Why this revised article?
This article is an update and revision of the merger article originally posted on the Ad Esse website in January 2016. Although more mergers have been announced since then, we have also seen some failures in mergers. This has meant that organisations have effectively put their change and transformation programmes on hold, focusing solely on the preparation for the proposed merger, only for those plans to change (usually because Boards or Executive teams cannot agree the details) and the merger to be cancelled. Because of this potential, we regard it as even more important that any preparation for the proposed merger should deliver some actual improvement in current performance rather than focusing solely on the administration and legal work necessary to merge two or three organisations.
Why are we talking about mergers?
The change to housing association finances triggered by the George Osborne’s announcement in the July 2015 budget is still sending shock waves through the industry. The responses that we in Ad Esse have seen across different organisations have ranged from ‘we need to drive our continuous improvement process to enable us to reduce costs and fund investment’ to ‘we need to stop our continuous improvement process as part of our cost-cutting measures’. You can imagine our view of these two differing approaches to improvement and cost reduction! It seems to be hard for organisations to focus on continuing improvement at the same time as moving towards a merger.
Many housing providers are reducing staff numbers, or have plans to, and are critically reviewing all areas of cost in order to rebalance the books. In Ad Esse, we clearly believe that applying Lean to the identification of waste and the reduction in non value-add activities should be a core part of any housing association’s response to the on-going reduction in income. We know that the use of Lean tools can create rapid cost reduction if effectively targeted, but it can also create the conditions of continuous improvement that will deliver on-going savings.
However, a topic that has become a more important part of the discussions between housing chief executives since July is that of merging housing providers. The mood has changed from one that, at the end of 2014, could have been categorized as ‘merger-fatigue’, to one of seeing merger as an essential option to be considered and presented to Boards as part of the approach for coping with the expected 20% reduction in income. The last few months have seen many announcements regarding larger associations (Circle & Affinity Sutton, Genesis and Thames Valley, and the super-merger between L&Q, Hyde Group and East Thames, etc.), as well as the many, smaller associations that we know are in merger discussions. As one G15 chief executive commented personally in November, “If people aren’t thinking about merging then they are idiots”.
What can go wrong?
Anyone that has studied business can tell you that mergers, whether between housing associations or in other business sectors, do not have a perfect track record. Whether is it problems merging different IT systems, agreeing strategies, or difficulties in getting organisational cultures to align, mergers can often create as many drawbacks as benefits. Many books and articles have been written about the failure rates of mergers and the reasons for the failures. The quoted failure rates range from 40% to 80% depending upon the definition of ‘failure’, but even taking the lower number implies that achieving a successful merger in the long-term is not straightforward. For this reason, we believe that a focus on ‘merging and improving’, rather than just ‘merging’ is vital.
Failure in mergers can occur for a number of reasons. These might be categorised as:
- Strategic – the wrong decision made for the wrong reason
- Tactical – bad preparation, planning, management, or focus
- Systems – not understanding the impact of differing processes and systems on performance, and hence creating an unstable or impotent new organisation
- The basic behaviours of humans – not focusing enough on getting the people element of the merger right, either at staff level, or more frequently at Executive level.
Because Lean is an approach that looks at systems, behaviours and the motivations of both managers and staff, it can help to address many of the potential banana skins waiting for the unprepared. Although the ideal time to have started a Lean transformation is always ‘18 months ago’, even a few months of Lean activity in both (or all three) organisations prior to the final merger can help deflect some of the pitfalls.
How to prevent it?
Based on our experience and the best brains we have been able to tap into, there are nine ways that starting your Lean programmes before the merger can help both Chief Executives achieve their objectives.
Before the merger
- A clear analysis of the motives for the merger. Mergers work more effectively if they are motivated by defined and agreed objectives across the two organisations, supported by a clear plan of action for each stage. If you cannot agree on why the merger makes sense other than ‘we can reduce costs’ then it will probably not be a success. Lean enables you to understand your own organisation, what makes it tick and what motivates your staff. You can quantify expected benefits both in terms of cost, but also in terms of customer service and impact on staff and culture. Having a clear, shared purpose, agreed upon by both management teams, and that you can explain to staff and a board, is invaluable.
- Getting to know the other organisation and how the merger will happen in practice. Understanding how your processes work, how the responsibilities in teams are different across the two businesses and what will have to change to create a single process, will prevent a lot of failure post-merger. The use of Lean tools such as SIPOC, value stream mapping and RACI can mean that people have a common view of what is done now, why, and where the fundamental differences are.
- A shared plan with clear responsibilities and the clearing of the decks to achieve it. Both organisations have to believe that the merger is the most important activity to be managed once the merger is official. The use of a tool like a Master Schedule that has been developed before the merger can identify all the change activity underway or planned in both organisations, and can ensure that all the non-essential ones are stopped or paused. As planning for the merger activity develops, having a common Master Schedule, with a clear picture of what resource is being allocated to what activity can prevent overloading of key staff or the unexpected impact of current projects.
- Creation of a common culture. Introducing Information Centres and other Lean Thinking tools as a precursor to the merger can help create the sense that things are moving forwards, and that the ‘others’ will have a common terminology and way of doing things. Using Information Centres can establish a way of tracking progress against change objectives and the introduction of new measures of joint performance. Information Centres will also provide a mechanism for the identification and resolution of problems by using concern strips and ideas strips. Ensuring that managers are visible and are visibly seen to listen to, and react to, staff problems means that your teams will go into the merger with a sense that they will not be left behind in the rush.
After the merger
- Speed of implementation. Doing things quickly is essential. The longer different operating processes and cultures are allowed to coexist, the harder it will be to change behaviours later. The use of Master Schedules to hold each management layer accountable for the changes that they have to make is a way of ensuring that change does not stall, or if it does, that it is recognised quickly and addressed. Creating a realistic plan, and then sticking to it will do much to reassure staff at all levels that things will work out.
- Strong leadership. This means leading from the front, being visible, communicating regularly and being honest about what is working and what is not. Information Centres provide a great opportunity for regular communications, cascading messages down the newly-created single organisation and being able to check that the message has got through and what impact it has had. Daily meetings give managers a reason for spending time with a team and discussing performance and problems. The whole basis of Lean is to ensure that managers spend more time out on the shop floor checking that things are being done in the way they should be done – even more important post-merger.
- Clearly defined decision-making responsibilities. Lean provides the mechanism for problems to be identified quickly, passed up the organisation effectively and for decisions to be communicated to all those who need to know. Ad Esse clients often find that the introduction of Information Centres reduces the tendency for knee-jerk decisions, that then have to be unpicked over the following weeks. The capacity for effective problem-solving increases and the definition of responsibility and accountability for key elements of performance creates a culture of ownership of problems and the actions needed to resolve them.
- Establishing a single culture. Although names and logos are important to staff, avoiding the sense that ‘they’ have taken over is vital. The creation of joint teams, creating joint Information Centres with common metrics for those from both organisations and the missing of staff from both parties at daily meetings will all do far more to create the sense of one team and one culture. Ad Esse clients have seen the impact of getting different teams to work on the same process redesign in terms of breaking down barriers and overturning long-held negative beliefs about each other. The same can be achieved post-merger if the Lean principles and tools are applied to breaking down process and behavioural boundaries.
- Supportive human resources management. Whilst much of the focus in a merger is on costs and performance outcomes, it is your people who are most affected. A mixture of fear, suspicion, resentment and apathy can create a perfect storm of lack of engagement amongst whole teams unless identified, planned for and resolved. The daily use of Lean tools provides an early warning of managers or staff who are not engaging. Visual management can prevent some of this as it means that a sense of peer pressure can keep people on track rather than them thinking that no one cares about them. The presence of managers and other teams will assist those that want to succeed, but as we say in our training, in a Lean organisation there is no place to hide, so if people do not engage, Lean allows managers to spot the signs early and use the skills and experience of human resources team to tackle the root causes of these problems.
The number of mergers of all sizes in the housing sector is going to increase over the next 18 months, although, as we have seen, some of the potential mergers may end up not happening. Reducing the chances of failure is a prime responsibility of all Chiefs and Chairs. The application of Lean Thinking as a tool to increase the chances of success of a merger, and to achieve that success more quickly, is evident to us. Not only will it improve performance prior to the merger, but it will also make the whole process more manageable and simple.
Equally, if the merger does not end up completing, the time spent on understanding processes, creating effective feedback mechanisms and creating your continuous improvement capability will not have been completely wasted. If you move on to developing a full Lean programme, you can continue your continuous improvement programme to deliver the cost savings you needed to achieve, but without the pain of a merger!
Please contact Ad Esse if you are interested in Lean, whether or not you think a merger is on the cards. You never know, you may be at the top of someone else’s wish-list!