Why Culture Matters in Tech Focused M&A Feat. Chelsey Nord

Mike Harvath  00:04

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from revenue rocket world headquarters in Bloomington, Minnesota. As you know, revenue rocket is the world’s premier growth strategy and m&a advisor, but it services companies. Today, I’m thrilled to have Ryan Barnett, my partner here at revenue rocket, as well as Chelsey Nord who is sort of a new addition here and around a rocket. She runs our strategy practice, and she’s an industrial psychologist with tons of experience, and happens to be a world expert in culture. So we’re going to talk a little bit about how culture interacts at the intersection of strategy and m&a. So welcome Chelsey and Ryan.

Chelsey Nord  00:53

Hey Mike thanks for having me.

Ryan Barnett  00:57

Yeah, and thanks Mike for hosting this yet again. When we look at m&a, we have a trio of things that are most important strategy in which we, it’s critical to make sure that if you buy a company or you’re selling yours, that the strategy is aligned. The second is really financial, that it no deal gets done unless it’s financially right. And then the third and oftentimes sometimes overlooked, but oftentimes, the most important is the culture. So when we look at deals, we look strategically and culturally first, and then those to work out, then we can start to dig into the financials. Today, I wanted to talk with you Chelsey, about why culture matters within m&a. And why paying close attention to culture is critical if you’re working through strategy changes, and through m&a deals. So that’s kind of the topic for today. If you don’t know what culture is, and IT services companies, I encourage you to listen to a previous podcast that around the definition of culture in which you walk through why it’s important IT services companies. But today, we’re going to switch that focus or to why that is critically important and why it’s overlooked oftentimes in m&a. So with that, Chelsea, I’ll just let you start to dig in and kind of look at the overview. And, you know, why is culture so critical in strategic strategic conversations?

Chelsey Nord  02:33

Yeah, thanks, Ryan. So I would say at the highest level, you know, culture and playing close, careful attention to culture is very critical in any type of strategic transformation, be it organic, or inorganic, through m&a. And the reason being is just some cases, your organizational culture, which just to summarize, values, beliefs, and norms, that kind of guide how people show up in the work, may not serve or support a strategic shift that you need to make within the company. So you might intentionally to make some changes to make sure that that culture does support the strategy moving forward. And I’ll just throw in a Peter Drucker quote here, but he said that culture eats strategy for lunch, and I would add probably breakfast dinner, and all the snacks in between. And what that means is that I think the sentiment there is that you can have the best strategy in the world. But if you don’t have alignment with how your people kind of behave and and show up to work, then the strategy won’t be successful. You need you need the people to make the strategy come to life. So it’s not just kind of words on paper or decision that one person made in a room, that talent and having the right talent behaviors, to to execute your strategy is is really the linchpin and the key to moving or bridging from strategy into to execution of that. So I would start there and say that, you know, like I said, it’s it’s the truth for organic or inorganic growth. I would agree with you, if you think about flipping it to to, you know, why culture is important for for m&a, I would say if we, if we think about it, think about this from a financial, strategic and then cultural fit standpoint. I would say that, in my experience, I’ve seen financial and strategic fit kind of steal the spotlight, right? They’re the most focused on enablers of successful nominee. I like to think of culture as a sleeper variable for transformational change and for m&a. So it’s kind of in many cases, it’s kind of like an afterthought, that might that becomes kind of unexpectedly critical during negotiations or post merger integration. So, you know, it’s my belief that you really do a disservice and kind of pushing that to the side and then a lot of people may feel kind of uncomfortable or not know how to handle how to best handle it. But it should be thought of intentionally handle as as early as possible in m&a process.

Ryan Barnett  05:07

When we look at starting deals, it’s much easier to look at a strategic fit. And for example, when you’re looking at ideal prospect profile, you’re going to define things like, what market they’re in, what they what kind of services they sell, and you’re gonna look at geography, you’re gonna look at size, you’re gonna look at maybe a management team that’s looking to go or we’re looking to stay. I think some of the challenge in culture with m&a is that it’s, it’s, someone may say, on their website, hey, we have a great culture. And they may try to define it. But it is, I would say more platitudes than it is real alignment. And it sounds like if you want to define your strategy, you have to be considered an organizational culture outside of the platitudes and plaques. Instead, more defined, elements of culture. May right and I thinking,

Chelsey Nord  06:05

Yeah, I would agree completely. If you can try to put some definition or some general themes around how you describe it in a consistent way can really help with both understanding your own culture, as well as you know, thinking about what a potential good fit would be for either buy side or sell side m&a.

Ryan Barnett  06:27

So if you’re embarking upon something as big as m&a, or if you’re even doing something where maybe it’s your strategic transformation, How does culture play a role? And just like to understand that? What’s the what’s the consideration of that organizational culture?

Chelsey Nord  06:45

Yeah, in the, in the space of m&a, I kind of think about it, like matchmaking. So in due diligence, if you think about why it would matter, why culture would matter for a buy side, and why it would matter for for a seller. And I think it’s important for both in this transaction, and let me kind of put two different perspectives in place for you. And the buy side, I think cultures do have a good handle on defining culture and considering it is important because of post merger, integration, right? Understanding how people show up to work and where there might be marked significant differences between their company and a company that then they might acquire, you might want to preserve some aspects of your culture that are core to your values and go to market brand and could be concerning to a buyer. If there’s large gaps there and kind of attitude and behaviors that might, you know, be significantly different. There is some concern around you know, scaling and growth that you could probably lose some of these founding beliefs that might be seen as unique differentiators that have contributed to their success as a company so far. So that’s why a buyer probably would have some, some concern or put, why would they would think culture is important. And then on the sell side, if you’re selling, I think it’s important for ourselves to consider to culture because they want to know, before selling, that their people are going to be taken care of that they’re going to have a good fit for their employees and teams. There’s definitely some pride there and a business they’ve built. I think that there is some thought of like avoiding culture shock, or at least being able to plan for emerging teams and to prepare customers and other stakeholders for that just to kind of manage and understand expectations.

Ryan Barnett 08:43

It is, there is some brokering there and there’s trying to figure some of those things out is is critical, I think and I think it’s sometimes hard to take a look at when you’re on the on the m&a side, it’s it’s hard to assess what they might be. So when should you start you’re considering culture in an m&a process

Chelsey Nord  09:08

As early as possible, like in due diligence, preferably. I think it starts with with the, you know, assuming this is by saying that the company has a good sensor description or assessment of what their culture is today. So, you can’t really do any of this if you don’t understand or you can’t articulate and clearly define what your culture is. That’s why I think these you know, set up cultural components or elements, if you will, give the the example of the customer experience on the last podcast is a good way to kind of have a common vocabulary or framework, I guess, to work around to understand and define your own culture and what might be a good fit.

Ryan Barnett  09:57

Yes, as soon as you can, I’d say for about probably, Mike, I’d love to hear your thoughts on this. When you know what kind of things as a, as an advisor are you doing to start to define that culture? You know, it’s a little bit easier with our clients when you can ask them some pretty direct questions to help define. But when you let’s say you have a target on the line, Mike, will, are there, what are you starting to do as early as your first introduction or screening called to help understand some cultural definitions?

Mike Harvath  10:37

Well, I certainly think, you know, some of the leading indicators have to do with sort of customer care and employee care philosophies, you can get the read a lot into culture, and you can get to some indicators as to how they think about their team, how they interface with their team, how they think about their clients, how they talk about each of those things. There’s probably 50 different sort of, you know, indicators, or what I’ll call sort of attribute to conversations that go into trying to get to the bottom of customer care and employee careful US visa, say a lot about culture. And, you know, we know that if the culture, material difference and thinking about culture, that that is a huge risk for any m&a transaction. And so, you know, I think we do a reasonably good job here, revenue rocket of assessing culture, cultural fit, and, you know, being able to, you know, kind of see how folks can work together in a meaningful way or, and or advising our clients on if there is a material, cultural mismatch. In that potential combination, we certainly upped our game there with Chelsey and team as she’s joined, and bringing her expertise around culture, to to the conversation. You know, I mean, some of the tools that she uses to help us assess these in a more formal way. But, you know, at the highest level, I think it’s about you know, those two things, customer care, philosophy and employee care philosophies. And are those in alignment with the firm across the table, you’re evaluating, you know, combining with.

Ryan Barnett  12:27

It’s helpful to be intentional and defining the culture, it’s helpful if you’re, when you’re evaluating a transaction to ensure that culture is aligned. Mike, have you seen challenges when when someone starts to go through a deal? And you get so wrapped up in the negotiations and the definitive agreement and the combining of the companies? Is it easy to lose sight of culture through some of the depths of m&a?

Mike Harvath  12:58

Oh, absolutely. You know, these deals are complex. You know, we’ve talked about before, and podcasts and general that, you know, they’re the most unnatural act in business, and they take a lot of energy and cycles, to get through due diligence and to negotiate a definitive agreement. And in many ways, that becomes the goal of both buyers and sellers as they’re working through to try to get to close and, you know, oftentimes they overlook culture or look the other way, when there’s red flags or warning signals about a potential cultural mismatch. for firms that do that, or get all the way to close and then say, we’ll deal with the cultural aspects of this deal. It’s too late. You know, we’ve often said that there’s only two reasons why deals come on down after their m&a deals come apart later. And that has to do with cultural mismatch, probably the first and foremost primary concern. And the second is poorly executed post merger integration. And we can certainly all point to a lot of transactions, you know, that have been in public markets where that’s been the case. And we see it, you know, playing this day in retrospect, and I think, even for those of you listening to the podcast that may have experienced some of that, in your own professional life, it’s easy to see kind of once the you know, once the broken glass is on the ground. And you know, the challenges have presented themselves, much harder to see when you’re in the swirl of getting through due diligence to close.

Ryan Barnett  14:35

I think an element here that can help anyone going through this is to realize that culture is a set of norms and beliefs that have some definable nature to it. In our law. Again, in the last podcast, we we talked about the transactional versus customer intimacy type nature. In future podcasts. We’ll be exploring a few more of these items to to help companies to really look at, again taking culture from this enigma into something that is definable and cultural, but even if you define it, I still think you just have to make sure that it bleeding throughout the, the company. And if you have your culture to define do you have to understand that the acquired company is going to have different, and she also had kind of be interested on what a company is needed to do. When you look at these two assimilating company companies into you know, is it a simulated culture? Or is it something that can be a bit of piece here and piece there? Yeah, I would think I would say that it’s not always that the acquired company will need to assimilate the culture, the acquisition company’s culture, right, I think best case scenario, the acquirer knows where the biggest gaps are, and kind of prioritizes some of those those cultural components with a Change plan, but I think, you know, it’s people are more bought in and engaged, if they’re involved in a process, and I think best best case scenario is that you can collectively define goal forward, future state desired culture together, and bring bring the acquired company in on that conversation, versus just just forcing assimilation, because the value there is that we know that, you know, innovation, and innovation comes from looking at things differently. So I think both parties should be kind of open to, to culture change, or looking at things differently. And you know, as much as you can involve both both sides of the house in defining future state, the better off everyone will be. That’s a great point. Mike any, any thoughts here? Any closing thoughts as we kind of look at why culture matters in m&a?

Mike Harvath  17:05

Well, I would just encourage everyone to take this diligence items seriously, and not to look the other way. As you’re considering potential combination with another firm whether you’re selling or buying, you know, culture, vetting, culture and cultural alignment in many ways will become evident as you work closely together in an effort to get through a due diligence process I would encourage you to certainly meet with the parties everybody get across the table and not only just you know size up cultural feel and fit and finish but to do you know formal review of culture and to really think about that, you know, customer care and employee care philosophies and how those might align or might be different post transaction

Ryan Barnett  17:59

Yeah, that’s great stuff. Chelsey anything you want to know any last thoughts?

Chelsey Nord  18:06

No, I don’t think so. I think we covered the the main things but I’m excited to kind of talk about introduce some some of the other components or elements of culture, beyond customer approach and future conversation. Appreciate you having me.

Ryan Barnett 18:22

It’s great to be here and again, such an asset to revenue rocket in this and to the shoot them and podcast. And I really looking forward to future episodes. With that, Mike, I’ll turn it back over to you.

Mike Harvath 18:36

Sounds great round. So that will tie revenue for this week’s Shoot the Moon podcast. Again, feel free to tune in next week, and we’ll unpack and explore further topics of relevance as it relates to growth strategy and m&a for your IT services company. Thanks and make it a great week.