The right M&A Operating Model to maximize value

Review current M&A Operating Model

M&A transactions provide an opportunity for the acquirer to reflect on the performance of their existing operating model – Organization structure, Processes and People to maximize value creation. A M&A operating model requires substantial changes to the existing operating model to deliver the strategic objectives and synergies.
Due to the need to integrate the acquisition quickly, executives often cut corners during operating model redesign.Leadership teams focus on the organization structure and leave the focus on processes and people to the middle management.This can lead to severe challenges in Change management during the integration phase.

Risks in M&A Operating model redesign

Conducting an operating model redesign during M&A presents some risks.

• Success depends on having a new executive leadership that is aligned on the end vision, steps to get to the final end vision and decision to finalize on the new way of working.
• Pressure on the CEO to get the executive team selection and alignment right.
• Transitioning from existing operating models to a new combined operating model requires the right transition planning and giving priority to Change management.Most companies do not have the right change management capabilities.
• The end state operating model needs to preceded by an interim operating model. The interim model needs to be robust and functional to start delivering on the deal rationale.
• Operating model design trigger anxiety in the workforce and this can impact the productivity of the employees.
• The period between deal signing and closing can restrict what acquirers can do, design, communicate and implement due to legal and regulatory considerations.

Defining the M&A Operating Model

An Operating model has three elements – Org Structure, Process and People. It is necessary to have a holistic set of levers across all three elements so that the Operating model designed captures the deal value and synergies.
Let us look at the three elements of the Operating model in detail.

Organization Structure

The new post merger organization structure should address the following:

• Clear reporting structure
• The primary value creation streams
• The Governance structure and how decisions will be made
• Scope of important roles
• How functions will support business lines
• New locations of the combined business operations

Process

• The Target company may have unique processes to run their daily operations.These processes may not be appropriate for the new post merger entity.
• Clear robust processes are essential in the combined entity to deliver value. The process redesign happens very late in many M&A transactions because the individual roles and responsibilities for all employees would still not be completed.
• The cross functional processes should be designed prior to the deal closure because until the processes are designed there will be no clarity on how the combined entity will operate with the new organization structure.

People

• Employees and culture are the most important components when building the combined organization.
• There should be dedicated workstreams for culture and talent management who would work in close collaboration with Operating model redesign workstreams.

Designing the M&A Operating model for the combined entity

• In successful integrations, the leadership teams play an important role in designing the top level organization structure and governance for the new organization. Once the blueprint of the operating model is finalized, the integration team is responsible for creating the detailed end state design for each organizational unit and the cross functional processes.
• Organization design in M&A is unique because it requires interim steps which can be different in various parts of the organization.Leadership teams generally work towards establishing an interim model before transitioning towards the end state operating model.

Steps critical to consider in the approach to Operating model design are:

Align on Design principles and establish the baseline M&A operating model

• Design principles are enterprise wide rules that defines the future state design which is aligned to the deal rationale.Design principles should be specific, measurable, actionable, relevant and time bound.
• When designing an operating model it is important to establish the expected deliverable. To create value, leadership should align on clear set of design principles that will shape the outcomes, objectives and guardrails for the end state design.
• The combined company’s leadership should be involved in development of the operating model design principles which should be aligned to the deal rationale and strategic objectives. The design principles vary depending on the acquisition strategy.
• In acquisitions involving a smaller company, the integration team should focus to preserve value of the target company, move swiftly and efficiently without disrupting the broader organization.
• In acquisitions focused on talent and capabilities, the acquirer should look to ring fence and nurture the target business unit.In integration of two large companies focused on full scale transformation, the acquirer should focus on consolidation and scaling of efficiencies.
• At the same time, the integration team should build a baseline understanding of the target company’s existing operating model and its current processes.This is essential because even when acquirer and target have similar operating models, the processes followed would be different. The integration team should document the current processes of both acquirer and target company and outline differences.
• Mergers move at a high speed, so integration leader should be ready to make decisions with information provided during the deal analysis and due diligence.

Develop the preliminary end state design of M&A operating model

• Once the design principles are aligned and the current operating models are documented, the next step is to transition to defining the end state operating model.
• The integration team and business leaders should manage communication with external stakeholders – Customer, investors and suppliers to avoid business disruption.At the same internal communication with employees should be handled to ensure transparency and clarity. The communication should clearly focus on why the deal took place and what is the future vision of the combined entity.
• A better way to build an understanding is through a change story. A change story is a communication that cascades from CEO to its employees that speaks about the merger in personalized way.In this way, the employees understand why the merger took place and the need to change to be aligned to the organization’s end state vision.
• Similarly the integration team should build a communication plan for working with suppliers and customers to help them understand the transition, issues that might arise during the transition and their commitment to service delivery.

Designing the organization blueprint of M&A operating model

• The organization blueprint should focus on how the organization will serve its customers and generate value, the important value streams and how the combined entity will be grouped by – Geo, product etc and how the functions and shared services serve the value streams.
• The leadership team should decide the top two levels of the combined end state organization structure, identify important roles and assign roles with core team of leaders.The first level should describe the main value creating streams – Nominating leaders for Geo, Business and Customers. The second level will design how functions will serve the value creation streams.

Detailed approach to design of M&A operating model

• Functional and business unit integration teams begin their end state operating model design by working closely with their first level leaders for their functions or business units.
• During detailed design, the integration team should work with business leaders to identify the functional knowledge and expertise that should be preserved at the core, the functional knowledge that business should own and basic shared services support required in the interim period.

Governance

• The Governance structure determines the decision making and how quickly the decision is taken in the organization.The decision making should be delegated as far into organization as possible to ensure quicker and quality decision making.
• The governance structure clearly defines the decision rights – who decides, who participates and who receives the information. The governance structure should be in alignment with target organization’s cultural priorities.

Cross functional processes

• The integration office should identify the important cross functional processes to design early in order to achieve stability.These cross functional processes should align with the deal rationale and deliver value.The integration team is responsible to work with multiple stakeholders to design the end state process.This is then subjected to the approval of the steering committee.
• Once the approval is secured, the integration plans are executed. Post execution, the integration leadership should validate whether the new operating model works as per the expectations.

Design Day1 and Interim state M&A operating model

• Full implementation of Operating model cannot happen at Day1.Different functions and units move towards end state at a different pace.
• Functions like HR and Finance take time to reach their end states because the target organization needs to retain excess capacity in the months after deal close in order to support the transition for remaining organization.
• Sales on the other hand reach their end state immediately after day1 to streamline the customer’s point of contact.Delay in sales integration will affect customer experience. At the same time, rarely are the processes aligned by Day1.
• As different functions reach their end state at different time, the IMO must develop a detailed consolidated plan to reach the end state operating model. This should include day1/interim structure, governance model and a transition plan that provides details on the strategic decision making taking place across the organization.
• Change management is critical to support employees during the transition phase.Change management involves blending employees of both the organizations harmoniously and helping employees make cultural transition.At the same time, Change management should also support employees operationally by adapting them to new hierarchies, role descriptions and work processes.
• The change management team should assess the degree of change between the new operating model and existing operating model, the number of employees affected and consequences to value capture if the desired change is not made.Change management is not only about supporting employees emotionally but also create strong understanding and confidence within the employees on their roles, expectations and way of working.
• The integration team should conduct use case sessions with target organization’s employees to ensure that they are comfortable and settled in the new operating model.The outcomes of these sessions would be either resolving issues if any or conducting training plans to address capabilities gaps.

Integrate, stabilize and Transform in M&A operating model

• Post Day1, the combined entity will continue to implement their integration plans to move towards the target operating model.Generally most deals take around 12-18 months to transition fully towards an end state operating model.
• The integration team would continue to support the transition.The functional and business units also have clear accountabilities and roles for managing the transition.
• A KPI metrics needs to be defined to track progress so that respective leads can understand their performance and respond accordingly.

Conclusion

• Implementing an end state M&A operating model is a long and tedious journey.In this journey, day1 is the most important step.
• The key success factors to drive value and meet synergies targets include having clarity on the deal value, leadership alignment, implementation of interim operating model during finalization of end state operating model, effective communication and change management support.