Manager's Notebook: Merger Mania Math

Restructured EHS organizations face the new math: 1+1= ¾

• By Richard MacLean
• May 01, 2005

They're baaccckk! "The most vigorous merger market in five years" is what the Wall Street Journal calls the recent wave of corporate restructurings.¹ For officers and directors, these are happy times because a wonderful exit package awaits even those who lose their lofty positions. But, for real people doing real work, the prospects are much grimmer. How can an environmental, health and safety (EHS) organization survive a major restructuring? Here are eight basic rules and five best-practice companies.

The urge to merge is a powerful force. Corporations are on steroids with a jolt of Viagra mixed in. It truly is remarkable considering all the business research indicating that the vast majority of these deals leave shareholders with diminished wealth. Think AOL/Time Warner. Business consultants point to synergies and cost reductions, as well as a myriad of other factors, that are great in theory but normally do not deliver the expected value. One thing is for sure -- these corporate restructurings are made at the top-most levels and no matter what happens, the guys and gals at those levels will cash out on the deal.

Much of the attraction and justification for these deals comes from the expected cost savings in streamlining staff support services. The math is sometimes straightforward. Now you only need one CFO when once there were two. The same basic reasoning applies to staff functions such as human resources, accounts payable, information technology and EHS. This logic is applicable to corporate staff functions, but it also can influence staffing decisions at the division or even manufacturing level, especially if these levels are supported through a shared service organization.

Some of this restructuring can be estimated with mathematical precision. For example, if "X" number of checks were issued pre-merger and X+Y checks will be issued post merger, one only needs to figure in any synergies and technological improvements and it is possible to determine what should be done. The business objectives are clear: lowest cost and fewest errors.

Sounds simple. In some respects, it is simple for many functions because both the top executives and the external consultants are familiar with the issues. For the EHS function, it can be another matter entirely. This conclusion is based on ongoing research at the Center for Environmental Innovation.² Through interviews with a number of leading companies and my own direct experience, there are a few basic rules that should be followed.

Rule 1: Don't assume that the deal makers understand the nuances of EHS. They may view EHS as just another service function and apply this logic to the restructurings. If anything, this is encouraged by the management consultants brought in to work out the details. Invariably they will benchmark with other "similar companies in the sector" and use simplistic ratios and copycat organizational modes to justify their recommendations. Top executives pay enormous sums to have these name-brand consultants perform evaluations and automatically assume that they are getting premium advice. Based on my direct experience in interviewing EHS managers who went through these exercises in restructuring by the numbers, this generally is not the case.

In reality, a myriad of factors influence EHS organizational design and staffing. Table 1 contains a partial list. Some factors depend on the industry sector; some on the company culture and history; and others on the dynamics of the existing EHS staff. Some are obvious and others are much more subtle such as clearly defined business objectives.

Rule 2: The first step is to define clearly the strategic business objectives in relationship to EHS pre- and post-restructuring. I have found that it is rare for a company to have a close alignment of EHS objectives throughout the organization. This statement is not just conjecture but is based on an interview tool that measures alignment (which I have used in many companies). For example, the top executives may talk of excellence but want only compliance. The EHS department may strive for leadership but can only muster the resources to react to ongoing issues. The important point is that unless you know precisely what the organization wants to accomplish strategically, how can you design and staff it post merger?

These deals can proceed with amazing speed which leads to Rule 3: Get on top of the action fast. There are two reasons for doing this. First, proper due diligence needs to be performed to determine the ongoing and legacy issues that demand added staff, resources or special organizational considerations. Executives think in big-dollar terms. When a deal is underway, that is the time to ask for resources. Once the deal is done, then it is back to the same old begging and scrimping. In a billion-dollar deal, one million is in the noise level. Just ask for a million later on and see what happens.

Most companies conduct these due-diligence exercises on the fly or turn the exercise over to an outside consultant since they do not come up too often. For those companies that undergo frequent acquisition, divestment, toll production, and property sub-leasing activities, formal procedures should be in place. General Electric probably represents best-in-class in this regard. For nearly twenty years they have had a detailed, written protocol.

Second, remember Rule 2. You want to kick into high gear and take as much control of the process as possible before that sharp-looking MBA from Harvard, at $400 per hour, starts to dictate how things should be run. He or she may have never run so much as an oil skimmer but, trust me, his or her word will be considered the gospel. When he or she starts exposing the new math of 1+1= ¾, your management will be all smiles while you are left picking up the pieces and the consultant is off on his or her next assignment.

It may take some delicate negotiation and management education, but the trick is to demonstrate that you have assembled a team able deal with these specialized issues which may have major downsides if they go south. For example, in 2004 the EHS group at a large East Coast pharmaceutical company assembled an internal team to review organizational cutbacks.³ They assumed control and established a robust organization. These internal efforts can be assisted by an external specialist who can bring innovative options and proven best practices to the table. (See also related Rule 7.)

Once the strategic business objectives are clear, move on to Rule 4: Establish a common set of standards and have a plan for implementation. This rule is particularly important for companies that have strategic objectives that go beyond regulatory compliance. Often, these "beyond compliance" objectives are driven by liability or brand protection concerns that may or may not exist in the acquired company. A best-practice leader in this regard is Johnson & Johnson. In the early stages of an acquisition, they evaluate a company relative to the strategic objectives captured in J&J's "Credo," essentially the operating philosophy of the company.

What is particularly interesting about their approach is that they conduct a staff evaluation to determine if there are sufficient resources to carry out the EHS programs to the level required under the J&J Credo. This review is based on a systematic evaluation of the staffing level in more than 30 of its own manufacturing facilities. Most acquisition plans identify resource issues, such as remediation costs, but few directly examine staff, capital and other budget needs of new acquisitions to this degree of precision. These EHS resource items are communicated to the business Integration Planning team before the closing of the deal.

And there is yet another dimension to J&J's approach. Sandy Yee, Director, Worldwide Environmental Affairs, states, "We want to make sure that the EHS employees feel that they are part of the new team and that we will not just load new tasks on them without consideration for the effort involved. This is essential if we are to retain the best employees."

In any merger, both parties bring something to the table which leads us to Rule 5: Establish a process to identify and merge best practices. Business executives recognize this and, indeed, this is part of the justification for these deals. Normally, they have some formal procedure to get representatives from both companies to hash out which practices will be followed post merger or acquisition. If one company tries to steamroll over another, a recipe for disaster follows.

Factors Affecting EHS Organizational Design and Staff Level

Dow has gone through several major acquisitions over the past decade and they use a process involving functional teams to arrive at a common company best practice. Alex F Pollock, Director of EH&S Expertise, describes the process as, "... a disciplined approach to unearthing efficiency/effectiveness gains that become part of the 'new' EH&S Management System. We use topically-focused functional teams, comprised of employees from both companies, to identify these 'best practices.' A benefit is that employees on these teams develop a sense of ownership in the outcome and become emotionally vested in the new organization."

Systems are one thing but, more than anything else, this is all about bringing people together which leads to Rule 6: Keep the keepers and deal with the problem employees. In a perfect world, this should not be an issue because management would have been attentive to these issues from the beginning. But, this world is far from perfect. The number-one priority should be identifying the valuable employees and taking steps to ensure that they feel wanted and have a promising future with the new organization.

The superstars and grossly incompetent individuals are often readily identifiable. Attention, however, should also be given to the individuals who are the backbone of the organization (i.e., the workers that get the job done and do not necessarily go around advertising that they are important). It can be problematic, however, to identify the competent and hard-working individuals who may be difficult to manage (the keepers) and the suck-ups that are loads of fun, but contribute little value (the losers). EHS managers sometimes can be blinded to what is obvious to everyone else in the department. If management keeps its buddies and gets rid of the difficult but key workers, morale and productivity suffers. Internal or external neutral intervention may be necessary to differentiate amongst these individuals.

This brings us to Rule 7: Don't be the bad guy. It generally is better to make the hard decision quickly and move on rather than let things linger and fester. As previously stated, if resource additions need to be made, your best chance is early in the acquisition process. To do this, of course, you'll need your justifications well laid out. This is another reason for some advanced planning and external intervention over which you have some degree of control. The worst possible case is to appear arbitrary and capricious. Employees can respect the tough decisions if they are made systematically, with a plan in mind and with learned expertise involved. After all, your primary objective should be that of the last rule.

Rule 8: Unite the company. The natural inclination after a major merger or acquisition is to return to normality (i.e., the way it was) as soon as possible. If the components of a merger are allowed to go about business as usual, much of the business synergy is lost. A major telecom company recognized this after the acquisition of two other large companies.⁴ The new company was comprised of essentially three major geographical regions with talented EHS professionals spread across the country. They could have remained as distinct regions (i.e., separate, autonomous silos), but that would have led to redundant efforts and difficulty in building common systems. The regional directors chose, instead, to take on company-wide functional responsibilities that transcended geographical boundaries and worked as one integrated company with common systems.

Conclusions
Far too many mergers and acquisitions are handled haphazardly when it comes to consideration of EHS issues. As these best-practice companies illustrate, by following eight simple rules, you can change the outcome and change the math. The business expectation might be 1+1= ¾, but the reality of emerging global EHS dynamics might require 1+1= 2¼. This requires early intervention, business management education and systems and expertise in place to take control of the process.

References
1. D. Berman and A. Latour, "Too Big: Learning From Mistakes," Wall Street Journal, February 10, 2003, page C1.
2. See www.enviro-innovate.org/OIT/OIT_main.htm, last visited 2/19/05.
3. The company asked to remain anonymous.
4. The company asked to remain anonymous.

Factors Affecting EHS Organizational Design and Staff Level

Company Driven Company business objectives vis-à-vis EHS Nature of the business/risk of operations (e.g., industry group, environmental "footprint," proximity to sensitive areas) Legal/Regulatory requirements (e.g., different states or countries, chemicals, and processes) Legacy issues (e.g., pre-existing issues, such as remediation problems which must be dealt with eventually) Company culture (e.g., degree of integration of environment into line management, tolerance for risk) Number of separate manufacturing sites/number of employees Communication obstacles (e.g., language barriers, distance between sites) Company regulatory compliance history Profitability and production rate of facilities

EHS Department Driven Competency and experience level of the EHS staff Morale and work ethic of the group Relationships with the community, nongovernmental organizations, and regulatory agencies Maturity of the existing programs Organizational structure (e.g., degree of outsourcing, use of shared service, degree of centralized vs. local autonomy) Departmental processes (e.g., use of information management systems) Program mix and priorities assigned Cost of EHS staff Willingness to share information and resources

This article originally appeared in the 05/01/2005 issue of Environmental Protection.