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Transact to transform: How a human focus can unlock deal value

Transactions can become transformational when leaders set specific conditions for high performance.


In brief

  • Transactions with a bold, ambitious vision can supercharge the transformation of a business.
  • Research shows the key to increasing the value of a transaction is the equal prioritization of the human elements of a deal with the strategic rationale.
  • Establishing key conditions can help leaders navigate transactions successfully — and improve their ability to carry out future transformations by 2.2 times.

Transactions, such as acquisitions and divestments, are a critical component of the corporate transformation toolkit. This year, 96% of global CEO respondents to the EY-Parthenon CEO Outlook Survey are expecting to pursue some form of a transaction in the following 12 months.

Put simply, they are a key aspect of most corporate strategies. Businesses which successfully deliver transformations that are transaction-led will realize value for shareholders and positively separate themselves from competitors.

And while transactions pose a unique set of challenges, they can also create momentum which accelerates transformation — and changes the trajectory of a business. EY research shows three factors are critical to success.

The first is boldness: 59% of transaction respondents indicated an organization’s ability to transform is extremely important to its future existence. The more transformational the vision of a transaction is, the greater the value that can be created.

Second, the human elements of a deal — not just the financial factors — are key to unlocking value. Leaders must create conditions where people can thrive.

Third, and most pertinently, leaders need to be ready to navigate turning points likely to arise during three key stages of a transaction: diligence to announcement, announcement to close and post-close.

When these three elements are successfully addressed, challenges can be reframed as opportunities. Leaders and their organizations can transact to transform.


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1

Chapter 1

Transactions are transformative when leaders are bold

Rather than simply trying to get the deal done, leaders who have a bold vision to transform the business can unlock greater value.

In all transformations, organizations make changes to their operations to improve performance and drive sustainable growth. The aim of a transaction is similar: integrating or separating organizations is the starting point toward unleashing the potential of the resulting entity, or entities. However, transactions face unique challenges.
 

First, they move at a fast pace with tight deadlines, which puts pressure on near-term execution versus longer-term bolder objectives.
 

Second, transactions become a public event upon announcement with progress externally tracked and monitored. That creates noise — analysts’ opinions, market opinions, employees’ opinions — and the scrutiny can be intense. Furthermore, leaders must report the strategic rationale, and financial benefits, of the deal to shareholders: another layer of pressure while trying to make it purposeful for the workforce.
 

Third, there is a long period of ambiguity between announcement and the close of a deal. Both leaders and workforces can feel less secure.
 

These challenges mean organizations often focus on getting the deal done, as opposed to truly transforming the business. But this reduces the value that could be created. Almost half of transaction leaders say they often fall short of delivering the desired value, while only 46% of transactions achieve their innovation KPIs.
 

Leaders need to set a transformative goal for the transaction: leading with a vision and ambition that takes people with them. Shifting the focus of the deal toward transformation, rather than forcing it toward completion, can achieve superior long-term results. 


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Chapter 2

Leaders must create the conditions for people to thrive

Key conditions can create high performance environments which enable workforces to overcome challenges and drive success.

Putting humans at the center of a transaction — with a deliberate focus on the people-focused aspects of the deal — is more likely to lead to success.

The EY organization’s research into organizational transformations identified six conditions that bring this to life. When applied correctly, they create an environment which increases the likelihood of a successful outcome by 2.6 times.

The research showed a new way to navigate transaction-motivated transformations: one that centers on people and supports both rational and emotional journeys.

Establishing these six conditions creates a transaction environment where people can thrive:

Condition

What does it mean for transactions?

Purposeful vision

Taking people with you is key: the workforce has to believe in a compelling vision beyond the deal’s economics.

Adaptive leadership

Leaders need to be present and adapt when needed. This includes being visible doing the difficult work with teams.

Psychological safety

Deals naturally create a perception of job insecurity, undermining the workforce’s psychological safety. Being tuned in to the real feelings of the workforce is therefore key. Leaders need to continuously invest in relationships with teams to build an environment where information flows more easily.

Disciplined freedom

Push accountability and decision rights as low into the organization as possible to enable speedy decisions and pivots when they are needed. 

Radical interdependence 

Collaboration across silos is key to the success of a transaction. Early in the deal cycle, multi-disciplinary teams need to come together and work at a high pace. And as the deal moves to integration or separation, teams need to work together in different ways. Collaboration can’t be left to chance; it needs to be architected and designed into the program.

Purposeful technology

Use technology to quickly bring the potential of the new organization to life, showing people what the power of the new entity will be.

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Chapter 3

How to navigate transaction turning points and maximize value

Decisive action is needed at each of the three key stages of a transaction to successfully navigate employee turning points.

Even if organizations have a bold aspiration for a transaction and provide a high-performing environment for people to succeed, they are still likely to face challenges. Almost all (98%) of transactions hit a turning point: a moment where the program goes off course and leaders must intervene. And while it is similar for transformations, turning points are more likely to have a negative overall impact on a transaction: 32%, compared to 21% in a transformation program.

Transactions, by their nature, have three key stages — announcement, closing, post-close — in which turning points occur. Further, external events, such as economic turbulence and antitrust reviews, can disrupt the flow of a deal.

As a deal progresses there are key moments where the transaction scales, bringing more people into the planning, and impacting broader parts of the organization and workforce. Turning points need to be anticipated and navigated by leveraging the human conditions outlined in Chapter 2. When teams come together to solve challenges, it accelerates momentum toward transformation.

The EY research on turning points, published last year, indicated a specific focus on four of the six key conditions — purposeful vision, adaptive leadership, disciplined freedom and psychological safety — can change the trajectory of a transaction and accelerate momentum towards a transformative transaction.


Stage 1: Diligence to announcement

Do you have a clear and compelling vision for the deal that leaders can articulate?

Causes of turning points

Once the strategy of the deal has been established, all organizations will encounter challenges in the diligence to announcement phase. As a director of a global digital payments company told us, transaction teams often prioritize the business or technology fit over a human or cultural fit, leading to downstream integration issues. An appropriate focus on the people elements — such as organizational structure, strength of leadership teams, culture and ways of working — is critical in due diligence.

This predisposition can culminate at announcement, when leaders often express the vision of the transaction largely in financial terms, without an inspiring vision for the workforce. More than a quarter of respondents cited an unclear or uncompelling vision as impacting deal performance, while 30% said ineffective leadership was an issue.

Actions to navigate turning points

The organization needs to have a purposeful vision at the outset. Furthermore, leaders need to buy in, contribute to the story and be ready to share it with the workforce as early as possible: it is critical at the first engagement with employees to set out a convincing vision of the future and opportunities the transaction creates.

A former executive at a global telecommunications company told us: “Immediately, there needs to be messaging around the ‘why.’ The other key thing is positivity. Humans need to ride the wave of some positivity and excitement around the change, and what that's going to mean for them as individuals and also for the company. They can’t feel like they’re just swaying around in the ocean, rudderless.”

To inspire confidence in the vision, and increase trust among employees, adaptive and aligned leadership is critical upon announcement of the deal. A vice-president at a multinational oil and gas company said this means communicating the vision with a “big hurrah” at a town hall. But it also means being present and accessible to the workforce with face-to-face interactions: “I’m going to walk a floor and make sure I’m not in my glass office all the time. I don’t want it all to be formal town halls. I need the social stuff: that’s what people connect to.”

Stage 2: Announcement to close

How do you equip people for change?

Causes of turning points

The deal is out in the open. The transaction moves into a new level of scaling and a larger deal team is engaged to drive progress. Meanwhile, the now-informed workforce needs to continue driving business results despite a high level of ambiguity and anxiety. The workforce is less likely than leaders — 34% versus 47% — to feel they have a secure future. It means leaders, who also experience insecurity, need to compose themselves and engage with employees to ensure they have confidence in the deal.

But this is difficult when there is heightened uncertainty. Post-announcement, organizations face legal and antitrust restrictions, which can curtail the level of information shared. There may be difficulty aligning existing leadership and new transition teams with conflicting management styles and philosophies.


During this period, the deal team needs to work quickly and effectively to identify issues, determine solutions and plan for closing across a diverse group of stakeholders. Yet, only 35% of respondents agreed decision-making authority was delegated in a clear and appropriate way. Further, at this time of heightened emotions, feedback channels are more likely to be absent: only 42% of transactions had formal mechanisms for questions to be raised, with just 37% having a formal assessment of the workforce’s emotional state and readiness.

Actions to navigate turning points

During the announcement to close period, it is important to rapidly form the deal team and progress at pace while supporting the leadership and workforce across the organization. A strong project management office (PMO) must operate with disciplined freedom to address both the rational and emotional progress of the deal. Clear transition leadership, governance, timelines and ways of working must be put in place to enable decision-making and accelerate progress. Respondents said using service providers which offer leadership capabilities, technology, tools and data was the most impactful way to accelerate deal progress.

Simultaneously, the PMO must also plan for and monitor the emotional journey of the workforce by supporting leaders and establishing formal feedback mechanisms, paying close attention to increases in negative emotions: 30% of respondents said lack of emotional support was an issue. By implementing feedback tools, such as pulse surveys, engagement surveys and anonymous mailboxes, PMOs can flag heightened emotional energy, such as anxiety or frustration, and address them before they disrupt the progress of the deal.

With the confidence of the workforce likely to waver during the announcement to close period, leaders also need to nurture psychological safety across the organization. One way is openly recognizing the challenges and uncertainties associated with the transaction, which enables more open, honest feedback. Leaders who do this, while exemplifying a growth mindset, are 3.7 times more likely to successfully navigate turning points. Some may tell the story of their own experience, even going as far as expressing their initial doubts about the deal. Sharing their own account gives permission for others to acknowledge the transaction is as much an emotional experience as it is a business experience.

Middle managers are also critical as they can allow employees to speak up without fear and will likely be the ones to identify potential issues first. Having effective engagement with middle management helps leaders pick up warning signals and develop solutions earlier.

Transparency in how decisions are made is important across all levels. Without this, it is difficult to navigate structural tensions. “If you’re going to communicate and not be transparent, that’s where distrust of management happens,” an HR executive at a multinational ride-hailing company told us. To foster trust, leaders need to equip middle managers to answer questions on how decisions were made at leadership level.

Many of the factors above can be captured and identified through what the HR executive labeled “cultural due diligence.” “Factors like your leadership style, decision making, work culture, communication, employee engagement … all of it needs to be looked at.” This takes humility from leaders, who will likely need to acknowledge the status quo is unsustainable in the future state. These factors need to be dealt with as soon as possible, the executive said, “because the moment you get into the whole post-transaction activities, it’s too late.”

Finally, as closing approaches and brings new scaling challenges, clarity on the design of the go-forward organization and leadership roles is key. This will help ensure confidence in the future state governance model and settle leaders into their positions. The director of the digital payments company told the story of trying — and failing — to engage with the chief human resources officer (CHRO) of a company being acquired: “She was so incredibly resistant because she was thinking that she was going to be fired.” On the other hand, when leaders are in place early, the organization not only has a tangible structure, but leaders are no longer as worried about their personal situation. They can lead through the next scaling point and beyond.

Stage 3: Post-close

How do you create the conditions to deliver transformation?

Causes of turning points

The deal is legally closed, but the biggest mistake leaders can make is presume the work is done. The new leadership team needs to align and scale up organizational activity to achieve deal objectives. Significant turning points in deals are often triggered by operating model issues, most commonly ineffective organizational structure: cited in 31% of deals.

By this stage, people across the organization are also likely to be fatigued. A lack of emotional support for the workforce is cited in nearly one-third of transactions and even among successful deals, only 40% of people experience positive emotions post close.

People may also find it difficult to embrace a new identity, especially those who had a strong connection to the pre-transaction company. Of workforces, 31% said culture and new ways of working proved a significant challenge, compared to 19% of leaders. As a result, letting go of legacy ways of working or business practices may be difficult. The risk of poor cross-functional collaboration also remains, with different teams potentially resisting sharing information amid uncertainty over roles and responsibilities. And, critically, capability gaps among the workforce need to be identified and addressed early to maintain the momentum that the deal has created.

This is the point of the transaction where true transformation can be achieved. Creating the conditions for success in the next phase is vital.

Actions to navigate turning points

First, it is crucial for the new leadership team to align with the vision of transformation and develop new ways of working. The HR executive at the ride-hailing company said this is key to successful cultural integration as it ensures consistent messaging and actions from the top down. “They have to walk the talk. And as long as management is aligned, it gets cascaded down.”

Furthermore, learning and development programs can help integrate cultures. These can acclimatize the workforce to the new ways of working, values and leadership styles. Organizations which adjust processes to encourage learning, as well as experimentation and innovation, are nearly three times as likely to successfully navigate a turning point: especially if the new learnings and opportunities are tied to the emerging, transformed entity.

Meanwhile, EY research (via EY.com UK) has found that on average, 75% of people in key roles quit within three years of a deal closing. To minimize departures and maximize confidence in the new organization, leaders need to maintain a psychologically safe environment. In acquisitions, part of this is not assuming the people in the acquired company have been happy to join the acquiring company. Leaders therefore need to “re-recruit” the workforce, engaging employees and communicating the opportunities of being in a combined organization. It is at these moments when a transformation agenda can be launched to re-energize and galvanize the teams with a new strategy and focus.

Finally, the purposeful vision that leaders started with needs to be brought to life after the deal closes. Celebrating the initial successes of the new entity is an important — but often overlooked — factor. If part of the transaction’s strategic initiative was combining two companies to increase geographic footprint, or bringing a product to a new geography, leaders need to celebrate the successful delivery of that first shipment or completed purchase in the new country. It shows the workforce the new organization has made an incremental but important step toward achieving unified success.

Summary

Transactions can be an incredibly powerful tool to change the trajectory of a business. The way leaders approach the deal will define how much value they get out of it. By having a bold aspiration of transformation, and creating the space for the workforce to thrive, they will be able to overcome challenges and maximize performance. Critically, this will prepare the organization for future transactions and transformations.

Christopher Laux, Partner, Ernst & Young LLP, David Werner, Partner, Ernst & Young LLP, Elizabeth Kaske, Principal, Ernst & Young LLP, Daniel Riegler, Partner, Ernst & Young, LLP, Rafael Nowak, Director, Ernst & Young LLP, AnnMarie Pino, Associate Director, EY Insights, Ernst & Young LLP, Monica D Elizondo, Manager, Ernst & Young LLP contributed to this article.


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