Insight

How organization design can preserve value during deals

Carefully planning for new talent, roles, and reporting structures can help companies get through M&A transactions smoothly.

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John Luce

Principal, Advisory M&A Services, KPMG US

+1 312-665-1112

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Jeremy Hof

Director, Advisory M&A Services, KPMG US

+1 858-527-5009

Few events in the life of an organization have more potential for disruption than an M&A transaction. An acquisition, divestiture, or other change in ownership can spark dramatic change in how people are employed and motivated in every part of the business. Figuring out how to keep the right people in the right slots to keep the organization running smoothly—even as some positions are eliminated—should be a top priority for deal teams.

Too often, it’s not. And the consequences for deal value can be serious. Neglecting organizational design issues can cause a loss of key talent, confusion about new or overlapping roles, and poor morale. When acquirers don’t address organizational issues adequately prior to close, they expose the target organization to avoidable risks.

On the other hand, companies that build organizational design into the deal process and carefully plan for new talent, roles, and reporting structures can get through M&A transactions smoothly, with all hands pulling together in the same direction.

In this paper, we show how C-suite executives and transaction leaders can make the right people and organizational-design decisions, manage risks, and effectively communicate the rationale and objectives of the deal to internal and external stakeholders.

Below we look at organizational issues during M&A in four phases

1. Defining organizational risks >

2. Aligning design with the new business strategy >

3. Defining ways to realize synergies >

4. Day 1 readiness >

1. Defining organizational risks

Deals often bring significant changes to a company’s operations. Without a thoughtful approach to defining and developing a model and structure to support these operations, leaders will likely find themselves unable to align their stakeholders to mitigate potential risks that can arise—risks that could derail a deal or erode the intended value.

An important step in addressing design challenges is to define and understand the organizational risks that are inherent with deals. This step includes looking across the organization to understand risks such as the ability to maintain business continuity or retain key personnel and then develop solutions to mitigate those risks.

Gaps in business continuity

Lack of a defined structure can cause organizations to stall post-merger due to lack of role clarity and diffusion of responsibilities. For example, some business groups may erroneously assume that others will be executing a task and fail to meet their own requirements. In addition, duplication of work may cause delays or misses in processing (e.g., backing out a previously submitted expense). Small tasks can quickly add up and create larger organizational issues. When undertaking a deal, organizations should first identify the leadership and workforce issues that could impede business continuity. Buyers will also want to identify interdependencies throughout the organization that enable business as usual. These considerations must be embedded in the organization’s structure to address such handoffs.

For example, if two workstreams are dependent and one requires a signal or equipment from the other to fully function, this relationship should be accounted for in the restructured organization. The what, who, when, and where should all be defined and clearly articulated to all stakeholders of the task.

Or consider a procurement situation where a purchase order may need to be created to start a certain service that may enable a key business process. Clearly defining the type of purchases that managers can create, who creates the purchase requisition, when it needs to be created, and the systems in which the purchase needs to be created can mitigate any delay in the services being performed and can help to ensure the organization and its operations continue running as planned.

Talent gaps

The absence of a well-defined organization structure can leave gaps in key leadership roles, hindering the organization’s ability to make important decisions or overcome obstacles. For example, a person assuming a role for which they aren’t yet qualified can lead to poor decisions and prevent effective responses to issues that may arise during a deal or even in normal business operations. As a result, a company could have trouble marshalling resources to make timely regulatory filings or lack the leadership to guide talent selection decisions and properly allocate financial resources.

The risk goes beyond having the wrong person in a role. Without proper organizational design, the company can wind up with no one in a key role, forcing other leaders to take responsibility for decisions beyond their remit. Even worse, it can cause a complete void in leadership for a critical function or business unit.

Organizations can address gaps in leadership or talent in several ways. For known upcoming leadership departures, meaningful retention mechanisms (as opposed to inadequate ones, which is the topic of another paper) can be put in place to ensure the organization can retain and transfer the key knowledge of past leaders to others who may be ready to assume the new roles. If the departure is more imminent, knowledge transfer plans should be executed to document key oversight responsibilities and associated decisions. Another way to mitigate this risk is to design future roles to split leadership activities in the short-term until leadership vacancies are filled. For this option, clear responsibilities must be assigned so that each person assuming those short-term responsibilities knows the what, when, and how.

If a newer, less-seasoned person is assuming a new role, a short-term committee approach can be implemented to allow peers to weigh in on key decisions on an interim basis. If a key role becomes vacant, talent acquisition or recruiting has a wide range of talent sourcing options, including looking at specialized groups (e.g., groups associated with industries), executive search firms, or leadership networks, in addition to the normal talent sourcing mechanisms.

Slowed or siloed decisions

Slow decision-making is often a problem during an M&A transaction and its aftermath. If, as a result of uncertainty, all decisions rise to the top (for example, to the CEO), leaders could be overwhelmed. Moreover, in many cases, top leaders would lack the detailed understanding of the situation that a lower-level employee would possess or the functional knowledge that would be required to understand the potential upstream or downstream impacts of the decision.

Leaders in siloes could be inclined to make snap decisions without fully knowing the impacts, resulting in unintended downstream implications—a potentially worse scenario. For example, a leader may not fully understand labor laws—laws that a human resources executive would know. Without this knowledge, snap decisions to reduce headcount or move resources could result in regulatory violations and end up costing the company in compensatory, reputational, and even punitive damages.

To avoid a slowdown in decision making, companies can develop governance and decision matrices to make clear who is responsible for each decision, who needs to be consulted and informed, and who is ultimately accountable for each decision. We recommend that decisions be pushed down to the lowest possible levels, so people with the required functional and working knowledge make the calls. In addition, key decisions should be tied to performance measures so that an organization can hold the people making decisions accountable.

Unclear roles and responsibilities

The lack of clear definitions of roles and responsibilities can leave members of an organization uncertain about what it takes to be successful in their roles and can ultimately hinder company performance. During M&A transactions, lines of responsibility can become blurred. For example, an acquirer and target may have similar roles executing the same tasks, but when they come together in the combined organization, those roles may serve a duplicate purpose or cover the same activities. Examples can often be found in marketing or sales, where roles cover the same sales territories and even the same customers. However, after close, it may no longer makes sense to have two people servicing the same customer or territory.

Clearly defining the roles and responsibilities in the company’s future state is an important first step to mitigating this risk. Organizations should then determine who is best suited to fulfill these responsibilities based on their experience and historical performance. Employees who remain unassigned can be placed into a hypothetical talent pool for potential assignment to other roles.

Next, organizations should determine if there are other roles where the strengths of these employees could be used and then interview and select those who can assume other roles if needed. If no role exists, organizations should exit these individuals, banking the reduced labor costs as savings from the synergies of the new combined organization. Ultimately, companies that don’t identify, define, and address organizational design risks during a deal will miss opportunities in the market and prevent the combined organization from realizing the value the deal was intended to deliver. However, careful planning of organizational design can ensure business continuity during the transaction and position the combined company for success afterwards (See “Designing layers and roles for a combined company”)

CLIENT STORY

Designing layers and roles for a combined company

Client need:
A global Tier-1 automotive parts supplier was targeting a major player in electronic components to help it keep up with the needs of auto manufacturers. The massive global deal resulted in new leadership, new capabilities and new markets. The challenge was to develop an organizational design that would have minimal negative impact on current operations, while also integrating the new business units into existing operations.

The company needed a robust yet simple method to identify, select, and retain the best talent from both organizations. It wanted a framework to ensure not only that the combined organization could hit the ground running on Day 1, but could also be used post-transaction to organize for performance. The organizational design would need to span layers, geographies, and business units and put qualified talent in appropriate roles in all layers of the organization.

Our Approach:
Supported by data and insights developed with KPMG proprietary tools, the team designed the organization structure for the top three levels of the organization. Senior leaders had the opportunity to design their organizations and then select the required talent. The CEO (layer zero) designed his reporting structure and selected his direct reports (layer one). Layer one leaders designed their organizations and selected layer two, etc. Beyond layer 4 (there were seven layers in total) a bottoms-up approach was suggested, matching the skill set and person to the role to fill in the structure.

The Result:
The talent selection methodology was designed to provide a standardized approach and criteria for success but provided latitude for the interviewer to adapt the questions based on level. Candidates were interviewed multiple times to get a robust perspective. After scores were aggregated, leaders met to build out each level of the organization. This greatly streamlined the interview and calibration process. The process also provided a consistent, measurable, and defensible approach to selecting qualified talent.

The approach allowed the operational leadership to continue to run the businesses separately until close, while senior leaders designed the future-state organization. The layered approach also helped build buy-in since each layer interviewed, assessed, reviewed, and selected their direct reports and the selection process was standardized and rigorous.

2. Aligning design with the business strategy

Companies make deals to take advantage of market trends or to adjust to changes in the environment. In either case, deals often serve as a catalyst to update business strategies. This presents another challenge for organizational design—to make sure that the organization remains aligned with strategy and that resources are connected to long-term vision—even in the face of disruptive change, such as the impact of COVID-19. The following two case studies illustrate how aligning organization design recommendations during the deal with the company’s strategy helps define a structure that is best for long-term success.

CLIENT STORY

A new strategy and a new organizational design

Client need:
A technology company that develops cloud-based software for construction management wanted to complete three simultaneous acquisitions to expand its product and service portfolio. Realizing the challenge and risks, the company invested in organizational design up front. The effort focused on three objectives

Changing the business model of the acquired units from on-premise to cloud
Building capabilities to deliver new services to help customers implement and maintain large-scale projects,
Moving from a geography-based model to a functional model to allow business units to focus on operational or functional strengths and leverage the scale of the organization.

Our Approach:
The team developed a detailed view of the future-state organization design to enable the business strategy. This provided a framework to communicate key organizational and leadership changes, retain top talent, and address key culture and performance differences between the individual units and the overall organization. This meant that some new roles and capabilities had to be defined, mapped to the future structure, and designed to support the design/build/maintain model.

The Result:
If skill or talent gaps were identified, the merger team worked with management to develop plans to close those gaps through organizational design changes, development programs, or external sourcing programs. For example, it soon became clear that the organization lacked critical software developer skills to convert newly acquired products to cloud offerings. The team defined skills that would be needed in the short- and longer-term and then worked with recruiting to develop sourcing strategies to find the talent they needed. Defining and articulating the business strategy and periodically checking to ensure that the structure and talent supported the strategic goals helped keep the organization on track to achieve the value of the deal.

An org design to expand sales and enhance customer experience

Client need:
A technology company acquired a business that specialized in direct-sales lead generation. The goal was to sell more offerings and custom services at the first point of contact with customers—and improve the overall customer experience by enabling rapid handoffs from sales to engineering. The challenge: how should the company integrate the new lead-generation capability into its existing operations?

Our Approach:
The integration team designed the new sales organization for agile decision making, enhanced information flow from sales to engineering, and new performance tracking and incentives to reinforce the business strategy to enhance the customer experience. The team accomplished this by adding a reporting structure that closely aligned to the stages of the sales cycle and customer touchpoints—outbound (sales staff calling out) and inbound sales leads (people calling in for service inquires). This structure was bolted on to the existing reporting structure that focused on the customer. Under the new model, technical support was shifted to a help desk, improving customer service. And middle-office administrative work was shifted from sales teams, giving them more time to focus on inbound or outbound leads and follow-ups.

The Result:
Not only did the organization design leverage the scale of the combined organization, but most importantly, it also improved the customer experience by enabling the engineering team to learn more about how they could address customer needs. The success of the design came from the intentional bolt-on structure, which allowed sales to more easily and consistently focus on sales.

3. Org design and synergies

Investing in organizational design upfront can also help the acquirer capture expected synergies. The most obvious opportunity is in overlapping roles. For example, the acquirer and the target will most likely both have finance and accounting teams and systems, among other back office functions. All too often, however, the task of identifying cost synergies and areas to reduce is left to diligence teams or those building a purely financial model, without considering the true value of the services provided or the upstream or downstream dependencies that rely on specific roles, processes, or technologies that reside within functions or operations.

For example, in one recent deal, both companies had billing departments—the acquirer’s was in-house and the target’s was outsourced. It was a simple call to eliminate the outsourced operation. Fortunately, before it was too late, the acquirer learned that key clients of the target had specific arrangements with the billing group to include automated payment reconciliation, which required key data fields on the outsourced billing platform to work seamlessly. Eliminating the outsourced billing department would cause much discomfort for these clients and potentially impact cash flow. As a result, the acquirer decided to continue with the outsourced billing until an in-house solution could be developed to ensure business continuity, cash flow, and ultimately preserve the deal value.

How to avoid such gaffes? We consider both bottoms-up evaluation of the business processes, roles to execute the processes, and supporting technology, while also understanding the top-down financial synergy targets and their genesis (i.e., how the financial synergy targets were formed). This knowledge helps balance top-down financial synergy targets with bottoms-up execution planning. Initial synergy targets may need to be adjusted to a timeline that is more reasonable to ensure business continues to run smoothly.

CLIENT STORY

Preserving sales relationships to preserve value

Client need:
A large food and beverage conglomerate had purchased a target with similar distribution networks, geographical spread, and even similar organizational structures. Achieving synergies in middle- and back-office operations was relatively straightforward, but sales presented a complex challenge. The new organizational structure of the sales team was going to force some of the sales team to relocate or commute greater distance. This would likely result in the loss of sales team members who had critical customer relationships.

Our Approach:
The integration team developed a solution that started with honest, open communications about short-, mid- and long-term strategy and cost targets. A buddy/shadow program was created to help new reps build their own relationships at key accounts and the company offered additional retention awards to existing sales reps who stayed on to transfer the key relationships and account knowledge. Lastly, relocation packages—which had not been previously considered—were provided for select sales team members.

The Result:
As a result of these accommodations, the original synergy targets for sales had to be adjusted to include the additional costs, such as retention awards and the relocation packages. However, the revenue that the organization preserved from maintaining the relationships was far greater and deal value was preserved.

4. Day 1 readiness

The redefinition and repositioning of employee roles is a delicate but essential part of the deal process. Addressing organization design early and transparently can help alleviate some of the anxiety in the workforce and allow for a smooth transition.

Well before Day 1, employees should know how and where they will fit into the new entity so that organizations can retain the key talent they need, provide crucial information for onboarding newly acquired resources, equip them to succeed in the new model, engage them in collaborative ways of working, and connect them with leadership and other key resources to help them feel like they are a part of the new, combined organization.

In addition to defining redundancies, companies in the deal process often need to realign functions for changes in business strategy, customers (and other stakeholders), technology, and process and performance management.

A critical step to achieving an adequate design is aligning employee capabilities with the skills needed in the new organization. This process should include a complete assessment of workforce structure and how people fit into their roles. It is often during the redesign process that most of the company’s activities are identified and assessed, enabling leaders to consider the best recommendation to accommodate all changes, to be ready for Day 1 and after (See, “Triage teams for the Day 1 plan”).

CLIENT STORY

Triage teams for the Day 1 plan

Client need:
To prepare for Day 1, we worked with a large environmental-services company to identify the people, strategy, processes, and technologies of its current state and desired future state. To ensure business continuity and ongoing compliance, the team identified wanted to create triage teams.

Our Approach:
By evaluating roles and operational scenarios, the team identified environmental, regulatory and operational risks that required special skill sets, certifications, or knowledge. People who had these skills would be placed on triage teams to mitigate risks or accidents from operational errors.

Managing the triage teams was another organizational challenge. Even as some roles were changing as a result of the integration, employees would also be required to work part-time on triage teams that required the skills and knowledge of their current roles. Since the triage teams were not full-time roles, the organization needed a separate process to inform, equip, and engage members prior to Day 1 so they could be ready to react.

The Result:
With this detailed org design in hand, the merger team was able to communicate upcoming changes in roles, training, etc. Employees were prepared to operate in their new roles and there was sufficient time to set up the technology for people to successfully operate in the new model. With roles, responsibilities, resources, technologies in place, the organization was ready, willing, and able to perform job on Day 1.

Key takeaways and actions

1	During an M&A transaction, paying attention to organization design early on can reduce risks such as gaps in business continuity, paralyzed decision-making processes, and unclear roles and responsibilities. Org design should be a consideration during all phases of the deal.
2	Linking the organization design to the business strategy or deal logic is critical to capturing intended value. Future state structures, governance, and procedures of the combined organization should all be tailored to enable the strategy.
3	Defining the organizational design and all supporting details—and communicating those details throughout the organization—can set up the organization for success on Day 1.

How KPMG can help

KPMG’s organization design professionals possess the knowledge and experience to identify the appropriate operating model and organization design needed in a deal context to address our clients’ needs. For example, an assessment of the current and future state organization may find that new talent is required to fill vacant positions or there may be a need to reassess the leadership structure to address any gaps and to accommodate for growth in the company.

In addition, new governance patterns may need to be established or clients may need assistance with decisions being pushed to the right levels to enable timely decision-making. Our professionals provide design solutions in such cases and in others that are discovered during the planning phase to position our clients for success.

Today, as organizations have transitioned to remote work, managing global organizations while undergoing a deal has become even more challenging. Therefore, we have adapted our organization design strategy to allow us to provide recommendations that are applicable for today’s new normal, remote workforce. Our professionals have adapted to this change by utilizing advanced digital technologies purposed to illustrate organization design models and their implications using organization specific data.