Change management in a firm

A practicing Chartered Accountant is not only a professional filled with knowledge on tax, audit, accounts, IFRS etc but also is an entrepreneur who sets up an organization early in his age, employees people, services clients and manages everything single handedly (ofcourse, unless there is a partnership or a team of managers involved).

From my experience, I clearly understand managing work or meeting deadline is never a problem for us, the biggest challenge is people management. People management involves both employee management and client management. These two are universal management issues in any business, starting from a tea stall to the biggest of the organizations.

A busy entrepreneur with clients to handle, work load to manage, cash flows to manage, generally, the last thought on his / her mind would be to notice low productivity from the employees and the most difficult to handle would be resistance to change. Generally, in such a scenario, most expected reaction would be to leave it in as in where in status and proceed with business work and decisions. Most common trend is things never improve if left without any action, either remains same or worsens. But, we are all used to accepting everything the way it is.

But, back in 1950s, Kurt Lewin didn’t feel that changing people’s mind is so very difficult. He simply compared changing people’s mind as changing the shape of an ice block. Even something as hard as ice could easily be changed to a different form through a simple three step process, unfreeze the current shape, change the shape and freeze it again. That’s human mind as well, rather, most of us could be easily compared to Lewin’s theory. Like the statement goes, Change is the only thing constant!

Let us understand this concept with a small case study
Mr X was running as a sole proprietorship, a CA firm, X & Co., for nearly 12 years and had slowly but gradually set up a client base contributing to around INR 75 Lakhs of revenue per annum with around 30 employees. All was going well, clients were happy, employees busy and the proprietor was earning his need. A frozen and stable situation! With everything set in an auto mode, proprietor decides to increase his business and size to move on to the next level, but he also realizes that he will need fresh mind with a different skill sets to compliment his capability, use his existing resources and generate new revenues and move towards expansion. Now Mr X decides to induct people of different skills set who could gel well and suit his organization. He finds Mr Y and Mr Z suitable to handle the new roles and services X & Co. could probably get into.

Well so far so good. Changes are noticed with new partners’ walking by one and all. A fine strong smile on the face of Mr X on the welcoming day slowly diminishes into an insecure smile and a mind full of ifs and buts. The employees are used to taking final orders from Mr X only so why now take orders from Mr Y and Mr Z. That marks the beginning of resistance to change. Continuous exchange of complaints, cribbing, low morale, high egos and the list goes now. The biggest problem to handle would be when so called less qualified but excellent manager with good experience, an asset to the firm till now threatens to resign due to his unacceptability of change. His fear would be loose his close position with the top man of the firm.

Now what? Either break the partnership, which will be quite unfair to the newly joined partners or now modify the partnership agreement and have everyone to report to the Managing Partner, that will be forceful, hence not very ethical.

Before we see whether Mr Lewin’s management theory applies here, we need to understand what will motivate the employees. For that, let throw some light on Herzberg’s theory of motivation and Maslow’s hierarchy of needs. Herzberg, a psychologist, proposed a theory about job factors that motivate employees. Maslow, a behavioral scientist and contemporary of Herzberg's, developed a theory about the rank and satisfaction of various human needs and how people pursue these needs.

As per Herzberg’s two dimensional paradigm, factors affecting people’s attitude about work can be classified either as motivators/satisfiers or hygiene factors/dissatisfiers. Motivators would include determiners of job satisfaction: achievement, recognition, the work itself, responsibility, and advancement, they are associated with long-term positive effects in job performance while the hygiene factors (dissatisfiers) consistently produced only short-term changes in job attitudes and performance, which quickly fell back to its previous level.

Next, quick understanding of Maslow’s hierarchy of needs would also help to find out a solution to the existing problem. He says first need for any human would be Physiological (Thirst, sex, hunger), next he would be naturally concerned about Safety (Security, stability, protection), third level of need would be Love and Belongingness (To escape loneliness, love and be loved, and gain a sense of belonging), on achieving the first three needs, a person looks for Esteem (Self-respect, the respect others) and Self-actualization (To fulfill one's potentialities).

Now, going back to our case, if looked at from the Maslow’s hierarchy of needs, quite evidently, our professional force would not be worried about the first three needs. The thought nerve making trouble is the human need for esteem and self actualization.

Naturally, we got to start bottoms up!

The esteem level involves the feelings of importance which needs to come from within (self-esteem) and from other people who believe we are important. While, self-actualization is full realization of our own potential. Fortunately or unfortunately, today world is clearly witnessing a strong tug of war between education and experience. Is better experienced one superior or more qualified one? Well, neither. It is just two sides of the same coin and unless both of them are embossed well, it is always incomplete.

But, our gentlemen offering resignation on the arrival of newcomers clearly shows lack of both the motivators of esteem and self actualization. First step to manage the firm wide resistance to change would be to start with preventing any resignations, as the true definition of “Organization” is “A social unit of people, systematically structured and managed to meet a need or to pursue collective goals on a continuing basis”.

Before that, the change management theory could be implemented positively in an organization only if the management is ready for the change. In the case being discussed, if Mr X himself is insecure not sure of whether the initiated change was a correct decision and has similar confusion thoughts, then, inevitably the new partnership / joint working agreement will fail. But, if Mr X believes in his decision to expand and intends to work towards controlling the frictions due to change then, Mr Lewin Kurt’s theory along with other motivational theories could be applied.

Assuming, Mr X is interested in the change and strongly believes in its benefit, we proceed to analyse the case. Mr X should talk to the new partners / senior professionals on the needs of implementing change management principles within the organization. He will need their support and patience for the success of the process. Clear organization and hierarchy structure, definition of job responsibilities and roles and reward / recognition system for performance must be laid down.

For it to be acceptable and successful, Change should be gradual. Once clear systems are defined, the next step would be to encourage team working and performance measures. Of course, performance measures should not be such that it motivates one and de-motivates others. The Performance measures should reward the performers and motivate others to perform. Such a system would avoid unnecessary resignations being rendered, as it would address the human needs of esteem and self actualization.

These policy changes, system implementation and focus on motivation factors mark the stage of unfreezing the prevailing situation in the Company. This first stage of change involves preparing the organization to accept that change is necessary, which involves break down the existing status quo before you can build up a new way of operating.

Sending compelling message to change will never help, it will lead to further resistance and reluctance towards change. In the stage of unfreezing the existing ways and thoughts, Mr X will need to challenge the beliefs, values, attitudes, and behaviors that currently define it. It will be necessary to explain in a convincing manner the needs and benefits of change, lest shaking the very foundations of the organization.  This first part of the change process is usually the most difficult and stressful. When you start cutting down the “way things are done”, you put everyone and everything off balance. You may evoke strong reactions in people, and that’s exactly what needs to done.  By forcing the organization to re-examine its core, you effectively create a (controlled) crisis, which in turn can build a strong motivation to seek out a new equilibrium. Without this motivation, you won’t get the buy-in and participation necessary to effect any meaningful change.

Once Mr X succeeds in familiarizing his team to uncertainty, he will next to lead them in the direction of resolving issues of uncertainty. This will be the stage of Change. With an intention to resolve the problem, people look forward to move in a direction which the management believes and acts positive in.

It is definitely a time taking process for people to embrace the new direction and participate proactively in the change. In order to accept the change and contribute to making the change successful, people need to understand how the changes will benefit them. Not everyone will fall in line just because the change is necessary and will benefit the company. Mr X will still face the issues of resignations and low productivity but most of the work force is expected to fall in line. Time and communication are the two keys to success for the changes to occur. People need time to understand the changes and they also need to feel highly connected to the organization throughout the transition period.

Once, Mr X finds positive work life back in the organization, it will be time for him to move the firm on the third level, Refreeze Level. The outward signs of the refreeze are a stable organization chart, consistent job descriptions, and so on, the skeleton for which should have been drawn in stage 1 but fully implemented in stage 3. The refreeze stage also needs to help people and the organization internalize or institutionalize the changes. This means making sure that the changes are used all the time; and that they are incorporated into everyday business. With a new sense of stability, employees feel confident and comfortable with the new ways of working.

As part of the Refreezing process, Mr X needs to make sure that success of the change is celebrated constantly– this helps people to find closure, thanks them for enduring a painful time, and helps them believe that future change will be successful.

The author of the article is a Chartered Accountant, Chartered Management Accountant (UK) and an Investment Banking professional.

Original Article by: Aparna RamMohan Sridhar

All Copyrights reserved. Any unauthorized usage of the article is subject to prosecution in India courts.

 

Getting ready for Mergers & Acquisitions

History indicates that Companies across Globe predominantly focus on organic growth plan rather than inorganic growth plan. However the recent trend indicates a shift in the paradigm and the fact that Global M&A activity has reached $1.5 Trillion in the first half of 2011 itself, a 22% increase from last year levels, it clearly depicts the pace at which the gap between the organic and inorganic growth is reducing.

Sounds interesting, doesn’t it, but the primary question to be answered is “are you ready?” Is your Company enabled with perfect operating procedures and a well placed plan of action? Well, that’s the first step. Prepare yourself for the change, identify the right candidates, scrutinize and acquire the Company with perfect synergies and be ready for the post merger hiccups. It’s a marriage and you got to have the right bride to keep your family intact and grow it too!

Pre M&A Planning - Implementation of Standard Operating Procedures:

Setting up Standard Operating Procedures (SOP) is definitely a strategic planning process – a success factor for sustainable corporate development, which prepares the ground for long-term growth that creates value. Corporate strategy defines the company's vision, sets targets for the long term and outlines the nature and scope of its business. Effective strategies can give the company a decisive competitive edge.

There is of course no such thing as the right process for strategic planning. But, existing planning processes do clearly contain avoidable weaknesses, which must be identified and eliminated. Further, the Company ought to be prepared to minimize the losses from unavoidable weaknesses.

SOPs lets you put into operation documents such as plans, regulation, compliance, and policies. SOPs distil requirements contained in these documents into a format that can be used by internal / external members in their work environment.

It is essential to carefully structure the procedure system individually for each of the process / business segment and Company as a whole. Caution, too many standard operating procedures could lead to a breakdown of the whole System. Minimum recommended period for review list is three years and changes to the SOP should essentially be triggered by the process or the procedure changes or the adaptations, led by the internal site controlling procedure. A clear focus on updating the coherent standard operating procedures regularly is indispensable.

SOP implementation must be planned for the whole Company which would further be split into business segments SOPs and functional departments SOPs. The steps of planning must begin with target planning, i.e., identification of vision, mission and goals. Next step should be strategic analysis (both external and internal analysis) of the Company situation as a whole and for each of the business segment. Post which careful formulation, selection and implementation of the strategy must be executed. Strategy must include product and business portfolio management plans, designing of structures and systems to achieve Company & Management goals and formulating & quantifying competitive strategies. The process definitely doesn’t end here and without performance measurement the entire hard work will have no value. It is very essential to track implementation success through operational checks and performance feedback from each of the business segment and functional department. Finally, corrective actions in case of issues identified would prepare the Company to proceed to the next step.

Key questions to be addressed while setting up the SOPs are:

Pitfalls in the existing system - Effectiveness of your early warning system - Sufficient attention to what competitors are doing – Underpinning of strategic alternatives with quantitative data – Fortification of value-based management - Strategic planning must be bridged with the medium-term and operational planning -Effective strategy implementation tracking system – Transparency in information flow to secure active commitment from the employees.

Pre M&A Planning – Acquisition Strategy:

The acquisition strategies are no different than any other strategic plan or work plan. Development of criterion before an investigation on possible acquisition targets and set up of goals to focus on the time and energy to the type the right candidate. Prior to scouting of targets, the Company must have absolute clarity on its vision and mission and identify its weak spots. The targets identified for acquisition would either assist the acquirer in overcoming its flaws or contribute directly to the primary aim – growth. The targets being looked at for acquisition should result in positive post merger synergies.

Determination of the financial resources to acquire the potential candidates or identification of the source of acquisition financing is another important step for planning. Any blemish on the acquisition financing plans could mark the beginning of doom for the acquirer.

A Pre Merger Planning would be a blueprint for the entire M&A transaction. Continuous research on potential acquisition candidates and developing the business cases for and against acquisition is essential to optimize resource utilization. Of course, like any other strategic plan, pre merger planning is also a dynamic document which will need to be tailored for each of the targets and each of the situational changes.

It is important for the acquiring Company to understand the Acquisition Risk, Integration Risk and Alignment Risk involved in the process, mitigation of which must be factored in the M&A Plan.

M&A Planning:

One would need to consider nature of the transaction, minimum (and maximum) income, geographical location, geographical coverage, years and post-merger management in the home, the ability to transfer Business, turn-around situation, capital requirements continue to grow the business and / or service line of products for your existing business.

The core areas of investigation on the target company should be on the Business Context (historical – current – future), Structure & Composition of the Board, Leadership Team and Business Units, Identification of Critical Positions and Key Contributors (High Potentials; High Performers; “Rising Stars”), Culture Analysis, Analysis of Talent Strategy & Mindset.

It would be useful to determine well in advance the information which will be needed to make an informed decision and look at only serious players who must be willing to realistically meet your needs, their responsiveness and maintain the necessary documentation.

Absolute clarity on the acquisition strategy and growth plan is necessary for the acquiring Company. This should be effectively communicated to the target Company once the decision to acquire is crystallized. A proper communication plan pre M&A is essential to ease the post M&A hiccups.

Due diligence is an important process while considering the targets to be acquired. In spite of an external consultant work on the DD, it is good to have an expert on the board to integrate the various DD reports delivered by different experts like CAs, Lawyers and technical experts.

Valuation is the key in any M&A Transaction to make or break the deal. Clear understanding on the value add by an internal expert is essential, to assess the post integration synergies for the Company.

M&A Plan must contain a detailed insight into the business and organizational risks associated with the degree of fit and match with the target company in terms of people and culture. Acquiring Company must clearly understand the target company’s overall leadership capability and talent inventory. It is essential to identify key leaders who could be targeted for specific retention initiatives, critical positions and post-integration strategic succession planning.

Post M&A Integration

It doesn’t end with a deal closure, an infallible post M&A integration strategy needs to be in place in order to achieve the objectives of the transaction. The skeleton plan will need to be modified and adapted to the specific acquisition targets based on their purchased goods, technologies and techniques to grow both companies together. Since the acquisition may represent a considerable investment of capital, resources and time, in the Companies’ own interest, the integration should be made as easy as possible. A thorough action plan framed by the management along with the consultants and experts in the areas of need is required for a successful result.

M&A creates value only when the value of synergies exceeds the acquisition premium paid. The integration plan must identify and unlock the full value post M&A which should include enhancing revenue and asset efficiency, reducing OPEX and cost of capital as well as tightly monitoring integration costs. Industry-specific benchmarks and synergy opportunity must enable the Company to spot the areas with the greatest value potential in addition to the regular consolidation and reconfiguration benefits.

It is vital to have a “road map” for a smooth integration process that further reduces key talent and customer “run off” and that does not distract key personnel from maintaining the focus on achieving the necessary synergies to achieving value.

The best practices on operating procedures set up in the Company will aid in easy adaption post M&A. Based on the integration master plan, the new business and operating model should be clarified and effectively put into place. Continuous meaningful communication and a cultural change program will be needed to ensure sustainable employee support of the merger.

Change and resource management towards success will be the key objectives from the Day One post integration. The entire focus of the strategy and structure development must be on organizational and management alignment through an accelerated transition. The spot light must be on the priority initiatives with clear communication of the same to all the stakeholders.

M&A process is not standing ahead alone but standing ahead together!

The article is written by Aparna RamMohan, Chartered Accountant and a professional Investment Banker with expertise on Financial Advisory.

All Copyrights reserved. Any unauthorized usage of the article is subject to prosecution in India courts.