The latter half of 2008 will forever be associated with global economic turmoil on an unprecedented scale, epitomised by dramatic losses suffered by the world’s major banks. The subsequent impact on the wider business and ‘real’ economy ensures that business leaders must now enter the New Year facing a trading environment vastly different from any they will have encountered before.

"The current situation fundamentally differs from the M&A spree that took place between 2001 and 2007, in that, in many cases it is motivated by survival rather than confidence."

As disturbing as the change itself, is the sheer speed at which it has ripped through the banking industry. Once revered institutions have been bankrupted, forced into mergers or rescued with Government funding. The global financial landscape has been utterly transformed, and all in the space of a few months.

What is clear is that many organisations face a future of extreme uncertainty as they grapple with a shifting economic, regulatory and political landscape that will not wait for them to catch up. The business environment is therefore set to become far harsher in the next 12 months, during which many organisations across the world will have to respond accordingly.

The next year will give rise to many challenges and opportunities. On first appearances some of these will seem familiar, but organisations should have no doubt; the rules of engagement have changed. Whereas in normal times a major business event such as a merger, acquisition or divestment may have been many months in planning and negotiation, today a business may find itself needing to respond at high speed. If business leaders fail to recognise this need for speed, they are unlikely to survive.

Economic Environment

As the global financial crisis continues, and as a result of the part-nationalisations of banks, a double-edged political bind is emerging. On one hand, banks may be pushed to divest certain assets, such as overseas acquisitions, or to improve their risk profile and to avoid accusations of profligacy with public money. Yet on the other hand, they will be urged to maintain or raise their levels of lending, particularly to small businesses, as a means of keeping the wheels of industry turning.

Moreover, the banks will be under pressure to pass on substantial interest rate cuts to customers, as public sentiment towards the banking sector grows more hostile. In addition, the regulatory environment is set to undergo seismic change because it is difficult to imagine politicians being content to merely tinker with the existing rules and procedures.

Whatever the outcome, there is certain to be a considerable strain on organisations as they struggle to respond to a situation likely to be far more challenging than the implementation of Sarbanes-Oxley, Basel II or indeed MiFID, with all the attendant cost and difficulty that these initiatives entailed. Dealing with such changes at the same time as a major integration programme raises many complex issues, as companies seek to identify benefits from the host of changes that they are undergoing.

A Changing M&A Market

One of the most striking aspects of the current financial crisis is the sheer number of mergers, acquisitions and divestments that are taking place simultaneously. Whereas in a typical quarter, there may be three or four large scale deals in progress, at the end of 2008 there are many more integration programmes being launched including HBOS and Lloyds TSB, Barclays and parts of Lehman Brothers, Santander and Alliance & Leicester, JP Morgan and Washington Mutual, Bank of America and Merrill Lynch, Commerzbank and Dresdner Kleinwort, and a host of others throughout the developed world. Although the Financial Services industry is the first to be affected in this way, the chill wind of change will undoubtedly affect other sectors in the coming months.

Many executives will not have been through such major integration in their working lives, few have experience of this in a shrinking market. In addition, those executives face pressure from several differing directions at once as indicated previously, and all at a time when many economies have entered recession.

A Proportionate Response

The current situation fundamentally differs from the M&A spree that took place between 2001 and 2007, in that, in many cases it is motivated by survival rather than confidence. This is against the backdrop of businesses no longer being able to look forward with confidence to the upward direction of stock markets sustaining their growth. As a result, speed of execution in mergers is crucial to achieving solid results. Companies may spend years discussing merger and integration issues, but the deals that have worked best involved prompt, decisive action. It seems that the longer a company spends thinking about integration once the deal has been finalised, the longer it will take to generate value.

So what can business leaders do to minimise the inherent risk in merging different cultures, business processes, technology systems, customer facing staff, product and services? If this were the only task facing a senior management team it would be difficult enough. However, organisations will also be coming to terms with several simultaneous challenges including having to reduce debt, the need to shrink costs, the greater emphasis on managing risk, all while still running the show.

Certainly, effective planning and rigorous management of the process surrounding such activity has always been critical to success. In today’s business environment this was never truer. That means establishing a large and complex programme structure to ensure that all necessary change activities are undertaken within a comprehensive strategy, where all inter-dependencies are identified, where issues and risks are understood and dealt with, and where there is an unremitting focus on delivering successful results.

Take Action

The speed of integration in today’s environment means that organisations may have less time to examine all the issues, assess the risks and make adequate preparations for integration. Companies still need to collect the same amount of information as they did in calmer times; they just need to complete the process faster. Equally, there is a need to communicate to employees and other stakeholders quicker than before.

The first 30 days following a merger are crucial, where the tone and expectations are set, both within the company and with a wide variety of stakeholders. It is critical to break down barriers between the two existing operating models and the two executive teams, to establish how the merged control structure will function and to tie in a reward structure to motivate key staff.
As an example, in the case of the RBS merger with NatWest, there was an initial issue of some significance, because the teams didn’t understand the model or the need for consistency across the programme. But as the integration progressed, the company had to provide the market with a message about what savings and income gains could be achieved through improved customer focus.
Jason Knight, PIPC Director and business integration specialist advises, “Most businesses thrown into the integration challenge struggle to work out what to tackle first”. He goes on to list a 10 Point Plan to help organisations respond to the challenges they face:

1) Act quickly and decisively

Drive the integration programme as aggressively as possible, addressing the cultural and political issues head on. This will ultimately minimise the impact on the core business. The inertia created by failing to address the political issues of each organisation will instil deep-rooted behaviours across both organisations that are difficult to break.

2) One aim, simply articulated

There should be a clear definition of the target benefits of merging, which is communicated in a style both organisations can understand - what’s in this for everyone? Why are we doing this? Often, the priority and focus is about “making the deal” happen, leaving the delivery of benefits as an after-thought. It is essential to build a robust business case for the integration and cascade this through the organisation to cement the benefits as expected outcomes from the programme. In essence, always keep the benefits in sight – this helps clarify decision-making.

3) Avoid Cherry Picking

Move to one platform, from either the acquired or acquiring company – then scale that platform to ensure it can cope with the volume of both businesses. Clearly there will be gaps and exceptions that need to be managed proactively. However, cherry-picking from each business, often done to accommodate political agendas, will almost certainly extend the time required to integrate the businesses and delay the delivery of the anticipated benefits.

4) Minimise any impact on customers

Customers’ expectations will not change, so avoid the temptation to reduce quality or service. Ensure that integration effort is carried out “behind the scenes” and that it is largely invisible to customers.

5) Integration before optimisation

Pick the fastest, least complex approach or strategy to getting to the end-state – this will not necessarily be the most elegant or the prettiest. Resist the urge to fix every minor operational issue as you go.

6) Bold Leadership

Senior executives need to demonstrate they are worth the investment from shareholders and are fully accountable for integration success.

7) Dedicated Team

Transforming or integrating a business is never a part-time job. Deploy a professional and dedicated team with solid programme delivery skills to become the driving force. Don’t underestimate the effort and resources required. You will still need at least the same management capability and capacity to continue to run the business and serve your customers and key stakeholders.

8) Lose the egos

Ensure that there is a single, robust plan or roadmap, which encompasses the critical activities that need to be executed right across the organisation – there is no room for departmental silos. The executive team needs to act as one to rapidly resolve issues. If the integration programme is being driven at pace, they will be called upon frequently to address the large number of issues being raised.

9) Firm but agile Governance

Implement a tight governance framework such that there is no doubt about roles, responsibilities, reporting lines and decision making. Command and control is essential to prioritise activity, make the big decisions and to drive delivery. Retain a dynamic approach to the project’s evolution, however situations change and it is therefore essential to be agile enough to exploit opportunities and address problems as they arise. While there is merit in ‘not sweating the small stuff’, the devil is often in the detail, therefore there will be a need for a regular meetings cycle, including daily conferences involving members of the senior management team, to close key issues.

10) Frequent and effective communications

Work hard to constantly communicate the logic of the acquisition, the integration plan, and the progress being made against the plan. Communication needs to be driven from the top and be seen to have their active involvement. Ensure that there is a very strong communications strategy and plan and don’t delegate this.
The logic of the 10-point plan is clear, however the real challenge comes when trying to successfully execute all 10 in an environment that is rapidly changing and unprecedented. Here there is no substitute for capability, experience and a proven track record of success.

And if you do nothing else…

Faced with so many conflicting challenges, the question is where to start? There are a small number of key issues that must be addressed by senior management and while doing these alone will not guarantee success, failing to do so will cause significant problems and possibly undermine the rationale for the strategy.

To begin with, the first 30 days are crucial during which time the first parts of the master plan are executed. The new group architecture must be established and great effort put into initiating employee and stakeholder communications. The second point is the creation and implementation of the new business architecture and a common operating model. Thirdly, the integration must be managed effectively, within an appropriate governance and control structure. All the while, the ability to make timely decisions based on sound information and knowledge of dependencies, the capacity to deal with issues as they arise and a total commitment to effective communication will serve as a solid foundation for success.

In this rapidly changing environment, where hundred-year-old institutions disappear overnight, shedding tens of thousands of jobs, where stock markets tumble by 10 per cent in a matter of hours and governments slash interest rates, borrow hundreds of billions of dollars to shore up the banking system and rush in new laws to patch up a leaking global financial vessel, businesses involved in mergers, acquisitions or divestments will need to choose who they partner with carefully.

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