episode 

Leadership Lessons to Overcome Change Management

Harry Kraemer Jr.

Change management is the tilting point of every M&A deal. Preserving the value that you just acquired is dependent on how you retain key employees. In this episode of the M&A science podcast, Harry Kraemer, Jr, Professor of Management and Strategy at Kellogg School of Management, talks about how effective leadership helps overcome change management challenges.

Jeff Desroches
VP of Corporate Development at Atlas Copco
Ivan Golubic
Former VP Corporate Development at Goodyear
Erik Levy
Group Head Corp Dev and M&A at DMGT PLC
Kison Patel
CEO at DealRoom

Leadership Lessons to Overcome Change Management

20 Dec
with 
Harry Kraemer Jr.
Or Listen On:

Leadership Lessons to Overcome Change Management

Leadership Lessons to Overcome Change Management

"I don't care what the numbers look like. If you can't deal with the people impacts and the change impacts, the deal is absolutely going nowhere." - Harry Kramer


In this episode, Harry Kramer, Jr, Professor of Management and Strategy at Kellogg School of Management, talks about overcoming change management With great leadership.


Harry explains the role of great leadership on retention, the importance of feedback mechanisms, and how to develop your people as they go through changes.

special guests

Harry Kraemer Jr.
Professor of Management and Strategy at Kellogg School of Management

special guests

Harry Kraemer Jr.
Professor of Management and Strategy at Kellogg School of Management

Hosted by

Kison Patel
episode 

Episode Transcript

Text Version of the Interview

Change Management

When I was a student at Kellogg 40 years ago, one of my professors made the comment that 80% of the time, acquisitions fail. They don't earn a return and would have been better off for the acquirer not to buy the target company. 

And of those 80, it's turned out that half of them do not understand how to value companies. But the other half has something to do with the ability to deal with change, the people aspects, the integration aspects of it. And it all comes down to leadership.

I define leadership in a very simple way: leadership, influence, relate. 

Think about it, when you're hiring somebody for your company, you're constantly talking to them assessing the fit. How are these going to fit in with the rest of the team? However, we make acquisitions, we spend very little time on the people dimension. We’re always focused on the economics of the deal.

Even me, I used to think it’s all about the numbers, and I have a lot of battle scars to show for it. But as I learned through experience, it is all about the people.

Your ability to relate also matters a lot. A lot of times, we try to relate to every single person in our company, but how often do we do that to the target company? Also, will the incoming employees relate to your existing employees? Can they operate with one another?

I don't care what the numbers look like. If you can't deal with the people impacts and the change impacts, this is going to go absolutely nowhere. 

So I'm constantly trying to figure out what are some things we can do to make this change easier from a leadership standpoint.

What I've noticed is, oftentimes, we don’t know enough about the company that we want to buy, and we need their leader to stick around, together with most of their people. But there is a lack of focus on how to retain these people. And we’re wondering why 70% of them are gone after three to four months.  

Most companies announce the fact that their buying the target company, and they don’t have any plans on what to do with the acquired employees. And after getting burned several times, I found the best approach.

When I'm buying a company before the announcement comes out, I sit down with the leadership of the target company and ask them: What are the five or six things your team is most worried about? And we literally walk through all the issues they have, and what we’re going to do. 

And I always push the CEO to make decisions pretty quickly. If they tell me they haven't decided yet on what to do with the facilities or the salesforce, I ask them, so what did you use in your cash flow analysis to buy the company? Because there were initial assumptions in the cash flow model that justified this acquisition. 

And here’s a little formula for everyone: Change plus uncertainty equals Chaos.

It’s a very simple equation, and change is inevitable. So what you have to figure out is how to minimize uncertainty. Taking uncertainty out of it will help you retain people, and even if they leave, you’re not surprised. 

Here's a three-part equation for acquirers:

  1. We tell people what we know. 
  2. We tell the people what we don't know, here's why we don't know it, and here's how we'll get this resolved one way or another in the next week or two. 
  3. We will let people know how quickly we'll get back to them.  

And I really do believe if we figure out a way to minimize the uncertainty and take on as many of the issues as fast as we can, we'll be able to help ourselves. 

But when I look at all the acquisitions that are out there, even when they get the numbers right, but because they really don't understand the people dynamics, the deal suffers. 

You need to figure out how to openly tell people what the change is going to be and how you're going to minimize the uncertainty. That will have an enormous impact on how successful the acquisition is going to be.

Leadership Retention

It’s very important that you know what you’re good at as a company. And even more important, is you stick to what you’re good at. A lot of times organizations buy companies they know nothing about.

This is a problem because not only you don’t know much about it, you don’t even know the right questions to ask. So instead of being able to get into the detail, you're now operating at a very superficial level. And you now depend heavily on the Target leadership to stay. 

I call this the island problem. And this is something that I eventually figured out through years of experience - If the CEO is getting $10 million on the deal, that person is not going to stay. He’s going to be on an island somewhere enjoying that money. 

So you need to know how much money the CEO is going to get in the transaction so you are not surprised. 

Part of great leadership is minimizing the surprise and reducing uncertainty. It’s to make sure people get comfortable with change management.

Driving Change 

If you draw the continuum of change, you will have people who:

  • Hates change
  • Avoids change 
  • Dislikes change  
  • Tolerates change 
  • Accepts change 
  • Enjoys change 
  • Thrives on change
  • Creates change

And from a leadership and change management standpoint, you have to ask yourself, am I reacting to change, or am I creating the change? I personally can’t picture Steve Jobs or Bill Gates in a conference room and talking about how they're going to react to what other people are doing.

Leaders need to figure out how to create change and deal with the fact that sometimes, it’s going to fail. And what’s funny is, most people are worried they can’t get their people to be innovative. But as it turns out, the last three people who took a big risk and failed have been fired from the company. 

So why would anyone try and innovate when there is a risk of getting fired after they fail.

A big part of leadership is continuous people development. I have an obligation as a leader, at whatever level, to develop the people under me to their full potential.  So you have to find and help the people who are motivated and ready to go. 

Now, the people that aren't, you have to figure out if you can work with them, if they can get better at what you’re trying to do, or are they misplaced. They can be great people but are in the wrong role. 

Leaders should be able to evaluate every person’s strengths and weaknesses, and if they’re really slowing things down, you need to move them out of the way. 

Feedback

Oftentimes, people confuse feedback. Most companies have that form in human resources and once a year they sit down with people and talk about it. That has nothing to do with what I'm talking about. 

When I say the word feedback, it stands for open, honest, continuous, transparent feedback.

I have a moral responsibility to help you understand what you're good at, what are the things you need to improve on, and what I can do to help you reach your full potential. 

And how do you know if you are good at feedback? It's actually very simple. If I'm good at feedback, I will never surprise you, because it’s an ongoing constant development of you.

Middle Management Alignment

I'll start at the top. If I'm the overall leader, I will set clear directions, and hold you accountable and its consequences.

I have to be looking down far enough that I can't just assume that what I tell 10 people is really going to happen. You have to cut through the layers from the top. 

And for the lower level, you have to learn the ability to lead up. It’s about driving change to the upper management even if you are in the lower rankings. If your leaders are doing something wrong, then you have got to find a way to change that. 

And it’s all about your ability to relate. If you can relate with your leader, the better the communication will be. If your leader refuses to listen to you, then you can convince someone higher than you, to communicate with that leader. 

If it still doesn’t work out, I’m going to the leader’s boss. And I have two rules on this one.

  1. I don't go to the boss without letting the leader know I'm doing it. 
  2. There's nothing that we’re going to talk about that I haven't talked about with the leader. 

I’m not afraid to get fired. Because If I am wrong, then clearly don’t understand anything about the company, and I don’t deserve to be there in the first place. 

I personally have done this in real life where I talked directly to the CEO of Baxter as a new employee because I didn’t support the acquisition. I came up with a $50 million valuation and they were willing to pay double so I decided to take matters into my own hands. The CEO agreed with me and changed their offer. 

How to Foster Lead Up Mentality

Even if you like your job and your role, we often get frustrated. And I've noticed that what usually causes frustration is making assumptions. So I decided many years ago to get out of the assumption business. Here is my four-step model:

  1. Set clear expectations
  2. Communicate the expectations at least three times. 
  3. Hold people accountable 
  4. Establish consequences.

And what I often tell my team members is, they are expected to challenge me. If you don't challenge me, there's going to be a problem whether you're going to stay in this job or not. Because leaders don’t need to be right, they’re trying to do the right thing.

Most people at the top of organizations don’t purposely do stupid things. It happens because they make the assumptions that people are going to challenge them. If I said I want to do one thing, my people should tell me if I’m wrong. I’m not paying them a lot of money just to say yes to what I say. 

But if they haven't set the framework to allow people to do it, and they haven't watched the people who challenged become successful, nobody's going to do it.

The biggest lesson I learned over time is that the very few people who tell people respectfully exactly what they think have an enormous competitive advantage. Because the reality is, no one likes dishonest people. 

And if your leaders are not listening to you, then it’s better if you leave the company anyway. Why would you want to be in an organization that purposely does stupid things? 

Influence

If I can relate to each person on the team, their ability to let me influence them goes up exponentially. And where I find the major problem is people truly do not take the time to really relate. 

You have to know your people on a personal level so you can relate to what they are going through outside of work. Because oftentimes, personal lives affect work. If you can understand each person in your team, they will do anything for you. 

Personally, the fact that I was the CFO of a $13 billion company, people think I’m a really bright guy. But the truth is, I was never that great. But I had three really good things going for me. 

  1. I took the time to get to know everybody. And I mean everybody. Including the people in the cafeteria and the maintenance people. 
  2. As a result of getting to know everybody Kison, I was able to figure out who are the really good people. 
  3. No matter what position I was in, I made sure, to the best of my ability, to create an environment where everybody wanted to work for me.

It all starts with relating to people. And it’s not just words. I will demonstrate to you how much I care about you. You have to remember that nobody cares what you say until they see how you treat people. 

Until they see how much you care. I don't think you're going to run a very successful organization. And that has to do with the more change management you have, the more uncertainty you have, you better create an environment where there's a lot of trust so people feel that they can really relate to you. 

How to Drive Change

At the end of the day, you can't relate to people unless you're with them. So this is going to be more difficult during international deals, especially with the whole COVID thing now. But if you're buying a company in Belgium, you better be in Belgium. 

And whether you like to drink or not, you better be there. You can hold one beer for four hours, but you were there and you're with them and you relate to them. 

Also, I would never visit a country and get off the airplane in Brussels without knowing the history, the religion, the politics, the style, and the way people work. If you’re in that country, I want to demonstrate to you that I respect and care, and relate to how you operate. 

Then you can start driving change by setting the expectations, getting feedback, and taking questions in. I really believe that your ability to understand relate uniquely to wherever you are is very important.

So before I allow you to get involved in international acquisitions, I'm going to test you. I'm going to train you. I'm going to try to develop you. And if it turns out in a very open, honest way, you're not capable of that. Then we'll put you in a job that you don't have to deal with it. 

Assess Target’s Leadership

I assess the target’s leadership style and culture based on the chemistry of their team. When we’re doing a diligence review, and he’s with his top seven people, I’m very anxious to see how they work together. 

Does he have to be the answer man? Does he have to be the smartest person in the room? When that person leaves the room, are all his guys silent because they can’t talk without him? There’s no way we're buying that company.

We're not buying a person, we're buying a team. And how well these people work together and how well they relate to the other members of the team is very important. 

Do their team keeps things simple? Do they have a sense of humor? I love to take them out to lunch or dinner because and I am dying to watch how they treat the waitress. 

So I'd rather find out these things before we buy the company. And that's why there's going to be a lot of due diligence meetings. It's going to be a lot of lunches and dinners. And I want to meet as many people as I possibly can.


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