When Cultures Come Together
Minimizing post-merger integration problems can be accomplished by training that fosters a sense of unity.
Records-management company Iron Mountain Inc. grew swiftly — going from revenue of $104 million in 1995 to a projected $3 billion in fiscal 2013 — through more than 250 acquisitions.
That also means the Boston-based company absorbed more than 250 organizational cultures. And for years a common culture didn’t take root.
The consequence: costly problems.
In the company’s transportation unit alone, workers’ compensation claims hit $9 million annually. Turnover reached 40 percent. And large customers complained that they didn’t receive the same service from one region to another.
“We had some very large customers who didn’t receive the same service,” said Stacy Henry, director of learning for Iron Mountain’s North American operations. “And that was putting us in jeopardy.”
Cultural integration issues are the second-most common direct reason cited for deals falling short of objectives, according to research by Aon Hewitt. But culture integration problems also indirectly contribute to other causes of deal failure.
Iron Mountain fared better than many companies: It recognized its problem and introduced solutions that delivered impressive results. Corporate America is littered with integrations that cast a blind eye on culture and lost shareholder value. Companies whose merger-and-acquisition activity delivered on the promise offer tips on navigating the transition and the key role of training and development.
“Organizational culture is on every CEO’s lips,” said Mark Arian, executive vice president for Aon Merger & Acquisition Solutions. “They get it. It’s out there that culture is a big tripwire for M&A. That’s usually post-mortem when things don’t go well, what people point at. The challenge for most CEOs is that they grew up in a finance organization, and culture seems to be squishy and soft. Because of that, they have trouble getting their arms around it.”
Arian warns against cherry-picking what’s perceived as the best of both organizations and instead recommends leaders articulate to the workforce the business rationale behind the deal and then systematically identify the behaviors needed to achieve goals.
That’s what happened at Enterprise Holdings.
On the day that the owners of Enterprise Rent-A-Car announced their purchase of Vanguard Car Rental Group in 2007, the parent of the Alamo and National chains, employees of all three brands arrived to find a booklet waiting for them.
Called “The Great Day,” it was written by then-CEO Andy Taylor, the son of Enterprise’s founder. Reminiscent of a children’s book, with simple pictures and concise messages, the booklet welcomed Vanguard employees and explained the benefits of the union. It also introduced the Taylors, who started Enterprise in 1957. And It also laid out the immediate future: The Taylors would operate Enterprise and Vanguard separately while assessing operations and cultures.
The Taylors and their advisers knew of some differences. Enterprise had a decentralized structure with decision-making pushed down to the local level, whereas Vanguard was more top-down. And the three brands served distinct niches.
National catered to high-end corporate travelers, and Alamo attracted vacationers, with both chains operating from airport locations. Conversely, Enterprise specialized in hometown rentals with smaller offices and had few airport locations.
The recruitment and development strategies diverged, too.
Enterprise only hired college graduates, funneled into a management-training program. It also liked to promote from within. For example, Taylor’s successor, Pam Nicholson, joined Enterprise as a management trainee in 1981 after graduating from the University of Missouri and rose through the ranks until becoming CEO in June.
In contrast, Alamo and National had many employees who were content with their jobs, and had no desire to rise within the organization.
They also were wary. The two brands had changed owners several times in recent years. Taylor and his team immediately began to assure the Vanguard workforce that Enterprise intended to build the chains, not sell them off or push for a fast payoff.
“With Taylor-owned companies, there is no ambiguity: We make decisions to benefit the business for the long haul,” Taylor wrote in “The Great Day.” “And one of the advantages of private ownership is that we are not pressured by illogical quarterly earnings expectations.”
'A lot of our new Alamo and National colleagues expected us to come in and change a lot of things. We said we wouldn’t. They had heard a lot of promises in the past from other management teams ... but they would look at us and say, "You guys said you would be respectful and would handle this the right way, and we can see that happening." '
—Steve McCarty, vice president of training and talent development for Enterprise Holdings
A Different Recipe for Success
In time, Enterprise executives earned the trust of their Alamo and National colleagues by not just saying but doing, said Steve McCarty, vice president of training and talent development for Enterprise Holdings.
“A lot of our new Alamo and National colleagues expected us to come in and change a lot of things,” McCarty said. “We said we wouldn’t. They had heard a lot of promises in the past from other management teams — and I can’t comment on how those promises played out — but they would look at us and say, ‘You guys said you would be respectful and would handle this the right way, and we can see that happening.’ ”
Some changes began quickly. Enterprise adopted Vanguard’s operations-focused quality assurance program, known as a Brand Integrity Audit, which assesses everything from facility lighting to vehicle cleanliness. At the same time, National and Alamo implemented Enterprise’s Service Quality Index, which measures whether employees make good impressions on each customer.
“Those two things have come together and, as a result, have pushed all three of our brands up to the top of the list of J.D. Power,” said Laura Bryant, director of corporate communications. Bryant refers to J.D. Power and Associates’ “2012 North America Rental Car Satisfaction Study,” whose top three spots went to the Enterprise Holdings portfolio of brands.
As at Enterprise, the combined workforce sees each office’s service quality index score and quickly learned that no manager could be promoted if the office’s score falls below average. “It really sets the right tone,” McCarty said.
When Enterprise, National and Alamo began operating as one company, their structure followed Enterprise’s decentralized organization, which gives significant responsibility to branch managers.
The company’s practice of providing in-the-field training and experience holding different roles helped infuse Enterprise’s entrepreneurial mindset across the organization and prepare managers for bigger responsibilities, McCarty said.
But senior management also recognized that the National and Alamo airport locations, which have as many as 300 employees, called for a different talent-management strategy than the Enterprise locations, which often have only six or seven employees. The management-training program continues to feed all three business lines, but Enterprise Holdings also accepted that some airport employees love the stability of their jobs and have no ambitions of rising.
“It’s a different mindset that we weren’t as familiar with at Enterprise,” McCarty said. “But if anything we really respect and embrace it because half of our full-time hires aren’t management trainees.”
The result appears to be working.
Enterprise Holdings and its affiliate Enterprise Fleet Management reported revenue of $15.4 billion in fiscal year 2012 and said it had achieved record profitability. The organization likes to boast that it’s the only car-rental company with an investment-grade credit rating, which rival Hertz Corp. has been seeking.
McCarty in part credits the carefulness for the success.
“The fact that we received direction from our CEO that we need to get this right — we heard a lot about how 80 to 90 percent of acquisitions fail to add value, they destroy value — and candidly we thought a lot of times organizations rush, and we didn’t want to rush it,” he said. “We had made a long-term business decision.”
Not all mergers and acquisitions result in the blending of two organizations. In fact, sometimes leaders decide to continue largely as separate operations.
Facebook Inc., for example, assured users and employees of Instagram that the photo-sharing service still would operate largely independently.
'We get to capitalize on all the great resources that Coke gives us while still maintaining who we are.'
—Debra Schwartz, Honest Tea’s vice president of human resources.
High-tech firms or companies that have fumbled in the past often make this decision in hopes of not quenching the entrepreneurial spirit, Aon’s Arian said.
That’s in essence what the Coca-Cola Co. did when it acquired a Maryland-based organic bottled-beverage company. Coca-Cola allowed Honest Tea to operate autonomously but to tap the soda giant’s distribution network and other resources.
“We get to capitalize on all the great resources that Coke gives us while still maintaining who we are,” said Debra Schwartz, Honest Tea’s vice president of human resources.
Honest Tea’s products are made in Coca-Cola facilities, an arrangement that lets it get raw materials at lower prices, she said. And its distribution has exploded, going to more than 100,000 outlets from 15,000. But the organization remains flat, which Schwartz describes as a workplace where everyone helps unload pallets and brainstorm ideas.
The wholly owned subsidiary still has no offices and no cubicles, Schwartz said. Founder Seth Goldman sits at one end of the room, his desk abutting the chief financial officer’s. And the company retains its frugal ways, which includes having workers share hotel rooms on business trips.
“We still own the business — this is our brand — even though we literally don’t own the business,” Schwartz said.
Honest Tea also has its own salary structure and its own incentives, she said.
As in years past, Honest Tea employees from across the nation will gather in Maryland during the third week of this month for the company meeting. It’s part camp-inspired fun like kickball and bonfires and part traditional corporate event with employee awards and business trends.
Since it became part of the Coke family, Honest Tea’s sales have doubled to $100 million. This year, employee engagement rose more than 4 percentage points, with 92 percent of the Honest Tea workforce saying it is a great place to work.
“Nothing that we do today has radically changed from what we did two years ago,” Schwartz said. “We still do it in the same passionate, entrepreneurial, mission-driven, challenger-brand way. Not to quote ‘Laverne & Shirley,’ but we do it our way. And that works for us.”
Something Didn’t Taste Right
For Iron Mountain, its litany of acquisitions fueled rapid growth, helping the firm dominate the U.S. market.
But by 2007, the records-management and data-storage company saw a problem: The only similarity across workplaces was the navy-blue shirt worn by employees.
More troubling, the company lost customer records because of errors — as many as 20,000 a year. Manuals sat ignored; turnover ballooned.
To turn around the situation, executives greenlighted a training program, starting with drivers and couriers because they work most closely with customers.
Henry, Iron Mountain’s director of learning, analyzed training programs at FedEx Corp., UPS and other companies that rely on logistics. She and her team then designed
23 e-learning and 30 on-the-job modules. But what they saw as a pivotal decision in helping to transform the culture was their decision to use peer educators.
The chief operating officer announced the new program, called Sentinel, through a number of channels. Senior leaders cascaded the message through their territories. And frontline employees applied and interviewed to be trained as coaches.
The coaches fly to Atlanta for a weeklong training in a 9,170-square-foot learning center that mirrors Iron Mountain’s operation sites. The COO or another senior executive kicks off each week. “It gives these hourly folks a sense of true empowerment,” Henry said.
Training covers everything from what services the company offers to how to speak to customers to safely operating a lift gate.
At the end, this select group becomes certified coaches and they re-certify annually. Coaches continue to perform their regular jobs, but they receive extra pay. By the end of 2013, Iron Mountain will have close to 400 certified coaches.
The Sentinel program has been expanded to Iron Mountain’s records center operations, the secure destruction operations and the data backup and recovery operations with more business units gaining trainers in 2014.
More than 35 coaches have been promoted. Turnover has fallen to 15 percent from 40. Workers’ compensation claims fell by $4.5 million in the first year alone. The number of document-scanning errors per week fell to less than 3,000 from a peak of 20,000.
And the culture? Walk into the Philadelphia or San Antonio operations at 6 a.m. and you’d feel and see the similarities well beyond the color of the shirts, Henry said.
“We’re enabling a frontline workforce who generally hasn’t had advancement opportunities to be a key player in our organization,” she said. “We continue investing in our coaches and reinvest in the workforce.”