Systems think: When the game changes, change the players

I HAVE to rush to the southern side of the Limpopo River (South Africa) to enjoy some well-deserved rest. I need the rest to reflect.

Sam Hlabati

I have been reflecting of late on issues that we have discussed in this column over the years. Those who have been following this column will remember that we once discussed the systemic issues that face mergers and acquisitions.

My trip to Mzansi in this holiday period helped me reflect on my thoughts exactly three years ago when I penned the article that I will replicate in this instalment, which was published on March 30 2012 in this column. I believe that the topical issues that I discussed then are still as relevant as they were then, if not more relevant in the present day.

We all know that business growth can be achieved organically, thus expanding the present operations and market share. On the other hand, mergers and acquisitions are other ways of expanding a business. This form of growth brings together existing organisations already in operation.

Mergers and acquisitions are not always successful. The business world has witnessed many organisations that merged and have subsequently sunk into oblivion. In Zimbabwe, there was once an amalgamation of banks that was forced into closure by the central bank after it had been in operation for several years. That outfit never got to be stable, causing the regulators headaches similar to its historical constituent entities. We will revisit the discussion we had three years ago focusing on a number of systemic issues that cause merged entities to collapse.

The leadership competencies required to run organisations tend to increase with the correlating increase in size and complexity. Let us look at two entities X and Y that are merged to form Z. The leadership team of either X or Y were originally hired to run the business of their original companies. Their competencies would have been assessed as appropriate and adequate to run the business of either X or Y.

It is important to note that these two entities would have been going concerns prior to the merger or acquisition. Each team of executives would have been accustomed to the operations of their own entity.

The new entity Z would be bringing the two organisations into a single entity. It is common knowledge that the cultures of the organisations would not be congruent. It is the duty of the new entity’s (Z) leadership to blend the two separate cultures into one. The complexity of the task increases with situations in which the cultures are not only dis-similar but are overtly incompatible.

The first mistake that the new organisation makes concerns the assembling of the leadership team. The old leadership from the two merging entities is mixed, blended and matched to form a new team. Duplicated roles are rationalised, resulting in casualties of some of either organisations’ former leaders being asked to pursue their careers elsewhere or being demoted and subordinated to their peers from the other organisation.

Rewind, we noted that the leadership of the original X and Y organisations were hired for their competencies to operate within the complexity context of their original organisations. It would be a rare situation to get any of the leaders having the competencies to operate in complexities much higher roles in the merged entity.

The question that organisational owners need to answer is why then should these individuals be entrusted with leading the much more complex merged entity Z. In the event of an acquisition, the leadership of the acquiring organization understandably usually escape the axe, thus they take over as the leadership team at the expense of the unfortunate leadership of the acquired entity who are shown the way home on a one-way ticket.

This would happen irrespective of the possibility of pursuing a reasoned outcome of a function on function comparison of the competences of the leadership teams of the two entities, which could weigh against some souls in the acquiring organization. Even if such comparison was carried out, it would be like fishing in your own fish tank; you will catch only the few fish you have – whilst the dams and lakes are thriving of different breeds.

Many merged companies fail to realise that their old leadership team may not be up to the job of leading a larger and more complex organisation. It is important to reiterate that a large company needs more effective leadership than a smaller one. It is surprising that when confronted by change or contemplating an acquisition, few companies would bother to check and measure whether the leadership capacity of their top teams will be sufficient to guarantee success in the bigger entity.

Systemically, it is true that the increase in size scale and complexity of a firm increases with a merger, hence the skills of the senior executives need to change. Can an organisation argue about the merits of a leadership development programme for the current leadership? Such efforts could work if the pace of the change is slow and relaxed; but we know that it is rarely so in business.

The other systemic complication is that the leadership could have too many cosy relationships in the team with colleagues that they have traditionally managed with kids’ gloves within the context of the old order.

In the new order, it becomes difficult for the old leadership team to up the tempo and increase the heat on their former colleagues to get performance levels high in the organisation.

The other dimension of the embryonic complexity is that the merged organisation usually comes with different culture, which may be beyond the organisation elevated to a social culture level if the merger is across national borders. Leading in a multi-cultural environment is a skill that the old leadership may not have acquired which may dictate their failure.

Organisations contemplating a merger/ acquisition or already in the mess of poorly planned transaction should take considered steps towards building an effective leadership team that can realize the entity’s potential. Firstly, it is paramount to assess the prospective team members’ leadership skills.

Sam Hlabati specialises in Systems Thinking and Reward Management. He holds the following certifications; Senior Professional Human Resources®, Global Remuneration Professional®, Certified Compensation Professional® and an MBA in Systems Thinking. You can join the discussion through email on samhlabati@gmail.com and follow on twitter @samhlabati.