Managing Cultural Integration post M&A

Year 2007. Indian companies have gone on an acquisition spree. According to Dun & Bradstreet, 243 M&A deals were concluded in the first 5 months worth a staggering $46.8 billion!! Most of these were acquisitions overseas by Indian companies. And the rate of these M&A activities shows no sign of slowing down.

Compared to the year 2006, the total value of M&A deals was a miserly $20.6 billion.

Local economy is driven by robust growth, buoyant demand & a strong surge of confidence. This effect is seen in increasing FDI inflows, resurgent stock market and long term Indian investors. Thus the increased inflow of capital and strong growth prospects is driving Indian companies to acquire companies abroad.

Indian companies have so far been able to manage these acquisitions quite well. But this time the challenges are bigger and there is lot at stake. The biggest challenge facing Indian firms after acquiring companies in other countries is that of Integration - more specifically Cultural Integration. As Indian companies are now acquiring global companies such as Corus Steel, Novelis, Flag Telecom etc., the challenge to integrate different work cultures is a daunting task.

Just to illustrate, long time Corus employees in UK were aghast when they heard of the possibility that an "Indian" company will acquire them, and they will have an Indian boss - whose name they cannot pronounce. Similarly, Novelis employees will not be able to pronounce the name of their new Chief - Kumaramangalam Birla!

Under such circumstances, think about the challenge of cultural integration.

To make these acquisitions work and deliver results as per share holder’s expectations, acquiring companies must overcome the challenge of cultural integration.

Why is Cultural Integration such a Big Challenge?

Cultural Integration is never easy. Even global companies struggle with it even now. The reasons why cultural integration is such a huge challenge are:

1. Cultures build prejudices which is often influenced by history. Most Europeans & Americans view India as a third world country, poor country and as a backward country. This distorts the current reality and people have difficulty to come to terms with the acquisition.
   
2. Corporate culture is an amalgamation of: National culture, Religious culture, and professional culture. These cultural dimensions are often invisible - but ever present & relevant.
   
3. Need to balance the local needs and the global needs during the post-acquisition period. These needs may be the local community demands, business demands, investors demands etc.
   
4. Need to meet the high expectations of the share holders post-acquisition. Often times these acquisitions are financed through LBO or debt, and this needs a good cash flows to sustain. In addition, the management will be under pressure to show the benefits of acquisition as promised before the acquisition
   
5. Lack of Experience in dealing with a different culture. This applies equally to Indian & foreign company managers. Most managers lack the cross-cultural skills needed during the post acquisition integration.
   

Changing the HR paradigm

For a long long time in India, the concept of human resource management meant only Industrial Relationship management. Indian HR Managers became experts in dealing with unions, all IR related issues and today they have to deal with this complex challenge of cultural integration. For most organizations, cultural integration is a new challenge never before seen in India.

How to overcome this Challenge?

Cultural Integration is not an easy challenge and therefore there are no simple answers or no single correct answer. The options of all available tools and solutions is just as large as the problem itself - and that makes it even tougher to overcome the challenge.

The task of cultural integration must be headed by "two-in-a-box" leadership, where one person from each company are assigned equal responsibility and they work in a team. For example in Tata-Corus merger, there must be two persons who share the responsibility for cultural integration.

• Identify the problem
  
  Based on my experience, I would say that if the company’s HR managers were to identify the scope and dimension of the challenge, then they have 25% of the solution. I often say that correctly defining the problem itself is the biggest challenge - once the problem is correctly defined, finding the solution is mearly an exercise of logical analysis.
  Identifying the scope, the nature and the dimensions of the challenge will require in-depth survey & analysis of employee behavior, attitudes and responses. This is best done by a third party consultant(s) who is seen as a neutral entity by all employees.
  
  
• Develop common policies & procedures for the combined organization
  
  Policies & procedures of the newly combined organization must have a great amount of commonality - but without imposing it forcefully on the employees. By this I mean, the new policies/procedures must be developed which takes both sets of employee’s interests into considerations and avoid imposing the policy/procedures of the acquirer company on the acquired company. The new policy & procedures must be accepted by both sets of employees.
  
  
• Build a cultural integration Roadmap
  
  Cultural integration will take a long time - often several years. It is therefore essential to have a roadmap for this integration which shows important milestones and accomplishments. Some of the milestones & accomplishments can be: Cross-Cultural training, Success of Inter-company transfer employees (rather % success of the transferred employees), measurable aspects such as employee behavior & attitudes towards coworkers from the "other" organization, level of cultural awareness etc.
  
  
• Hire a Cross-Cultural Consultant
  
  During cultural integration, it is important to be seen as fair and reasonable by all employees. Often times, existing company managers are influenced by the past records & history and their decisions cannot be guaranteed to be fair or neutral - more over there is an element of mistrust by one set of employees. It is therefore very important to hire an outsider - a neutral third party consultant to deal with sensitive issues.

The main advantage of having a third-party consultant is that they bring in the expertise needed to carryout the cultural integration. Consultants have the expertise in developing company policies, establishing procedures, conducting survey’s, analyzing these survey results, conducting the required training's etc., Due to their high level of expertise, employees often have a high regard to these consultants and are seen as neutral arbiters in a conflict situation. (which is often in the early days of acquisition)

Closing Thoughts

Benefits of global acquisitions are HUGE, and so is the risks. To make these global acquisitions succeed, one must overcome the challenges of cultural integration - which are complex and hidden.

In this article, I have just highlighted the main issues of cultural integration involved in a global M&A. There is lot more to it and I can keep on writing about it. If you need more information, please feel free to contact me at - kvarun@hotmail.com or arun@ninedots.in

Is the Indian IT revolution Over?

Rising Rupee, Prospect of losing income tax holiday, Slowing US economy and the Sub-prime mortgage crisis et al, has taken a toll on the Indian IT sector. Indian IT Giant Infosys is now projecting a moderate revenue growth of 35%. While TCS reported the slowest new growth in last 7 quarters - with net income growth of only 26%.

It is clear that the tough business environment challenges are putting breaks on the rapid growth of Indian IT companies.

Accordingly, the stock markets have punished them. In the recent rally of BSE Sensex, the IT companies are no longer the darlings of the investors. The lack of investor confidence is showing through sagging stock prices. Stock prices of TCS, Infosys, Wipro, HCL, Satyam have all trailed the BSE Sensex.

Does all this mean that the Indian IT revolution is Over?

The answer is both "Yes" & "No".

Yes! The markets have changed

Yes - the era of revolutionary growth of 50%-100% year-on-year growth is over. From now on growth in revenue & profitability will be a major challenge, one that requires bold innovative management. Increasing competition from the global giants will see that Indian IT companies lose some accounts to Global majors.

Yes - the growth revolution is definitely over for small & mid sized Indian IT companies, especially those companies which offer run-of-the mill IT services. Companies such as Patni, Polaris, Aztec, ITC Infotech 3i-Infotech, L&T Infotech, iGate etc will find it harder to compete and some of them will even see a drop in revenue.

No! The growth Story continues

No - the growth story will continue. Indian IT companies will now make a steady march to become the top-10 IT companies in the world. Albeit at a slower pace.

Think of this situation as that of a mountaineer climbing a mountain. Till some stage, one can make a rapid progress, and then comes a point where the progress is slow and painstaking. Only the fit will be able to climb on further towards the summit. In the Indian IT context, only the best IT companies will now be able to grow - while others will falter. Companies which have a strong leadership, a bold vision and deep capability will be able to grow and reach the new heights.

No - The long term market conditions are still favorable to Indian IT companies. The overall global economy is showing a healthy growth. Asia, Europe and Latin America is experiencing very strong growth. Even the US economy is growing - albeit at a slower pace. Intel & IBM recently announced better than expected results - which is a string indication of growth in IT sector. This growth implies that there is a strong demand for IT services. The only question that remains is:

"Who will provide the required IT services?"
"Can Indian IT Companies tap into this growth opportunity?"

Added to the global growth in demand for IT & IT related services, the changing demographics of the US & European population shows a strong promise for the future of Indian IT companies. With an aging US & European population and ever tightening immigration laws means that more work has to be off shored to India or other places.

Thus, in short, the long term prospects for Indian IT companies looks good. The only question that remains is that: "Can Indian IT companies tap into this opportunity?"

What can Indian companies do?

Changing business environment calls for changing strategies as well. What worked in the last several years may not work in the future. Indian IT companies must therefore adapt to the changing situation - and take advantage of it. To begin with, some of the strategies Indian IT companies can adapt are:

Take advantage of the stronger Rupee & Go for Major Acquisitions
Take advantage of the stronger Rupee & go for expansion abroad
Take advantage of the huge human talent available & go for niche markets
Take advantage of Asian growth & Go after Asian markets
Build deeper relationships with customers

Play the Merger & Acquisition Game

Mergers & Acquisitions seems to be the flavor of the month. But I am not suggesting that Indian IT companies to opt for acquisitions just because its fashionable, but now with a stronger Rupee, it makes sense to go for it and acquire tier-II players in US & Europe - especially companies which have revenues of $ 1-8 Billion. These companies in general have lower profitability than Indian IT companies and they also trail the biggies (IBM, HP, Accenture, EDS) in terms of profitability. Companies such as KPMG, Cap Gemini, Unisys, CA, Covansys, Sapient etc., will be a good fit for Indian IT companies. These pure play services firms have high operating costs and merging them with Indian company will help lower their cost structures, improve profitability and deliver higher value to customers. US or Europe based IT services companies have a higher cost structures. Indian IT companies can acquire such companies, and transfer their low cost business models into these acquired entities - thus recovering the investment and gaining bigger chunk of the revenues.

These acquisitions will not come cheap, these acquisitions will be in the range of $3-20 Billion dollars, and Indian companies have to take on debt or do SPV (Special purpose Vehicles) or do an LBO (Leveraged Buy Out). Indian IT companies can take advantage of a stronger rupee and huge US client base to fund for these acquisitions.

Such big ticket acquisitions is not for the faint hearted. It takes lots of management skills, vision and guts to pull it off successfully. Given the history of Indian management talent and abilities, Indian IT companies do have the necessary management capability. Tata's, Lakshmi Mittal, Wipro etc., have shown their M&A skills in the past. Indian companies have the necessary management skills to do a successful acquisition - it now needs a bold vision and daring guts to execute such a move.

Expand Abroad

A strong Rupee & rapid growth in Asia & BRIC countries means that Indian IT companies should now concentrate on these markets for growth. Traditionally, Indian IT companies have depended on US & Europe for business. ( Almost 80% of revenues comes from US for most Indian IT companies).

Another good reason to expand in BRIC, ASEAN countries is that their currencies have not appreciated as much as Indian Rupee against the US Dollar. Chinese Yuan has appreciated by only 2.85% against the US dollar while Indian Rupee has appreciated by ~12%. This means that setting up operations in multiple countries will offset the risks if appreciating rupee and at the same time enable Indian IT companies to tap into the business opportunities in these countries.

Indian IT companies should look at expanding operations in Russia, Brazil, Poland, Romania, Mexico, Egypt, China, & Malaysia. These countries have the necessary talent base. Particularly Russia, Romania & Poland. These countries have first class educational system and Indian companies can hire engineers from these countries to serve the global markets.

Diversifying the talent pool of their employee base will help Indian IT companies compete better and gain a significant competitive advantage in the global markets.

Go for the Niche Markets

India has the second largest pool of engineers and scientists in the world. This talent pool has to be utilized carefully - by going into niche areas where competitive pressures are lower and bill rates are higher. For example, getting into R&D services - like Mindtree & Symphony Services is a good example of going into Niche markets. Targeting niche markets will ensure steady revenue growth.

Indian IT companies can look at growth opportunities in Electronics R&D, Pharma R&D, Aviation R&D, Embedded systems, Automotive technologies etc.
But to sustain high growth in niche markets, Indian IT companies will have to invest in developing the human talent and also invest in marketing efforts to build the customer base. Indian IT companies have the necessary talent - but this human talent has to be repositioned to serve higher margin customers - and that requires investments in training.

Build deeper relationships with existing customers

Having served the customer for several years, Indian IT companies should now aim to build a deeper relationship with them. Probably look at outsourcing the entire IT operations from their customers. (instead of providing piece-meal services) Indian IT companies should look at co-ownership of certain IT services/products and become a profit sharing partner. For example, HCL has entered into various revenue/proft sharing contracts with the customer. TCS won a $1.2 Billion contract from Neilson company.

Closing Thoughts

The current turmoil for Indian IT companies is an opportunity in disguise. This situation calls for consolidation and re-strategize for future growth. The era of rapid growth is definitely over, but Indian IT companies can still look at a healthy growth rates of 25% and above if they have the right vision and right management capability. I have highlighted few options available to Indian IT companies - and that too at a high level. But these options have to be explored further and executed upon inorder to grow and become world leaders in IT services.
Over the next two decades, if Indian companies execute properly, The largest IT companies in the world will be TCS, Infosys, Cognizant, HCL, Wipro, IBM, & Accenture (may not be in the same order)

Imagination Engineering

Imagination Engineering

An Example

Creativity requires imagination. Children have a great imagination & if it can be tapped effectively - it will lead to fantastic innovations. Often as adults we have grown up to accept things as they are and rarely challenge the status quo. But children are not like that at all - they challenge the status quo all the time. Recently, I was observing my daughter play with a cell phone. I observed how she uses the cell phone & this gave me few ideas for improving the cell phone.

One of the common problem everyone faces atleast once a week is searching for the TV remote. Invariably we always misplace the TV remote and spend a good amount of time searching for it. This problem is so persuasive that people have comeup with various ideas to help them find their TV remote like extra attachments, tying up the remote with a wire etc. Hotel’s also have a problem of disappearing TV remotes too.

Recently my daughter could not find the TV remote, so she picked up the cell phone, pointed it towards the TV and tried to use it as remote (but in vain). But her curious experimentation led me to comeup with a creative idea - build an intelligent programmable remote controller into the cell phone. Today’s cell phone has all the components to make a TV remote - and all it takes is to write a program to make the cell phone learn how to control the TV/Stereo/DVD etc.

The cell phone can interact with the TV/DVD/Stereo and automatically learn how to work as a remote. This added feature will solve all the problems searching for TV remote, fighting for TV remote etc.

Digital Arts

Lately, I have been blogging less and postings have become far apart. I have been utilizing my time into two creative pursuits: writing two books and digital art. I will write more about my book in future posts. For now I am going to post some of by digital art works. Enjoy.

Eco Damage

My Target

Lava on water

Imagination for Innovation

"Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world" -- Albert Einstein

Imagination is the fist stepping stone towards innovation. People imagine a future and then start to work towards making that that dream come true.

Often people ask me the question: "How can we create a culture of Innovation in our Organization?" The answer to question is quite complex and there is no one single answer. Probably there are as many possible answers as there are organizations. However, there are few root issues that are common to all innovative cultures: Strong leadership, Risk taking ability, creativity among all employees, ability to harness imagination into creative ideas, and the ability to harness creative ideas into commercially feasible innovation.

In my opinion, imagination forms the very foundation of creativity. Every innovation in the world today began as some nebulous idea or as an imagination of the future. People who are creative tend to have great ability to display their imagination.

Everyone of us are born with the natural ability to imagine things, to dream and fantasize. But most people are afraid to share that imagination with others and that ultimately stops them from implementing it.

Creative Individual

Every individual is creative. Some people have the ability to publicly discuss their imagination and few people have the ability to convert their imagination into reality. Those who are able to convert imagination into reality are called as creative persons or visionaries.

As an exercise spend some time to identify people whom you consider to be creative & list them down. Next do some research about them, about their imagination of the future etc. Or if possible interview them and ask about their imagination of the future. Once you do this study, you will notice that all these people have a very fertile imagination and they are willing to share that imagination with others.

If you are trying to build a culture of innovation, then you must start with encouraging people to share their imagination and also build a system to harness these ideas into reality.

As a photographer, before taking a picture, I try to imagine what the final result should look like: I mentally remove all the clutter, position the right scenery, the right lighting and the right moment in my mind first. Then I go about getting those things implemented - like choosing the right time to photograph, getting the composition, adjusting the light etc. In one photo session, I then take 300-400 pictures of which I choose 3-5 photos and discard the rest. The lesson I learnt from photography is that I get lots & lots of ideas - but only a few are worth something, the rest are best discarded. Creativity requires risk taking - the more I experiment, the better are the chances of getting the right picture.

Pablo Piccasso painted about three canvases a week - only to discard the other two. ( This is on an average). Da Vinci painted several works - but few became very famous: Mona Lisa, Madonna on the Rocks, Last Supper. But all of his works have their own merit of ideas.
Everyone of us is an artist - a creative individual. It just takes effort to bring out the master piece.

Imagination and the Organization

Modern organizations of the industrial age has often struggled with Individual creativity. Great Henry Ford always complained that why does the pair of hands (he has hired) comes with a brain?

Ford and several other industrial organizations have then developed several efficient techniques in form of management processes, rules & regulations that effectively kill the individual creativity. While the centrally planned innovation (read R&D Labs) worked great for several decades in the industrial age. But with then new information age or in the knowledge economy, these practices will not succeed. In 2005, Ford Motors spent a little more than $4 Billion Dollars on R&D - yet the company lost more than $12 Billion in the same year.

In this new information age or in the knowledge economy, imagination & creativity will be the central theme for growth and survival of all organization. To do that, long standing firms must change their way of life. Companies must make creativity & imagination as essential components of its business strategy.

Building a creative work culture is not easy. Organizations often times resort to hiring creative individuals - who then quit soon after. Hiring creative people first and then rushing towards innovation will not work - its like putting the cart in front of the horse. You got the right components but not in the right order. Once a major manufacturing company in India hired a talented engineer who was also a creative painter. After a few days at work, he decided to decorate his office with some of his paintings. But when the building maintenance manager ordered it to be removed - quoting a company policy: "All wall hangings must be inline with the company values and must approved by the management ..." Needless to say that the engineer quit his job within few months.

Creative people thrive in a creative organization - and for that the organization must setup a right work environment. Once the environment is conducive for creativity, creative people will gravitate towards it and soon the organization will be filled with creative folks. Just look at Google, Apple, & IDEO - see the talent these organizations are able to attract.

To create the right work environment for creativity, it is essential to understand the characteristics of imaginative people. If you are going to employ creative people, you must ensure that you can meet their needs and maximize their creative potential.

Work Environment for Creativity

All creative individuals have three basic characteristics: Strong Motivation, Risk Taking, & Social skills.

Artists, painters, writers etc., all have strong sense of internal motivation. They are internally motivated to create. However due to other factors if this motivation is removed their work suffers. Money is not a major motivator but is necessary to meet their needs. Encouragement, appreciation and enthusiasm from peers, superiors and co-workers is essential as motivating factors. The challenge for the organization is to build such an environment where creative talent is encouraged & people are motivated.

Creative people take risks. To implement an imaginative idea compels people to try out new things or try something different. In a workplace, this translates to being flexible enough to new approaches, not punishing failures, and encouraging people even when an idea failed.

Creative people are highly social. They thrive in teams of people who are also equally creative. (birds of same feather flock together) Developing a work culture centered around teams of equally creative individuals or even good listeners is essential.

Creating a right environment for creativity involves making some cultural changes. Imagination & Creativity blossoms in an environment which cherishes:

1. Freedom to try out new things
2. Encouragement to try new things
3. Recognition to individual & teams for their creative endeavors,
4. Organizational desire to be creative.
   

Freedom or empowerment of the individual is essential for creativity. Organizations often create several rules which inhibit creative freedom. The famous cliché is "Our people are free to try out new things - but only after they seek the necessary approvals" This attitude will not encourage creativity.

Encouragement for creative people can come from simple sources - a few kind words, spending time to understand their ideas etc. Leaders should take it on themselves to encourage everyone around them, and this should spread all across the organization. Employees must encourage their peers, superiors & subordinates to try out new things.

Creative people need instant recognition. This encourages them in their work. Often times, companies have recognition system - which will be their annual recognition & awards program. These annual awards program are good, but it does not serve the needs of the creative individual. The best solution is to have an instant "kudos" system where people can give an instant recognition award - without having to go through a formal procedure.
I have several organizations that have innovation boldly written in their mission statement or in the vision statement or in their goals statement. But at the work place, there is hardly any activity or encouragement to build a creative organization. Organization need to build a strong desire at the unit levels to be a creative organization. Ideally, this translates to having a role model, nominating the creative person of the month, happiest employee, having small but creative challenges - like paper aeroplane contest etc. These kind of small activities has a huge impact on creating a creative workplace.

Closing Thoughts

Creative organizations are the ones that promote the imagination of the individual - and encourages sharing those imaginations. Organization must build a work place and a worlk culture that encourages individual's imagination.

Creating such an organization from scratch is tough - and its a lot more difficult for existing organizations to change their work culture and become a creative work culture. Several Indian manufacturing firms who are planning to transform into a knowledge driven organization will find that they have to build a culture of creativity and innovation. This would imply changing the organizational culture and that's daunting task.