them. They subsequently choose their own teams, and so on. If leaders at the top are not aligned with their synergy targets, they will push the savings burden down to the next layer and the next to the bottom of the house. As it gets harder to find savings deeper in the organization, they may have to go back and go through the process again—sometimes several times. When that happens, leaders can either go back and make difficult choices they didn’t make the first time or give up on the synergy goal, which is not uncommon (this is an example of leakage we discussed in chapter 7). And since the talent has already been informed, it can be painful and difficult to undo.

Option 2 allows a more data-driven approach for talent selection that’s overseen typically by L3 leaders along with their HR business partners all the way to the bottom-most layer of the organization. An advantage here is that it can facilitate the fair, and strict, application of the agreed-upon criteria to arrive at selection decisions across the enterprise, not just department by department. The design phase already considered the average cost of a role, but the selection phase now involves the specific cost of individual talent. It’s possible that such a straightforward application could result in sub-optimal choices or one that’s too costly because, for example, the highest producers are often the most expensive. This means that in the end the most expensive people might be chosen because cost was prioritized last. On the other hand, the new organization risks being without its best talent because it prioritized cost over something else—resulting not in a cost issue but a talent issue (which may be fine if the pool consists of younger high-potential talent who can grow with the role).

More tension arises when leaders don’t want to readily accept the results of the strict application of criteria. Leaders may feel that not only did they not design their organization, but they also couldn’t pick their best people. Although option 2 has less risk of unfairness or inconsistencies overall, people might feel resentful or unhappy with what they feel stuck with. The synergy target has been met, but they didn’t get the team they would have chosen. If upper-level management is unhappy with the results, or if lower-level managers revolt, adjustments may be necessary. The criteria can be revisited in the event of not meeting the synergy target. If lower-level managers are unhappy, the organization can help them be successful with the team they have—which might mean longer transition times, training programs, or more leadership time.

Regardless of which approach is used, it must include legal and synergy team reviews. Legal is looking for consistent application of the criteria with no unfairness or bias. The synergy team is looking to confirm that leaders didn’t deviate—intentionally or otherwise—from the approved synergy estimates and goals. Legal and synergy teams are often in the unenviable position of being the enforcer of the rules.

A review of the entire workforce can provide a chance to understand where processes may have created inequities (e.g., through unconscious bias) and to resolve or to reinvent those processes to foster long-term DEI goals. Day 1 can offer a time for the new organization to be transparent about where and how each company has had challenges, and to proactively address those inequities in the selection decisions. At the very minimum, redesigning the workforce should not unravel any progress either company made and should—looking forward—create career paths consistent with larger DEI goals.

Workforce transition

There are two major themes in workforce transition. First is the notification of all employees, as well as regulatory bodies, works councils, unions, and so forth, on the nature of how they will be impacted. Most countries will have their own employee notification requirements for plant closings and layoffs that have to be followed, such as the Worker Adjustment and Retraining Notification (WARN) Act in the United States. Notification includes presenting employees who are staying (in new roles) with offers, presenting those who are needed short term with retention agreements, and presenting employees who are leaving with an exit plan and outplacement services. It is also important that employees who are not impacted understand the major organizational changes that are going on around them.

Second is the knowledge transfer that must happen for the smooth operation of the business as employees move into their new roles. Some employees will possess such valuable knowledge that they might need financial incentives beyond recognition and praise of their value, even to be simply “on call” during transitions. But the total number of employees who receive such retention bonuses should be minimal.

Other major considerations for orchestrating an orderly workforce transition include questions of timing, logistics, and sequencing—again, on 30-, 60-, and 90-day horizons. One important decision is which functions should transition at the same time and which should not. The organization design team can assess the relationships, documents, major account changes, and shifting technology changes that are coming and how they will affect different populations. For example, the sales force might be learning a whole new CRM on top of a new customer base and new metrics for accounts, as well as forming new relationships internally with support people who are also learning new things. Questions of sequencing revolve around the right amount of time and support to minimize disruption to the customer and stress for the employee.

As a consequence, workforce transition looks different function by function based on the level of risk attached to a poor transition. The most common approach is to quickly notify the enabling functions and realign employees as soon as possible before transitioning customer-facing people. On Day 1 it can be unclear who owns the major customer relationships, because that knowledge resided in the clean room planning. Companies typically view their customer relationships as competitively sensitive as well as their top talent, so leaders need to fully absorb the customer portfolio and sales relationships before making important decisions.

It is common to know how the back office–enabling functions will be impacted because pre-Day 1 planning included decisions on outsourcing, shared services centers, and IT system choices. That said, these changes may need 12–18 months to fully implement, which would mean retaining a substantial portion of those supporting people (e.g., systems administrators for payroll) for the duration of time that systems are being retired.

Timing, logistics, and sequencing are also important factors in knowledge transfer. With rapid notification and quick exits, vital knowledge that comes through years of experience can walk out the door. If an exiting employee wants to help, retaining them may require a short stay bonus of 30 days or more. Bonuses can be predicated on the successful transfer of knowledge, introductions to key relationships, or transmitting important documents as enumerated in the transition contract or retention agreement.

For instance, if Ellen gets picked to stay and Michael doesn’t, knowledge transfer planning should ensure that normal operations are not negatively impacted when Michael steps back and Ellen steps forward. Conversations that prompt self-reflection should account for the knowledge, relationships, documentation—the history of Michael’s engagement with the job and the information Ellen needs to continue to seamlessly serve the client, internally or externally (what we called the service delivery model in chapter 6). The aim is to create consistent if not elevated service delivery.

This process can be burdensome to the workforce, so it’s necessary to also account for the extra time and effort that the transition creates. This time might be tumultuous for an employee’s customers, while at the same time the employee is losing their finance or HR business partner and engaging with someone who is effectively a stranger and also unfamiliar with the new processes (with no bond of trust or shared history)—and that can be overwhelming for some talent. The workforce transition team must manage the sequence and timing of those changes.

The organization design team will also need to assess which functions can go faster than others. Ensuring that transitions happen in a way that’s least disruptive for employees and customers is vital. Of course, there are times when a culture is so broken and so toxic that disruption may be welcomed as an immediate fix, but this is rare. A more normal window for exits might be two weeks for many back office employees; customer-facing functions that are being redeployed but not exited could span a couple of months. But, again, the main message here is that both the workforce transition and knowledge transfer must be as thoughtfully sequenced as the rest of the acquisition has been.

From the clean room to growth opportunities

During sign to close, the clean room offered a sterile environment to assess the product and service portfolio across both companies, including overlapping customers, overlapping products and services, pricing, direct versus distributor approaches, and customer profitability and sales trajectories by customer and geographies—all to size and prioritize potential opportunities for driving revenue growth and profitability.

But let’s get back to basics. Revenue synergies are in fact just a special case of the general issues all companies confront when they evaluate and consider changes in their go-to-market strategy to improve their growth trajectory. Broadly speaking, improving go-to-market strategy boils down to either expanding how much of the addressable market can be served (beyond what we called “serviceable market” in chapter 3) or making better offers based on improving the customer experience, creating new offers, or a combination of those two that customers value.

Expanding the serviceable market starts with a focus on capture points or the moments that allow a business to get in front of the customer—the “at bats,” as it were. In financial services, for instance, the bank branch is a traditional capture point, a concrete place to attract depositors and offer new, relevant, valuable products or services. It’s where customers—even millennials—still prefer to show up and engage.²

Go-to-market strategy changes will often focus on “win themes” that focus on strengthening or expanding customer capture points (customer segments, geographies, channels) or addressing customer preferences you aren’t doing today (service, responsiveness, product quality) or offering bundles of existing products they really want and may create less price sensitivity because of the new benefits. Internally, that might mean redesigning sales incentives and sales teams, streamlining the sales process by offering faster pricing approvals, using better CRM, or using better sales systems from order and billing to delivery.

In M&A, the issues are no different, but they can certainly be more complex. Acquisitions bring with them an entire portfolio of new possibilities and opportunities—myriad new capture points and potential offerings that presumably were not available as separate companies. Company A might have stronger relationships at large accounts or better digital channels than Company B. Company B may have better geographic or international presence than Company A. Collectively, they have a portfolio of products or services that can be sold together, enabling a cross-sell of existing products, attractive new bundles, increased geographic presence, or brand-new products or services.

Let’s start with an organic growth example that would-be acquirers should appreciate: the successful transformation at IDEXX, a veterinary diagnostics and information management company. It’s a great illustration of a dramatic change in go-to-market strategy that involved a combination of cross-selling and new and better offers.

In 2013, Jay Mazelsky, leader of the North American Companion Animal Group at IDEXX, undertook a commercial model transformation to engage customers in a more compelling way. The transformation involved moving away from an emphasis on individual products to a market model built on solutions for companion animal veterinary clinics. That thesis kicked-off a multi-year, two-step go-to-market strategy transition to redefine how IDEXX touched customers.

The original commercial model had included a specialized sales force organized by product or service, and three large national distributors that touched the same veterinary customer base. That meant that diagnostic analyzers, laboratory services, and a rapid “SNAP” blood test for early diagnosis were separate product groups often sold by different salespeople. This segmented approach to customer engagement impeded cross-selling opportunities that could take advantage of multiple offerings to the same buyer, and salespeople had siloed career paths with little movement across product segments. It also meant there were insufficient IDEXX commercial resources who had the time or account coverage to build trusted adviser relationships with their customers. Any cross-selling that did occur required complex coordination.

IDEXX first restructured the commercial model into an account manager model with sales professionals owning accounts within an assigned territory instead of only selling individual products or services. That empowered customers to choose what was best—single products or an integrated solution—for their practice. It allowed, for example, diagnostics equipment sales to include discussions on laboratory support, SNAP tests, and a new offering that facilitated an integrated IDEXX software solution, including software that served as a data warehouse of all the historical test results for an individual animal patient.

Immediate impacts included an increased level of cross-product sales at points of sale; increased access to the veterinary clinic as the solution model allowed salespeople to serve as “strategic advisers” with a broader view of the business challenges facing clinics (which are essentially small businesses); and a more coordinated commercial operations framework that supported pricing, contracting, and service visits. This go-to-market strategy change—which effectively paired cross-selling with new and improved offers—was so successful in the first year that, for the second major step, IDEXX announced a distributor exit strategy at the end of 2014, replacing their distributor contacts with their own sales force. A larger commercial footprint with subject-matter experts in diagnostics resulted in dramatically faster topline growth, higher customer satisfaction scores, and ultimately a successful global rollout following the success of the new North American operating model.

Acquirers should have the same, or greater, opportunity than IDEXX to rethink their go-to-market strategies. In M&A deals, any analysis of growth synergies should reveal a long list of opportunities that will vary in degree of anticipated value, time to realize, complexity, and required investment. Prioritizing those opportunities must allow both quick wins to achieve early momentum and investment in longer-term projects like new innovative products to fully achieve the promise of the deal thesis.

Cross-selling—selling more of Company A’s products through Company B’s channels or relationships and vice versa—can provide quick wins by immediately expanding your serviceable market. It also supports the building of the new company’s brand. Leadership must clearly define these opportunities so the sales forces know who sells what to whom (so both companies aren’t calling on the same customer) and how to reach them—and be ready to announce a sales compensation plan that incentivizes cross-selling on Day 1.

Sales forces are typically excited about the opportunity to cross-sell, but many questions must be answered. Can Company A really sell Company B’s products? Are the procurement professionals the same for the individual products where they sell? Where there are overlapping sales forces at an account, will procurement be looking for discounts, just like you are trying to do with your suppliers for cost synergies post-Day 1? Can the companies reconcile different contracting and pricing terms? Can sales teams be sufficiently incentivized and trained to sell the other company’s products?

Whether it is pure cross-selling of existing products or considerations of new bundles or new products, inevitably the term that will emerge in revenue synergy discussions is “complementary”: “We have complementary sales forces” or “We have complementary products,” or “Customers will just love our bundled offers,” and so on. The bottom line is that capture points, or products or services, are not complementary just because leaders say they are. The new company must be able to better penetrate existing customers, reach more customers, and make offers that will delight them in new ways.

Examples of successful bundled offerings cleverly stitching together existing products and services abound. A simple but powerful bundled offer that many young families loved was when Amazon bought Quidsi (parent of Diapers.com) and offered a discount on diapers paired with a three-month free subscription for Amazon Prime—resulting in greater sales on both sides.

A more involved bundle was a deal that brought together transmissions and engines for heavy trucks. With some modification, the combination brought a powertrain with greater fuel efficiency than if customers purchased them separately or from other providers (any other transmission with a particular engine). Another example is when a chemical company acquired a data services firm, which allowed it to automate ordering so that customers no longer had to pay close attention to inventory, reducing the risk they would run out of key chemical components. Bundled offerings might unlock a customer segment that is less price sensitive and more focused on other benefits, such as when two airlines consolidated routes and offered better non-stop access to more destinations with more choices, which attracted the more lucrative business traveler.

Brand-new products will often have the longest lead time to value realization and will emerge from joint innovation where companies reimagine what the products or services can be beyond the bundling of offers. The two companies will already have their own innovation roadmaps at various stages of progress. Joint innovation should be led by examining a joint product development roadmap, combining intellectual property and technological capabilities, and exploring the “art of the possible” that would not have been available if not for the deal. That exercise will also aid leaders on a go-forward vision and decisions on which developing products to advance, which R&D efforts need to be rationalized, and what the future pipeline will be. Joint innovation can be as simple as creating a new application for a normal business process through new chemistries or technologies.

Valuable M&A revenue growth is challenging and complicated—but far from impossible.

New growth depends on customers who believe they are being served better with higher-value offers by the combined company than they were before the deal. Building on the work of the clean room team, relentlessly focusing on customer needs, and leveraging knowledge about customer behavior will form the solid foundation to create opportunities for growth that otherwise wouldn’t have existed. Cross-selling, new bundles, and new products can each provide pathways to real, sustained growth.

Growth at Ecolab

Ecolab and Nalco complementary products and services were the foundation of the combined company’s growth strategy, presenting opportunities for cross-selling, bundled offerings, and new products and services. Ecolab defined success as building and growing market momentum and increasing penetration in key accounts by leveraging existing channels and relationships.

With these and other growth objectives in mind, Ecolab held a three-day global sales conference in the first 10 days after close. The conference included the top 50 account leaders (from both companies) as well as key business leaders. The agenda included product demonstrations, cross-training, account leader meetings, and the development of action plans for each account, including jointly integrated value propositions.

Attendees discussed synergy and growth opportunities against the backdrop of the sales force reorganization, revised coverage models, and the drawing of new territories and responsibilities. These discussions revealed new opportunities to expand the pie for the combined company, and owners were assigned. Product experts from both sides offered training sessions to explain the joint product roadmap and identify innovation opportunities.

Ecolab and Nalco also focused on their top accounts and customer needs, making sure to use their sales forces to determine the long-term objectives of their top accounts and to understand how the combined company could best respond to customer needs. According to Harvard Business Review, “The company’s model was to provide on-site evaluations and training for customers and build them customized portfolios of products and services based on those visits.”³ Many of their customers had worked with both companies for years, and it was essential to maintain those strong relationships.

Cross-selling was a key opportunity for Ecolab post-close. One of the largest hotel chains in the world was a key account of Ecolab. They used Ecolab cleaning products throughout their operations from washing towels to cleaning corporate offices. Nalco, however, had not been able to penetrate that account and provide their extensive water solution services. The combined sales teams worked to articulate how the combination of Ecolab with Nalco services could enhance its existing water services and create a more complete end-to-end solution. Together the “new” Ecolab enhanced capabilities also provided specific customer-focused field services. For example, the water used for washing hotel towels could now be used to water on-site landscaping—a bundled solution as a result of the merger.

Ecolab also focused on new products and services. For instance, one of Nalco’s existing services included sensor monitoring in heating and cooling towers. These sensors collected data to help monitor operations and identify pre-emptive maintenance needs. As a long-term product development goal, Ecolab explored creating a new monitoring service that used Nalco’s sensors to track in situ product effectiveness. For example, Ecolab offered descaling chemicals used to clean and sanitize pipes that have become blocked due to buildup. Using Nalco sensor technology, Ecolab derived a method for monitoring the progression of buildup, subsequently tracking the effectiveness of their products when used by their customers to descale their pipes, allowing for predictive maintenance and reduced downtime.

Culture

Any discussion of change management in M&A will converge on culture. Discussions of culture can come off as “fluffy bunnies.” But in reality, issues associated with merging cultures are complex and meaningful problems, deeply connected to integration efforts. Shared beliefs on “how work gets done around here” involve decisions rights, access to information, and rewards and incentives that can be dramatically different across companies. Those shared values and expectations didn’t happen overnight. They took years to evolve and were passed down through the generations of managers and employees.⁷

Company cultures are so taken for granted that someone from a different culture may view the practices and beliefs of the other as absurd—creating the seeds of a so-called culture clash. At its core, culture allows behaviors to become reasonably predictable. As a consequence, it’s imperative to pay attention to developing a shared culture early—beginning on Announcement Day. We’ve seen clients fall down when they say, “We’ll deal with culture after the work from the integration has slowed down and we have more time.” By then, it’s too late.

Organizations can differ across many dimensions that need to be assessed on what matters for the new operating model and the vision for crafting the culture of the new organization. Culture assessments will reveal differences in a sense of pride and ownership in the organization, attitudes toward inclusion, risk and governance processes, the appetite for change and innovation, a focus on customers versus products, how employees collaborate and team, the importance of informal networks, and even daily routines and rituals that impact how work gets done and what are acceptable behaviors.

Culture is also a supporting rod that can hold together the organization and drive performance. Take the extreme example of one CEO who focused relentlessly on maximizing profit. In meetings, when making decisions, it was what she and her leadership team asked about first. When they approved new products, they did so only if they met a clearly defined operating margin threshold. Employees internalized this and went to outrageous lengths to conserve costs, even foraging in dumpsters for copper wiring to use in their new product designs. Their profit-maximizing, cost-conscious culture was reinforced by a profit-sharing mechanism that paid out more than 35 percent of their base pay every year. Consider how tightly integrated that aspect of culture is: strategy to execution, supported by reinforcing incentives with a vision set by leadership.

Or consider the care that Disney took to preserve culture when it acquired Pixar in 2006 to breathe new life, technology, and innovation into its animation division. Not only was Pixar’s creative head, John Lasseter, appointed to lead Walt Disney Animation, reporting directly to Robert Iger, then CEO of the Walt Disney Company, but both parties negotiated a “social compact” of culturally significant issues. Disney promised to preserve everything such that employees felt that they were still Pixar—email addresses and signs on the building would still say Pixar and rituals like monthly beer blasts and the welcoming new employees would be retained. As Iger writes in his book, The Ride of a Lifetime, “If we don’t protect the culture you’ve created, we’ll be destroying the thing that makes you valuable.”⁸

Culture signals and symbols that began at Announcement Day and that were reinforced pre-close are now becoming embedded post-close, whether you want them to or not. Which leaders are chosen and their styles and values send important signals about the new culture. Employees will also observe and have feelings about the new priorities, who has influence and how will decisions be made, what gets rewarded, who has a say and gets to participate in decisions, and even what systems will be used to run the business. Each of these is a signal to employees about the shared culture that is developing through the merger. The post-close period also presents the opportunity to publicly celebrate early wins—like new accounts or successful cross-selling—to show employees what is important for future success.

And yet, each of these is under your control and should be addressed deliberately with an appreciation of the effect they will have on employees: not just on culture but on employees’ sense of affiliation and growth, keys to keeping them satisfied and productive and seeing themselves as part of the company for a long time to come. If culture is the shared norms around how work gets done, and how work gets done is going to change, then the opportunity is to take an active role in shaping new shared norms, rather than coming to them too late when employees have already decided and their new behaviors have calcified.⁹

Culture at Ecolab

In the April 2016 issue of Harvard Business Review, Jay Lorsch, of Harvard Business School, and his associate, Emily McTague, interviewed Ecolab CEO Doug Baker on how he shaped the company’s culture. Baker had taken over at Ecolab in 2004 when revenue was $4B and grew it to $14B in 2014 by completing more than 50 acquisitions, including Nalco as the largest. The workforce had more than doubled during his tenure.¹⁰

As Ecolab absorbed new acquisitions, complexity and organizational layers grew and divisions and managers became siloed. As Lorsch and McTague write, “The expanding bureaucracy was eating into Ecolab’s customer-centric culture, and that was hurting the business.”

Baker aimed to restore customer focus and customized offerings as a core strength—and that meant a major change effort. He focused on pushing decision-making to the front lines, to the employees who were closest to customers. Ecolab also engaged with those frontline employees by training them on all Ecolab’s products and services so they would be better equipped to figure out on their own which solutions best fit customers’ needs.

Although it seemed risky to push decisions down, Baker “found that the bad calls were caught and fixed faster that way. Eventually, managers began to let go and trust their employees—which was a huge cultural shift.” Ultimately, that fostered frontline responsibility and allowed Ecolab to stay connected with its customers as their needs evolved.

Baker championed an important tool in change management and culture shaping: public acknowledgment through promotions and recognition. Lorsch and McTague write:

Baker also emphasized the importance of meritocracy in motivating employees to carry out business goals. ‘People watch who gets promoted,’ he says. Advancement and other rewards were used to signal the kind of behavior that was valued at the company. Baker found that public acknowledgment mattered even more than financial incentives over time. ‘What do you call people out for, what do you celebrate, how do people get recognized by their peers? The bonus check is not unimportant, but it is silent and it’s not public,” he points out. Kudos went to managers who delegated decisions to customer-facing employees and encouraged them to take the lead when they showed initiative.

This collaborative approach across divisions had long-lasting positive effects on the new Ecolab:

As frontline employees were rewarded for owning customer relationships and coordinating with one another, a culture of autonomy emerged. (This also freed up senior management time, allowing executives to focus on broader issues.) Once people throughout the ranks felt trusted, they in turn trusted the company more and began to view their work and their mission—to make the world cleaner, safer, and healthier—as real contributions to society. And in their enhanced roles, they could see firsthand how they were making customers’ lives better. This shift took time, though, because the process had to happen again and again with each acquisition.

“When we buy businesses, they’re not going to love the new company right away,” Baker says. “Love takes a while.”