By Graham Scrivener, European Managing Director, Kotter International
Shareholders of Standard Life and Aberdeen Asset Management vote in June on their proposed merger, which would create UK’s largest active asset management company and the second largest in Europe. They believe that it will create scale, financial strength and an increased breadth of investment capability, as well as an estimated£200million in annual cost savings, but at a cost of some 800 jobs within three years – almost 10% of the combined total workforce.
However, delivering those cost savings and creating a new entity where 1+1= 3 is far from straightforward. In France, a number of mergers in the asset management sector have led to very different results. Where there are complementary skillsets, as when Natixis Global Asset Management (NAGM) acquired a controlling interest in Darius Capital Partners, or it creates a more balanced client portfolio, as when Financière de l’Echiquier acquired Acropole Asset Management, the results have been positive.
In contrast, when the two companies are of very different sizes it is all too easy for what has made the smaller partner special to become submerged in the processes of the larger. This was the case when BNP Paribas Asset Investment merged operations with Fauchier Partners, and BNP subsequently sold Fauchier a few years later.The same appears to be happening following the merger of Rothschild & Cie and HDF Group.
Research says less than one third succeed
Navigating the internal dynamics and restructuring challenges associated with a merger is full of complexity. John Kotter, founder of Kotter International and Emeritus Harvard Professor of Leadership, has spent some 40 years analysing the factors that can derail the best laid plans. His research shows that 70% of large-scale transformations, including mergers, do not deliver the anticipated benefits.
To be one of the 5% that fully succeed in their original large-scale transformation ambitions, organisations need to address both the management aspects of the merger (i.e. technical/business/regulatory issues) and the leadership aspects, such as developing the vision and engaging as many people as possible in the two organisations.
In financial services, with stringent and constantly changing regulatory issues, it can be all too easy to lose focus on the leadership side of the equation. Deadlines need to be met, systems integrated and the highest standards of governance maintained. However, DrKotter’s research has shown that, to be successful, executives also need to focus on actually leading the newly combined organisation forward and creating a strong team that understands and can deliver their vision. How might this apply to Standard Life and Aberdeen Asset Management?
Obtain buy-in to the vision
John Kotter’s body of work shows that the single most common factor in why mergers do not succeed is not the lack of a post-merger vision for senior leadership, but the lack of one in which everyone can share and buy in to. This is essential: a post-merger vision from the top echelons of senior leadership, or one that is focused on delivering the right response from the City, is not enough. It is vital for two organisations genuinely wanting to become greater than the sum of their constituent parts to engage their staff throughout both organisations. It is particularly important in this instance where, although there is a size difference between the two organisations, they will be merging as equals. The vision must stress what both organisations bring to the combined entity, and emphasise clearly that it is a merger, not a takeover, despite the facts that Standard Life is much larger, its chairman will preside over the new entity and its shareholders will own two-thirds of the new company.
The two chief executives clearly know each other well and will have spent considerable time with their senior teams talking about the benefits of merging their organisations, strategically, financially and in terms of their offer to customers. Having answered the fundamental question: “what more could we become by coming together?” the combined senior leadership team needs to express this in a way that resonates with everyone at all levels and build a collective sense of urgency, excitement and alignment around a common goal.They have a sophisticated workforce, and need to communicate appropriately with them. Staff must be given permission to make the vision culturally their own, and to run with it in building the new organisation.
Retain key staff at all levels
In any merger there is the potential for both attrition and for job cuts due to economies of scale, and in this case the two companies have already been open about the scale of potential job losses. Aberdeen also has some history in this area – three years ago it bought Ignis Asset Management, the Scottish Widows fund management arm of Lloyds Bank, which resulted in the bulk of Ignis’ 250 Glasgow-based staff being made redundant. This will not have been forgotten in the tight-knit Scottish finance community.
In many sectors staff retention is ignored because human capital assets are difficult to value correctly. This is not the case with this merger, where the two companies have (according to media reports) put aside around £35m in retention bonuses to offer top fund managers once the merger goes ahead. With significant competition now from tracker-based and new low cost market entrants it is still critical to retain the very best fund managers to maintain funds under management. Asset management is after all a people business. With one star fund manager already having left Standard Life in March, effective steps need to be taken to ensure that other fund managers want to stay.
But it is also important to make other staff at all levels feel valued and able to participate in the merger. Institutional knowledge needs to be retained in the short term if the new entity is to function effectively. Interestingly, we have found that in situations where it is clear that some rationalisation and cost-cutting will be inevitable, those at risk respond much better if they are engaged with the process. Although sometimes seen as inevitable, the loss of organisational knowledge capital and goodwill can be minimised if people not in key client-facing positions are able to build the new organisation together with their new counterparts. Creativity and positivity can emerge from even the most difficult circumstances if people are given the chance to have more input. This requires courage from senior leaders, who have to resist the temptation to tightly control the integration and instead trust their workforce.
Avoid creating a survive only mentality
Dr Kotter’s latest thinking suggests that the way our brains are wired affects how we respond to change. If the process is not handled well, many people go into a state of panic, in which they believe the only possible responses in order to survive the change are fight, flight or freeze. Clearly none of these bode well for successful business performance.
Communication needs to motivate people through optimism, not fear. There must be enough urgency generated to spur everyone into action without creating frenetic, unproductive activity. True urgency means painting a clear picture of what’s important, what’s at stake and the role each employee can play in delivering the new future.
It is vital to ensure that a majority is involved in delivering the transformation, or they will quickly become disenfranchised.There must be a critical mass of people within the organisation supporting the roadmap for change, typically way more than half, to successfully transform both parties into the new organisation.
The best leaders understand that there will be varying opinions and challenges and are open to considering them to create the best of both in the new organisation. Only if disagreement genuinely jeopardises the pursuit of the newly-merged organisation’s big opportunity in its market is an immediate exit process actually required. Courage shown by senior leaders to allow staff from both teams to engage with the realities of the merger, with the emotions that entails, builds a much more engaged final organisation than the traditional night-of-the-long-knives approach.
Enable employees to shape the new organisation
Could this merger be one of the 5% that exceed their transformation ambitions? This is not a sudden marriage – it has been some eight years in the making, the CEOs know each other well and the top-level structure will have been prepared for the City to feel comfortable. However, a paper organisation chart will not consider the actualities of how both organisations work. The new organisation needs a degree of flexibility to enable employees to shape it.
In our work, we have observed that business transformation stands a much better chance when the newly combined organisations create more informal networked groups to run alongside the hierarchy – a kind of dual operating system. Composed of leaders at all organisational levels who have volunteered in service to the vision, the network side of the system can infuse the company with more agility, adaptability and innovation than a hierarchy alone allows.
This network can quickly adapt to new ways of working and innovate processes that drive toward the company’s future goals. It can also disseminate new cultural norms much faster than is possible in a hierarchical structure.
An integrated, informal network will allow key cultural traits to become ingrained in the DNA of the new company and serve to make it stronger. Organisations with strong networks running in tandem with the hierarchy already in place grow even stronger during integration. They are critical to innovation, engagement and effective execution. Shutting them off would only serve to disenfranchise employees and disable the routes for effective change.If the new merged organisations can maintain their relationship and curiosity about the real strengths that each party brings there is the potential to create 1+1 = 3.
No secret to success
There is no magic bullet that guarantees success in merging complex entities, as Standard Life and Aberdeen Asset Management will find out over the coming weeks and months. However, if they focus on crafting and communicating a vision that clearly spells out the opportunities of the new business and engage the majority of employees in working out how to make it happen, then they have a good chance of being in that really successful 5%.
For more information visit www.kotterinternational.com