Executive Forum: Integration Is Not a Four-Letter Word

In the mid-1990s, Wall Street rewarded small companies that had a vision to become big companies within fragmented industries, a concept that was often referred to as a company roll-up. The idea was to become the industry leader by acquiring companies that were exactly like your own. The investment bankers stood in line to manage initial public offerings for small companies that needed cash to buy 10, 20, or more industry competitors a year.

Ideally, the financial model worked by using combined purchasing power to obtain lower prices from suppliers; increasing product and service offerings to customers; and lowering operating costs by integrating the acquired businesses. The internal growth rate was expected be phenomenal because of the clout the larger organization would carry in the marketplace.

Wall Street’s love affair with roll-ups cooled in the late 1990s, as the acquiring companies struggled with integration, both physical and social. Investors found what businesspeople who had been through acquisitions already knew: Anyone can acquire a company, but it takes real talent to run it after acquisition and near heroics — originating from the middle of the organization from middle managers, such as distribution and call center managers, rather than from the top — to integrate it.

In a large company, the middle managers have the most perspective on the organization. They are the ones who should tell upper management to slow down, and the rank and file to speed up. At the same time, these workers have to create an environment where everyone has to bring together the “best practices” of both companies. This isn’t easy, considering that these practices stem from years of different methods, procedures, and cultures.

What to watch out for

If you have experienced an industry roll-up, you may know what integration is all about — and are aware of its pitfalls. Aside from the devastating effects that the clashing egos of the two CEOs may have on the organization, other issues can create disaster. The acquiring company generally believes it knows more about what is going on and does it better than the acquired company. As a result, it often imposes its practices on the acquired company.

On the flip side, the acquired company often buys into the idea that, since it has been purchased, it is in a submissive position. It may expect the acquiring company to take the lead and establish its business practices companywide. Ultimately, the result is often that the practices implemented are those of the acquiring company, whereas those of the acquired company are lost, even though those procedures may have been best for all concerned.

The time frame of the integration can also create problems. When the parties involved are novices regarding acquisitions, they typically want to make sure that operations continue to run smoothly, so they integrate slowly and deliberately. Indeed, once the acquisition is announced, the planning process itself may take many months.

While the goal of a smooth integration is a worthy one, delays in implementing changes often make employees uneasy — particularly if you don’t tell them what to expect. Without communication and reassurance, employees at the acquired company often jump to conclusions about what will happen to them as a result of the integration, conjuring up the worst case scenarios — layoffs, department consolidations, demotions. Resistance and anxiety build while morale and service performance decline.

Though the integration team may want to go slow, top management often wants immediate results. After all, they just paid a lot of money for this company. Slow execution also prevents the organization from realizing the benefits of the integration right away. You can’t enjoy cost savings and efficiencies until you have eliminated redundancies — typically in people or procedures.

So management’s preference is often to slam the acquired companies together as fast as possible to get what they paid for. In this scenario, the top management forces middle management to go faster — which may lead to mistakes. For example, the merged companies might integrate the mainframe without first training people how to use it.

The worst mistake an acquirer can make is to withhold information that will be “bad news” for employees and management at the acquired company. The acquirer may be tempted to say, “Let’s not tell them until we have to. Otherwise they will quit, and we can’t operate this business without them.” Worse, they could sabotage the operation (for instance, through pilferage or by delivering poor service to clients).

But it’s better to face reality: Once decisions are made, they are seldom kept quiet. Often senior managers — or even the CEO himself — may spill the beans by “confiding” in someone, and the whole organization will then find out. The ramifications of this scenario are disastrous; all employees start to distrust the organization. It would have been much better to be straightforward with employees to begin with.

What works

To avoid calamitous situations, you should tread carefully and bring everyone into the fold when planning an integration. While there is no prescribed formula for every situation, here a few steps you can take to make the process smoother:

  • Announce the plan the day you announce the acquisition.

    Honesty is the best policy. Employees want to know what is going to happen to them, as individuals. They want to know who the new guys are, and what kind of people now control their destiny.

    The best way to start an integration on the right foot and to gain employees’ trust is to show up at the company you are acquiring on the day you of the acquisition to announce the plan of integration, the compensation philosophy, and any benefits issues. If you want to encourage people to remain focused on the customer, rather than worrying about their future, be forthcoming about what you know and have planned.

    Even if you are simply considering possibilities — for example, closing part of an operation — but want to gather more information, tell them. Then, when you reach a decision, announce it promptly. We have announced location closings as far in advance as one year and have not had operating problems. Have confidence that people have pride and want to do a good job. If employees have spent years helping to build a business, they are unlikely to destroy it in retaliation.

  • Offer a good severance plan.

    If you want to encourage people to stay through the integration period, give them a good reason to. Develop a severance plan and announce it along with the integration plan on the first day. Our plan gives two weeks’ pay for every year of service. We set a date of termination as early in the process as possible and announce it as soon as we can, so people have plenty of time to plan their future.

  • Let operators lead the integration.

    Some companies designate a separate group of people to plan and execute the integration. We ask our functional operations people to fill this role.

    Form a cross-functional committee represented by people from each area from both companies to monitor the integration. This includes representatives from the purchasing, catalogs, merchandising, warehousing, and accounting departments. The top managers’ role is to monitor progress.

    The committee should get together as often as possible for short meetings (we meet every two weeks) to discuss issues but mostly to communicate with each other. Put one person in charge to run the meeting, just to ensure that everyone has a chance to be heard. This process will keep everyone informed about key integration decisions as they are made and about the time frame for their implementation. It will also give departments the opportunity to share plans that might affect other functional areas and provides a forum in which to discuss the implications of proposed solutions. For example, if someone from IT says they’re going to convert a system on a certain date, the shipping manager might tell him that’s not a good time because it’s a busy shipping date.

    Also, each functional area should make its own decisions about what to do. The operations people have to make things work after the integration. Why should they allow someone else to design the way that they will run the business? If they know best what to do in the daily operation, then they are in the best position to make decisions.

    The procedures, processes, and locations that exist in the acquiring company should also be subject to change or integration. Management needs to step in here to make it clear with the employees of the acquiring company that they do not get to dictate what will happen (they may feel they are entitled to since they are with the acquiring company) but must rather participate in developing the best solution.

  • Convert systems swiftly.

    If you are doing a totally invasive integration of an acquired company, put both companies on the same system. Regardless of which system you convert to, a conversion creates consistency. Information that is independent before the conversion can become available to everyone in both companies immediately after. Metrics used to set goals and measure performance will be consistent. Accounting information becomes easier to interpret.

    The system conversion should occur as soon as possible after closing. Don’t delay; get the two IT groups on-site to make conversion decisions. Once a course of action is established, order the equipment and data lines and connect the companies as soon as possible.

  • Bridge corporate cultures.

    Once you have purchased and physically integrated the company and even converted the systems, you may think your work is done. And it’s true that completing the integration process quickly will refocus the employees on meeting the customers’ needs. But the company is not truly integrated until the people view it as one company.

    It will take a long time — most likely one or two years — to bring the corporate cultures together. Nonetheless, the employees have to build trust and working relationships with each other. Good communications programs such as newsletters and e-mails updating everyone on the company’s status will help. And seeing management fulfill their promises will build trust.

    Employees must accept the acquisition and feel accepted by others in the new organization. The conflict often created by the integration, the possible low performance levels that result after the integration, and the loss of closeness that typically exists in the acquired company create problems with acceptance. Ultimately, it is up to each individual to feel a part of the combined organization. But if the integration went well, and employees have good support and the proper resources, they are on the right track.

  • Trust your employees.

    On a closing note, have faith in human nature. If you treat people with honesty and respect, they will continue to work hard for you, no matter what road lies ahead.

Dave Vander Zanden is the president/chief operating officer of Appleton, WI-based School Specialty, a multititle marketer of educational supplies for schools and teachers.

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