For the exclusive use of A.

PUROHIT
FA L L 2 0 0 8 V O L . 5 0 N O. 1

SMR295

Stephen A. Miles and Nathan Bennett

6 Steps to (Re)Building a Top Management Team

Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published.

REPRINT NUMBER 50115

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

MANAGING CHANGE

6 Steps to (Re)Building a Top Management Team

Most mergers fail because the newly constructed management team has been put in no position to actually

lead. Can the pitfalls

faced by merged teams be avoided and the opportunities seized? Here are six guidelines for setting up new management to succeed.
Stephen A. Miles and Nathan Bennett

ven during the credit crunch of the past 12 months, hardly a day has passed without the media hailing a major merger or acquisition (M&A1) event. In 2008, Microsoft has been chasing Yahoo! in an on-again off-again manner, Delta and Northwest are in the midst of executing a complicated merger integration effort, United Technologies is targeting Diebold and more. Yet numerous studies show that most mergers fall short of creating significant shareholder value. A Bain & Co. survey of 250 global executives involved in mergers and acquisitions indicated that only three in 10 created meaningful value for shareholders and that poor integration was behind two of the top four reasons for failed corporate unions.2 Why does the newly combined company so often fail to deliver on the promise of the original business case for a merger? Our research suggests the most fundamental failing involves the inability of the post-M&A top management team to quickly establish and then maintain productive working relationships, leaving it poorly positioned to lead. In a post-M&A company, many of the preconditions for team success are absent. Mutual trust, shared vision and roles that are clearly articulated, understood and accepted require time to develop. Unfortunately, stakeholders want to see results and expect top team performance almost from the day the M&A agreement is signed. Executives who participated as adversaries during the negotiations, advocating for their respective stakeholders, are left to navigate the challenging segue from tough negotiator to trusted colleague. Stephen Elop, who negotiated the 2005 Adobe Systems Inc. acquisition of Macromedia Inc., told us, I was obligated to my role as CEO of Macromedia. I had to fight hard for Macromedia at one moment and then become a new Adobe employee the next. It required that both sides forget we had just fought to get where we are and begin working together. There may be a number of other challenges to face as well. Some executives may have a bitter taste in their mouths about how negotiations unfolded or be resentful of the outcome, causing hard feelings about titles, roles, responsibilities and compensation. Executives from the acquired companies may have newfound wealth, prompting jealousy and raising questions about their commitment to the ongoing venture. Other executives may feel trapped in an arranged marriage, rather than excited about new opportunities. It is hardly a harbinger of an effective top management team when what binds it together is a shared grin and bear it strategy. For the past two years, we have been involved in a project focused on identifying keys to top management team success. In the process, we have had the chance to study the

Stephen A. Miles is the Regional Managing Partner, Americas, within the leadership consulting practice of Heidrick & Struggles International Inc., and he oversees the companys worldwide executive assessment/succession planning practice. Nathan Bennett is the Catherine W. and Edwin A. Wahlen Professor of Management at the Georgia Institute of Technology. Comment on this article or contact the authors at smrfeedback@mit.edu.

60

MIT SLOAN MANAGEMENT REVIEW

FALL 2008

SLOANREVIEW.MIT.EDU

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

struggles of a number of post-M&A executives as they labor to come together again in the new enterprise as a top management team. Through that research, we have identified six critical guidelines to help executives and boards effectively build (or rebuild) and support the top management team. For each guideline we offer some recommendations based on best practices from the experience of mangers in our research. As will become clear, the first three recommendations focus on activities that should be started very early and continually reinforced throughout the process. The fourth and fifth recommendations concern challenges that will be most pressing during the integration process. The final recommendation involves activities that should begin as soon as legitimately possible and then become habitual as the new entity develops.

operations, the research and development pipeline, specific customer peculiarities and so on, it is critical to minimize the risk of their departures by addressing their concerns. The primary driver of early departure is role ambiguity: Individuals who feel uncertain about their future with the new entity inevitably begin to consider other opportunities. To worsen the problem, M&A rumors rarely stay quiet for long. This, combined with broad awareness that uncertainty raises anxiety, makes the talent at any company fending off M&A rumors a target for other companies hoping to develop theirs.

Guideline 1: Reduce Role Ambiguity

Though M&A is often defined as adding technology or products, market share or achieving synergy, it is inescapably about people and their capabilities. And people unlike acquired intellectual property, physical assets or customer lists can walk away. But because many of these people have valuable knowledge about
SLOANREVIEW.MIT.EDU

Recommendations The combined company must do what it can to control which employees leave and which remain many of these potential ship-jumpers are vital to both the team and the organization. From his experience with the PeopleSoft Inc. acquisition, Oracle Corp. CEO Larry Ellison is quick to point out the importance of immediately removing all employee-related ambiguity so people know what is ahead and can get to work. Next, being aggressive in assessing people on both sides of the deal allows for a more sophisticated analysis of retention risks. Linda Sharkey, vice president for people development at Hewlett-Packard Co., told us:
FALL 2008 MIT SLOAN MANAGEMENT REVIEW

61

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

MANAGING CHANGE

We use assessment tools in order to understand the talent that comes with the deal. Then we develop a clear road map for ensuring we understand any areas where we are at risk so we can take proper action. This is a critical step in our M&A playbook because it greatly increases the odds that a deal delivers on expectations. At the same time, the executives who choose to remain likely have their own unique motives for doing so. Some may be concerned with title or money, others with balancing work and personal life issues. Tom Hogan, now the senior vice president for software at HP, led Vignette Corp. through three acquisitions as its CEO. Reflecting on this experience, he noted that some potential team members wont have the same objectives and others will never really be on board. Extraordinary efforts to retain them will do more harm than good.

inadequate data about its talent. Just as with an analysis of financials, bad people data likely leads to bad people decisions.

Guideline 2: Due Diligence Around Talent Is a Dangerous Corner to Cut

Most companies have much better discipline regarding the way financial data is pursued, challenged and leveraged than they do with data on the talent side of the deal.

Recommendations Give sufficient attention to assessing the personnel who will lead the new enterprise. Executives too often see due diligence about human resources as a place to cut a corner in what is understandably an enormous undertaking. Even in instances where the staffs on each side of the deal provide good information, human resources is often given short shrift in decision making about the M&A and the integration planning. Our findings effectively suggest that misplaced confidence on the part of executives often leads them to underestimate the complexity and nuance of the challenges these deals pose with regard to talent management. As one M&A veteran told us, We had several self-inflicted wounds that were very preventable. Successful M&A events result when leaders invest to understand who the new set of players are and how best to deploy them to accomplish the new entitys mission. The learning curve here is steep but not insurmountable. Cisco, Microsoft, General Electric, Adobe and Hewlett-Packard are examples of companies with track records for successfully integrating new people and allocating talent to support new operations. As noted above, all the participants have some uncertainty about their own personal future, but these same individuals are also concerned to know what talent the new enterprise will have, whether as leaders, as coworkers or as subordinates. Making it very clear very quickly that the most talented people throughout the new entity will be in position when the dust settles regardless of which side of the deal they came from is critical. This can only be done when the talents and capabilities of the personnel are known and understood.

The second vulnerability management teams face in M&A reflects a naivet caused by inadequate due diligence around talent management. We were surprised by the staggering number of executives who said they were affected by information they learned about their new colleagues after the deal took place. As one executive told us, During the deal making you hold one another at arms length because you arent sure how things will go. That, along with the somewhat adversarial nature of the situation, causes you to develop a point of view that is not necessarily accurate about what each company is really about. The irony is that it is a rare deal that can succeed on the basis of the story conveyed by a spreadsheet. Yet most companies have much better discipline regarding the way financial data is pursued, challenged and leveraged than they do with data on the talent side of the deal. Because that is where executives are comfortable, that is where they spend their time with the result that due diligence efforts focus myopically, if not exclusively, on financials. This means that the new and likely still somewhat fragile top management team will begin its move forward with
62
MIT SLOAN MANAGEMENT REVIEW FALL 2008

Guideline 3: Recognize Old Habits Die Hard But Not All Should!
Companies have well-established routines that they retain because, simply put, they work. Employees, particularly in uncertain times, stick closely to these routines for the comfort they provide, and M&A events are no exception. Virtually everyone who has been through one is familiar with the phrases thats not how we do it here or we had a better way at my company. Of course, the fallacy in this response is that we has been redefined, and top management teams need to determine carefully which way the new company wants to do it.

Recommendations There is an art to recognizing how habits serve different groups, how they impact performance and the role they will play in the newly formed company. Leaders must be able to discern quickly which habits will best serve the company moving forward and support them. As former Macromedia CEO Stephen Elop told us, Even a few signs of willingness from the mother ship that they are trying to listen and learn pay huge dividends. If
SLOANREVIEW.MIT.EDU

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

employees think, We have been consumed and no one ever listened to us, then post-M&A prospects are not good. Elop described how executives from Adobe and Macromedia together went through a process where each identified those elements technology, culture, values each held as most treasured assets, things that they did not want to lose as a consequence of the acquisition. Elop noted, We [Macromedia] knew we were going to lose the name, the building and so on. What was much more important was to label those things we fundamentally treasured. One example was what we called a synchronous development process for software. It was a very customercentric approach we strongly felt should be retained. Another concerned the way we were accustomed to having our workspaces designed. We shared these concerns with Adobe throughout the process. In the end were able to say, We have maintained some of our treasured assets. It was no small thing; it brought great comfort to everyone going through that transition.

Guideline 4: Dont Tolerate Bad Behavior

Our research reveals three common forms of harmful behavior in top management teams: cliques, information asymmetries and the sabotage of decision making. Cliques often arise in response to the newly uncertain environments following an M&A. Uncertainty drives individuals to close ranks with those they trust, and the result is a clique. Cliques are harmful because they contribute significantly to information asymmetries within the top management team and slow down the teams development. With their new formal position, executives from the acquired company may believe they are part of the team and therefore privy to all relevant information. However, a clique can keep them in the dark about exclusive meetings before or after the official meeting, in an effort to avoid collaborating with the new teammates. These exclusions can clearly limit both the effectiveness of the executives who are new to the team and, worse still, the effectiveness of the team as a whole. As one executive told us, Execution after a merger is tough because people will try to position themselves so they can force decisions to be revisited again and again. This slows the entire operation down until everyone learns just who really is responsible for which decisions.

Elements of the Hewlett-Packard M&A Playbook

In addition to the importance of assessing strategic fit and conducting careful financial due diligence, the following steps are representative of the approach to M&A integration that Hewlett-Packard has developed. 1. Conduct human capital due diligence obtain structured external (for example, independent) assessments of the top management team. Depending on the size of the companies involved, the assessment might involve the C-level plus one, two or three levels of the organizational chart. 2. Invest to develop ways to identify and objectively assess the tacit elements of the companies involved. This might include key elements of each companys culture, history, and any sacred cows that would be risky to confront too soon. Additionally, this should involve understanding the acquired companys real practices (as opposed to what written documentation or the organizational chart suggests). For example, how do decisions really get made? Where do power and influence really lie? Who are the leaders that are sitting in positions not automatically part of the management team? 3. Identify the members of the top management team, and involve them in the development of an on-boarding plan to provide a structured approach to their roles in the integration with milestones to gauge progress. 4. Develop and implement a system to capture employee input, and use the findings to track progress on issues of concern for them.

Recommendations Getting beyond this requires strong leadership and setting very public examples from the top. Selecting individuals to be a part of the top management team requires extremely careful consideration: Executives with reputations for political or self-serving behavior will be dangerous in this context. Early on, there needs to be a very deliberate effort to manage conflict constructively so that disruptive/dysfunctional/counterproductive habits and clique behavior are not reinforced as ways for executives to cope. The greatest success comes from identifying a goal that can be accomplished only with the full cooperation of the entire top management team. In the long term, of course, that goal is the success of the new entity. Short-term goals, though, must involve activities proximate to the M&A integration. This will leverage any self-interested behavior for the good of the whole, encourage cooperative behavior norms and, with luck, produce an early win to provide the team with momentum.

Guideline 5: Practice Patience With Purpose

The completion of an M&A event is a heady time, but the immediate enthusiasm needs to be bridled somewhat during the new entitys break-in period. The nascent team will need time to develop trusting and functional relationships. The top management team may have new members or members in new roles. New reporting structures, human resource management systems, expense reporting procedures and so on are being learned. As one M&A veteran told us, Until systems and processes are properly integrated, you are trying to run two suboptimized organizations. This sentiment was recently echoed in the press
FALL 2008 MIT SLOAN MANAGEMENT REVIEW

SLOANREVIEW.MIT.EDU

63

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

MANAGING CHANGE

by Mike Campbell, Delta Air Lines Inc.s executive vice president of human resources, labor and communications, who quipped that the merger with Northwest Airlines Corp. had created a situation where were like Noahs Ark: two of everything. Consequently it is unrealistic to think the top management team can push very hard on the new companys accelerator during this transitional period. At the same time, everyone from pundits to investors to customers to employees will be anxious to see if the team can capture the value promised through the creation of the new company. Moving too slowly can present as much of a threat as moving too quickly. What is required then is patience with purpose the simultaneous ability to be deliberate about providing the needed time to build a foundation for success while honoring the obligation to demonstrate results.

Recommendations The toughest challenge here is to find the rhythm for pushing ahead that properly balances the need to respect the potentially fragile nature of newly forming relationships with the need to produce evidence of positive results. Doing so begins with a careful assessment of the top management team and its readiness to move ahead. When the top management team has a high proportion of new members or members in new roles caution should be taken. Even in instances when the changes in the roles of top management team members appear to be inconsequential, the fact that they are a new team leading a new enterprise must be taken seriously. Our work suggests that too often dangerous assumptions are made about how much top management team members trust one another, how clearly they understand the boundaries between positions, how clearly they understand cause-and-effect relationships in the new company and whether or not they share an understanding of an commitment to the strategy moving forward. Key here is investing in the teams development as just that a team. Standards must be developed to address the way the team will
64
MIT SLOAN MANAGEMENT REVIEW FALL 2008

Too often, dangerous assumptions are made about how much top management team members trust one another and whether they share an understanding of a commitment to the strategy moving forward.

operate and communicate as well as the members various executive roles in support of the agreed-upon mission. Finally, the top management team needs to be aligned regarding the mission and vision of the new company in order to cascade this message accurately and uniformly down the organizational chart. As one acquisition veteran shared, executives are sometimes slow to recognize they are trying to slay new dragons, not the ones they faced in their former company. Only when this understanding is clear throughout the company can the top management team feel confident about pressing hard on the accelerator.

Guideline 6: Count and Then Celebrate Your Blessings

Everyone associated with the deal is in a difficult situation. Uncertainty and anxiety abound; there is increased pressure to perform; and everyone is learning new roles, developing new relationships and executing a new plan. This is the time to reinforce and communicate repeatedly the upside of the deal that there was a clear reason why it was pursued.

Recommendations Sue Barsamian, who joined HP when it acquired Mercury Interactive Corp. and is now the vice president of global operations, software, commented that her job, post-acquisition, is more interesting because it is more complex. The sandbox is bigger and more interesting. Berrie Maas, plant engineer for 3M Co., who joined the company when it acquired his employer, the Bondo Corp., described a similarly recast post-acquisition mindset, noting that he went from squeezing every penny to [having] an abundance of capital enabling us to make long overdue equipment replacements. These are just two examples of upsides to recognize and celebrate post-M&A. The top management team must take the steps necessary to ensure these advantages do not get lost in all the clamoring surrounding the integration.

Conclusion
Though M&A events typically involve a crew of talented executives, results years later often show the new whole is worth less than the sum of its pre-merger parts. Our work suggests that focusing on the six key guidelines outlined here can help the top management team to come together quickly, enable it to lead the newly created company effectively and thereby increase the likelihood of success for the new enterprise.

REFERENCES
1. We use the term M&A to refer to either a merger or an acquisition event from which a company is moving forward. 2. D. Harding and S. Rovit, Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Boston: Harvard Business School Press, 2004).
Reprint 50115. Copyright Massachusetts Institute of Technology, 2008. All rights reserved.

SLOANREVIEW.MIT.EDU

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.

For the exclusive use of A. PUROHIT

PDFs Reprints Permission to Copy Back Issues

Articles published in MIT Sloan Management Review are copyrighted by the Massachusetts Institute of Technology unless otherwise specified at the end of an article. Electronic copies of MIT Sloan Management Review articles as well as traditional reprints and back issues can be purchased on our Web site: sloanreview.mit.edu or you may order through our Business Service Center (9 a.m.-5 p.m. ET) at the phone numbers listed below. To reproduce or transmit one or more MIT Sloan Management Review articles by electronic or mechanical means (including photocopying or archiving in any information storage or retrieval system) requires written permission. To request permission, use our Web site (sloanreview.mit.edu), call or e-mail: Toll-free in U.S. and Canada: 877-727-7170 International: 617-253-7170 Fax: 617-258-9739 e-mail: smrpermissions@mit.edu Posting of full-text SMR articles on publicly accessible Internet sites is prohibited. To obtain permission to post articles on secure and/or password-protected intranet sites, e-mail your request to smrpermissions@mit.edu. Hyperlinking to SMR content: SMR posts abstracts of articles and selected free content at www.sloanreview.mit.edu. Hyperlinking to article abstracts or free content does not require written permission. MIT Sloan Management Review 77 Massachusetts Ave., E60-100 Cambridge, MA 02139-4307 e-mail: smrorders@mit.edu

This document is authorized for use only by Ashwini Purohit in CET 171 Spring 2012 taught by Dr. Ron Lesniak from January 2012 to May 2012.