Best Practices for Knowledge Transfer in Merger & Acquisition Integrations: A Phenomenological Study

Dr. Thomas BlumerApril 15, 2014

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Quick Introduction

Dr. Thomas Blumer (tfb@qad.com)Director of Knowledge Management at QADSpecialty: KM, Systems Integrations, M&A, KPIsDBA in Business AdministrationMBA in Technology ManagementBS in Business Administration (Finance)

Agenda

• Research Study Background• Data Analysis• Conclusions• Implications for Companies• Implications for Leaders• Recommendations

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Research Study Background

The Four Dimensions

KnowledgeTransfer

M&AIntegrations

Phenomenology

U. S. EnterpriseSoftwareIndustry

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Problem Statement

• Approximately 50% of M&A destroyed value for shareholders of the acquiring company(a)

• Knowledge has become one of the main assets for the enterprise software industry (b)

• Less than 24% of companies achieved access to talent or know-how through M&A (c)

• Little research exists on how M&A process influences knowledge transfer, which is crucial for acquiring, understanding, and incorporating newly purchased knowledge (d)

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Purpose Statement

The purpose of this qualitative phenomenological study was to identify and explore best practices for knowledge transfer in mergers and acquisitions integrations in the U. S. enterprise software industry.

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Research Question

How do people successfully transfer knowledge during a merger or acquisition integration?

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Limitations

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• Self-collected data- Bias towards managers and executives

• Research- Phenomenology is subjective (a)

- Postpositive when dealing with human behavior (b)

Postpositive means that the researcher cannot be positive about the results of their studies when focusing on human behavior or actions. Studies are often a reduction of the reality and leave out certain important variables for different reasons—variables that may be important to understand the system (Phillips & Burbules, 2000; Watzlawick, Beavin-Bavelas, & Jackson, 1967).

Delimitations

• Focus on enterprise software industry• Focus on United States• Focus on people with M&A and knowledge

transfer experience• Focus on the M&A integration process

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Data Analysis

Sample Demographics (n=22)

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30-39 years

40-49 years

50-59 years

60 years and over

Age

Male

Female

Gender

ManagerExecutive

Employee

Position

No move

Branch or subsidiary (acquirer)

Headquarters (acquirer)

Left company

New Work Location

Caucasian

Hispanic

Mix Asian

Race

Sample Population Criteria

• Enterprise software industry- IT- Support- Services- (Sales)

• M&A experience• Knowledge transfer experience• Sequential sampling (a)

(Maximum variation until saturation)

14aGhauri & Gronhaug (2005)

Findings OverviewCategory Theme Sources Percenta References Percentb

M&A 1. M&A Integrations 22 100% 407 21%

Knowledge Management 2. Communication 22 100% 442 23%

3. Knowledge Transfer 21 95% 180 9%

4. Lost Knowledge 21 95% 95 5%

5. Information Ambiguity 18 82% 60 3%

Organizational 6. Management 22 100% 227 12%

7. Organizational Culture 22 100% 189 10%

8. Information Systems 21 95% 164 8%

Personal 9. Trust 20 91% 97 5%

10. Feelings 19 86% 97 5%

Total   22 100% 1958 100%

15Note. aRepresents the number of participants compared to the whole sample (n=22); bRepresents the number of references compared to all the references within this category (n=1958).

10 Core Themes by Importance

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M&A Knowledge Transfer Organizational Personal

Core Themes Word Similarity

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10 Conclusions

Define and communicate M&A goals StatementExecutives had to explain the strategic M&A goals to integration managers, line managers, employees, and IT.ExampleOne of the dilemmas as stated by Participant 5 was that executives did not want to share goals clearly and honestly up front because of the fear that valuable employees who were needed for integration work might leave the company too early unless they were given a strategic function. However, manager should communicate the goals clearly to secure the strategic resources.What’s newExecutives should ensure strategic success by communicating M&A goals clearly and openly with the risk of creating tactical integration issues for non-critical business units rather than doing the opposite. 19

Deliver consistent messages

StatementIt was important to synchronize internal and external communication.ExampleParticipant 5 mentioned, "And they [communication from management] have stayed very consistent. And they are not saying something to the press and then something else to us." What’s newHolistic view on communication including reputation.

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Select the appropriate transfer channel for the knowledgeStatementThere are different kinds of knowledge, and each requires a different transfer approach (e.g., IT knowledge, business knowledge, and M&A knowledge).ExampleParticipant 4 stated, “In a merger situation, the solutions for, making knowledge management a smooth affair is actually outside knowledge management, on the strategic level.“What’s newCross-divisional solutions: • Business process ensures knowledge transfer.• Knowledge management ensures that the right knowledge

is preserved during integrations.

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Avoid knowledge transfer traps

StatementThe knowledge transfer trap is a situation in which the knowledge or the data was transferred, but it was useless.Example• Participant 1 mentioned that the data from their knowledge

base was transferred into the new system; however, neither customers nor support engineers could find the content anymore because the search engine was overwhelmed.

• Participant 18 stated that the complexity of the acquired product required employees with a PhD to work in customer support, although the patents were successfully transferred.

What’s new The possibility of successful transfer without value.

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Manage perception differences between companiesStatementEveryone interpreted the situation through his or her frame of reference, which caused information ambiguities.Example• Different information depended on who you talk to. Different

people in different positions have different viewpoints (Participant 14).

• This difference was often big between the acquirer and the acquired company. The issue is that effective knowledge transfer requires understanding (Participant 6).

What’s newThe true meaning of the M&A impact cannot be fully understood by studying M&A or by managing an integration, but by going through an adapt-and-go integration as an acquiree.

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Back up knowledge transfer with decisionsStatementManagement decisions had a direct impact on the M&A integration and on knowledge management. It all boiled down to having access to resources, getting budget allocations, and gaining sponsorship for the KT initiatives.Example• Participant 15 elaborated on how senior management allocated time for the

knowledge management initiative and stressed the importance that the commitment has to go beyond lip service.

• C-level support was important to ensure knowledge-sharing goals were set from the top all the way down to kick-start a knowledge-sharing culture (Participant 4).

What’s new Literature has paid little attention to knowledge transfer during M&A (Zollo & Meier, 2008), and the same is true for the influence of management (Sitkin & Pablo, 2004). This research provided some practical examples.

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Focus on behavior, not culture

StatementIn addition to the mental changes in the behavior, this study found instances where systematic processes were introduced to enforce the new way. Participant 2 summed it up like this: “And guess what? The systems don’t allow you to do it the old way.”ExampleThe program was called KM stars and rewarded people for knowledge-sharing activities. By creating this program and financially rewarding people for sharing, this initiative sent the message to employees that senior management found knowledge sharing important (Participant 10).What’s new The research provided practical examples on how to overcome knowledge transfer challenges in M&A integrations.

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Foster interactive systems

StatementTechnology, like public instant messaging, enabled knowledge transfer before IT people started integrating systems.ExampleThere are many interactive systems available and Participant 6 mentioned, "Fundamentally no one of them is critical. But the collection of them together." Participant 22 mentioned that communities of practice enabled new members to participate quickly in role-specific discussions company-wide and to be recognized as experts within weeks What’s newLiterature did not focus on the additional challenges for communities of practice during M&A integrations, such as budget allocations for migrating systems or onboarding of new employees.

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Improve the organizational socialization processStatementThis study revealed the importance of organizational socialization; the integration teams should first focus on managers and then employees to create a trusting culture, which companies need for knowledge transfer.Example• Participant 6 stated, "You’ve got to be re-recruited.... And if you don’t feel

as if you’ve been brought in and that you’re an important part of the team, you’re going to drift away."

• Participant 13 stated that employees chose the companies they worked for before a merger; however, in a merger, many employees move into the new company simply to have a job—it is not a cognizant decision to join a particular company.

What’s newOrganizational socialization goes beyond learning the new tools: it includes learning how to navigate in the new organization efficiently and effectively.

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Remove negative emotions and political barriersStatementManagers made a difference in integrations, shaped organizational cultures, selected information systems, built trust, and influenced with their actions the feelings of the employees.ExampleParticipants 10 and 22 mentioned that communities of practice highlighted professionalism and removed the politics, which helped to overcome barriers to knowledge sharing. This was particularly true if sharing was incentivized, linked to a promotion path (Participant 10), or embedded in standard operating procedures or computer systems (Participant 4).What’s newThe difference to the existing literature is that this research provided practical best practices on how to overcome these kinds of challenges.

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Conclusions

• Define and communicate M&A goals• Deliver consistent messages• Select the appropriate transfer channel for the

knowledge• Avoid knowledge transfer traps• Manage perception differences between companies

• Back up knowledge transfer with decisions• Focus on behavior, not culture• Foster interactive systems• Improve the organizational socialization process• Remove negative emotions and political barriers

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4 Implications for Companies

Ensure sustainable profits

StatementThe following implications for companies all support ensuring sustainable profits.Mastering the integration process does not guarantee financial successExample• Participant 11 mentioned that 6 years after the acquisition, 50%

of the workforce was reduced.• Participant 18 mentioned that the financial outcomes of M&A

deals were kept secret because the financial goals were seldom reached.

What’s newKnowledge transfer is required to set realistic M&A goals and to ensure ongoing profit. Sustainable profits require a sales force that knows how to sell the acquired product and an R&D organization that can leverage the acquired intellectual property to build the next generation of the product. 31

Set the right M&A goals

Statement The M&A deal price often determines the financial M&A goals, which are often unrealistic.Example• Participant 18 recommended engaging in OEM deals first to get

a good understanding of the potential of the company. • Participant 18 elaborated on the connection between M&A deal

price and M&A goals. If the M&A goals are too low, shareholders may not approve a deal; if the goals are high to meet the deal price, they become unrealistic.

• Participant 13 mentioned that the integration teams should have actively communicated which of the initial M&A goals they could accomplish and which goals would change.

What’s newEnhanced understanding of (a) the conflict between the M&A deal price and the M&A goals and (b) the communication challenge of the true M&A goals. 32

Establish accountability

Statement Ongoing reorganizations and management changes make M&A accountability difficult. This is particularly challenging as the success of a M&A deal is not visible for many months or even years.Example“After two or three years after you see results, very few people will be in that room comparing the results and understanding what did work and didn’t work” (Participant 18)

What’s newThe study illustrated how M&A goals are set and why accountability and transparency are difficult.

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Maintain a strong sales force

Statement A strong sales force ensures reaching the M&A goals; however, transferring sales competencies is difficult. The sales force is often not interested in learning new products or does not have the capacity.Example• Participant 5 mentioned that the existing sales force seldom

wanted to take on new products and that special incentives had to be set.

• Participant 18 agreed and stated that after years of losing market share the company realized the importance of keeping the acquired sales teams together (separate) and focusing on their core products.

What’s newThe research questioned the advantage of a combined sales force because of the increased complexity and the missing passion. If merging sales forces is required, timing, training, and compensation are crucial.

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Implications for Companies

• Ensure sustainable profits• Set the right M&A goals• Establish accountability• Maintain a strong sales force

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3 Implications for Leaders

Leadership matters

Statement Knowledge transfer is driven by leaders through their understanding, actions, and decisions.Example• Engaged leaders aligned and motivated their teams and

removed roadblocks to speed up the integration process (Participants 4, 6, 18, 19).

• Disengaged, self-serving leaders jeopardized integrations, delayed the integrations, and created additional stress (Participant 17).

What’s newLeaders have to be aware of their feelings and the feelings of employees during M&A integration. After leading several acquisitions, Participant 16 realized what it meant to be acquired once his company got acquired.

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M&A integrations can be improved

Statement Integrations can be improved by following the best practices for knowledge transfer; for example the ones discussed in this research. ExampleThe research identified lost opportunities, particularly around key knowledge holders. For example, the sales force is not just important for maintaining the prognosticated revenue; the knowledge from the sales force is difficult to transfer and existing sales people are often reluctant to take on new responsibilities (Participant 5, 18, and 20).What’s newThe research showed the complexity of M&A integration, the political struggles, and the challenge of determine the right integration points for the different departments. Each integration is different; however, clear communication—particularly around the true M&A goals and applying the discussed knowledge transfer best practices—is universal. 38

Communication and decisions are importantStatement Communication built the foundation for knowledge transfer by informing employees, building trust, and engaging employees. Decisions need to reflect what was communicated because contradictory, direction-changing, or secret decisions jeopardized trust.Example• Changing the integration approach midstream from a symbiotic

approach, where people are excited to work on a new solution, to an adaption approach, is detrimental (Participants 6 and 19).

• Participant 2 elaborated on his frustration regarding a foregone conclusion for the new development platform.

What’s newThe conducted interviews provided extensive insight into the communication process, the communication systems, the communication methods, and the different sources of information. In addition, knowledge transfer relies on the manager selecting the right integration approach, the right integration teams, the right tools, and the right process adjustments.

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Implications for Leaders

• Leadership matters• M&A integrations can be improved• Communication and decisions are

important

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6 Recommendations

Over-communicate

Statement During an M&A integration, managers have to use every communication channel to reach their employees and to inform and engage them.Example• "I mean the key to M&A is communication." Leaders do not just have to

communicate—they have to over-communicate (Participant 19).• Participant 6 confirmed that only 10% of the communication gets through

to people and that communication depends on a good understanding by the parties involved.

What’s newThe research highlighted that several participants were not clear about the true M&A intentions. The combination of open communication, frequency of communication, understanding of the parties, and selection of the right communication channels will improve the situation.

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Identify and secure knowledge

Statement Participants 4 and 18 stressed the importance of identifying the strategic knowledge holders. Example• When managers had to reduce their teams during M&A

integration, managers often selected the tactical specialists to keep operations running, and the strategic people were dismissed (Participant 4).

• Participants 17 and 18 mentioned how certain products could not be supported without one or two key specialists.

What’s newThe research highlighted the challenges for managers between ensuring continuity of the current operation and ensuring future growth. As a result, a company needs to secure knowledge from a strategic point to ensure the next generation of the software can be developed.

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Instill job security

Statement During M&A integrations, managers and integration teams have to instill job security for the resources the company needs.Example• As a manager, it is important to ensure job security for the important

knowledge assets. Retention plans, compensation, and career opportunities have to be aligned with the message of who is important to the company (Participants 1, 3, 5, 6, 12, 14, 17, and 18).

• In addition to retention bonuses, three participants (Participants 12, 14, and 18) recommended keeping successful teams together.

What’s newTransparency, good communication, and applying the right HR tools such as retention bonuses have to be aligned. Employees have to be aware of the true M&A goals to ensure themselves of their importance.

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Carefully select integration team membersStatement Integration team members should be subject matter experts, have worked in M&A integrations, and preferably know both companies. Example• Appointing the right experts to the integration teams is not easy

for political reasons; the managers are often neither integrations experts nor subject matter experts (Participants 1, 3, 4, 5, 6, 7, 10, 13, 14, 15, 17, 18, 19, and 20).

• In addition, four participants recommended employing third-party M&A experts, at least as mediators (Participants 4, 13, 15, and 20).

What’s newThe study revealed the political challenges of finding subject matter experts. For example, certain managers participated in high-level discussions for self-serving purposes and excluded themselves from lower level process work, while the integration teams had to go through several iterations of potential subject matters until the true ones were discovered.

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Adjust systems and processes

Statement The true value of knowledge comes from sharing the knowledge across the company by adjusting the systems and processes to support the transfer.Example• Participant 4 mentioned that knowledge transfer should be embedded in

processes and systems to ensure that changes are sustainable. • Sustainability was an important aspect for M&A integration and was highlighted

by 13 participants (Participants 1, 2, 3, 4, 5, 7, 10, 11, 13, 14, 15, 16, and 20).• Participant 10 proposed that knowledge-sharing activities should be tracked,

communicated, celebrated, and a prerequisite to promotion. What’s newKnowledge transfer requires adjusting existing business processes, which often requires adjusting computer systems to enforce the change.

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Influence the KT culture

Statement Managers can and should actively influence the organizational culture and kick-start a knowledge transferring culture after an M&A integration. Example• Participant 4 suggested kick starting the knowledge-sharing culture,

setting clear knowledge transfer goals for the leadership team, and creating mixed teams for enhanced knowledge transfer.

• Managers should balance their teams with employees from the acquired and the acquiring companies (Participants 4, 12, and 13). Not only does such a decision create trust, it also helps propagate knowledge. Separate teams had minimal interactions with each other and knowledge was hardly exchanged (Participant 11).

• It is important to differentiate which teams to migrate quickly to improve knowledge transfer and which teams to keep separated to ensure an uninterrupted revenue stream (Participants 18 and 20).

What’s newThe interconnectedness of soft components, processes, and systems during M&A integrations.

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Recommendations

• Over-communicate• Identify and secure knowledge• Instill job security• Carefully select integration team

members• Adjust systems and processes• Influence the KT culture

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Researcher’s Reflections

• Bias- Selection of participants- Preference for pragmatic approaches

• Surprises- Every participant could contribute something

new- Dissonance between self-view of acquirer and

view from acquired company- Underestimation of the importance of the sales

force

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Theory meets Practices – NVivo 9

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ThemeSources References

Sub-Theme

Section

Sub-Section

Source

Reference

Annotation

Meaning Units

Essence

Theme

Further Research

• Continue qualitative exploration in different setting- Different companies- Different industries- Different countries

• Test findings with quantitative approach and build grounded theory

• Processes- Establishing effective integration teams- Building a new organizational culture

• People- Organizational socialization process of existing employees- Sustainability of career opportunities

• Tools- Influence of extract, transform, load (ETL) tools & web

cameras 51

Questions

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Dr. Thomas Blumertfb@qad.com(805) 452 5731

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Backup Materials &Printer Friendly Graphics

The Four Dimensions

KnowledgeTransfer

M&AIntegrations

Phenomenology

U. S. EnterpriseSoftwareIndustry

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Findings (Saturation Graphic)

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60%

70%

80%

90%

100%

% N

ew

meanin

g u

nit

s

% C

um

ula

tive n

ew

meanin

g u

nit

s

QuantitativeResearch

Design

MixedResearch

Design

ExperimentalResearch

CorrelationalResearch

SurveyResearch

TriangulationMixed Method

Explanatory Mixed Method

Exploratory Mixed Method

Qualitative Research

Design

NarrativeResearch

GroundedTheory

Ethnography

Case Study

Phenomenology

Methodology and Design

DescriptivePhenomenology

Interpretative Phenomenology

Interpretative Phenomenological

Analysis (IPA)

Hermeneutic Phenomenology

Critical Narrative Analysis

TemplateAnalysis

63

Findings OverviewCategory Theme Sources Percenta References Percentb

M&A 1. M&A Integrations 22 100% 407 21%

Knowledge Management 2. Communication 22 100% 442 23%

3. Knowledge Transfer 21 95% 180 9%

4. Lost Knowledge 21 95% 95 5%

5. Information Ambiguity 18 82% 60 3%

Organizational 6. Management 22 100% 227 12%

7. Organizational Culture 22 100% 189 10%

8. Information Systems 21 95% 164 8%

Personal 9. Trust 20 91% 97 5%

10. Feelings 19 86% 97 5%

Total   22 100% 1958 100%

64Note. aRepresents the number of participants compared to the whole sample (n=22); bRepresents the number of references compared to all the references within this category (n=1958).

10 Core Themes by Importance

65

2. C

omm

unicat

ion

1. M

&A Inte

grat

ions

6. M

anag

emen

t

7. O

rgan

izatio

nal C

ultu

re

3. K

nowle

dge

Tran

sfer

8. In

form

atio

n Sy

stem

s

9. T

rust

Lev

el

10. F

eelin

gs

4. Los

t Kno

wledg

e

5. In

form

atio

n Am

bigu

ity0%

5%

10%

15%

20%

25%

21%

40%

30%

10%

M&A Knowledge Transfer Organizational Personal

66

Tacitness

Specificity

Complexity

Experience

Partner Protectiveness

Cultural Distance

OrganizationalDistance

Ambiguity

IT

LearningStrategy

TrustCulture

Flexible Structure

Knowledge Transfer

0.342*

-0.045

0.168*

-0.2

83*

0.02

30.

176*

0.27

4*

-0.357*0.744*

0.688*

0.660*

0.62

3*

*p < 0.01

Simonin (1999)

Rhodes et al. (2008)

67

Methodology

Research Interconnectedness

68

Chapter 1

Purpose Research Question

Chapter 2Literature

Review

Chapter 3Research Approach

Chapter 422 Interviews10 Themes

1958 References

Conclusions

Implications for Companies

Implications for Leaders

Recommendations

Data Analysis Process

• 10-step method combines- Moustakas (1994) based on his modified

• Stevick-Colaizzi-Keen methoda

• van Kaam methodb

- Langdridge (2007) method- Smith, Flowers, and Larkin (2009) method

69aStevick (1971), Colaizzi (1973), and Keen (1975); bvan Kaam (1959, 1966)

10-Step Approach

1. Conduct researcher self-description of the phenomenon (Moustakas, 1994).

2. Identify suppressed or omitted data points (Langdridge, 2007; Smith et al., 2009).

3. Create meaning units (Moustakas, 1994).4. Eliminate repetitive, overlapping

meaning units (Moustakas, 1994).5. Cluster meaning units into themes

(Moustakas, 1994).

70

10-Step Approach

6. Repeat steps 1-5 for all participants.7. Fine-tune and reorganize overarching

meaning units and themes (Langdridge, 2007; Moustakas, 1994).

8. Add verbatim text examples (Moustakas, 1994).

9. Compose the essence of the experience (Moustakas, 1994).

10.Reflect on the process (Moustakas, 1994).

71