How New Heights Health Centres and York Community Services minimized culture risk when forming Unison Health & Community Services
December 12, 2011
By Jeff Chan

There are many steps necessary for a successful merger or acquisition, including the strategic rationale, conducting rigorous due diligence, not over-paying and capturing the planned revenue and cost synergies. Bridging the culture gap between the organizations is the one most often overlooked and under-valued. The 2010 merger of New Heights Community Health Centres and York Community Services in Toronto Canada, to form Unison Health and Community Services, was one in which the boards and executive leaders identified and considered corporate culture as an explicit success factor in their planned merger. More importantly they utilized cultural assessment tools such as employee engagement surveys and focus groups in pre-merger planning and post-merger integration.  Eighteen months after approval, the new entity can be considered an unqualified success based on financial, operational, customer satisfaction and employee engagement measures.  Culture’s role in that success, and the lessons learned, are the focus of this article.

INTRODUCTION

Much has been written about the failures of mergers, acquisitions and other forms of organizational and business combinations, and, consequently, how to get things right, ensuring the merger creates value for shareholders or other stakeholders.

Since most transactions attracting interest have occurred in the private sector, attention has focused on the financial aspects of success – revenue growth, cost reductions, and shareholder value creation – and consequently, the financially-driven causes of merger failures. Lost in the shuffle is the very real challenge posed by different or clashing corporate cultures, in particular, how to assess the relevant cultural differences and use them as a basis for pre-merger planning and post-merger integration.

From Hermann Hesse (Human life is reduced to real suffering only when…two cultures…overlap), to Peter Drucker (Culture eats strategy for breakfast) to Herb Kelleher of Southwest Airlines (Culture is the most important focal point for leaders) and Lou Gerstner, former CEO of IBM (The thing I have learned at IBM is that culture is everything), important thought and business leaders have recognized culture is an essential consideration, perhaps even more important than strategy to success.

MERGERS AND ACQUISITIONS FAIL MORE OFTEN THAN THEY SUCCEED

 Why Mergers Fail

Achieving success in a merger or acquisition is difficult. Literature documenting a litany of dismal failure abounds.  McKinsey & Company’s Scott Christofferson, Bob McNish and Diane Silas pointed out a primary cause of these failures, observing, “The average acquirer materially overestimates the synergies a merger will yield. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and, often, the stimulating effect of the combination on the individual companies. However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble.”^[1]

Since accurate information to bolster these estimates may be sorely lacking in the early pre-merger period, and more so with a hostile takeover, even the most experienced corporate M&A specialists can fail to properly assess the synergy potential. In a similar vein, as the excitement of the chase accelerates, the difficulties in implementing the merger and the time it may take to capture the synergies are often minimized, resulting in unrealistic plans and timetables.

The most common synergy value error according to Christofferson, McNish and Silas is in revenue increase projections. While top-line growth is the most common rationale for mergers and acquisitions, almost 70 percent of the mergers in their database failed to meet revenue expectations and more than one quarter didn’t achieve even one-half of revenue synergy goals.

A 2001 McKinsey study by Matthias Bekier, Anna Bogardus and Tim Oldham^[2] found similar results. Of 160 acquisitions completed by 157 publicly traded companies in 1995-1996, only 12 percent managed significant growth acceleration in the first three years.

Both McKinsey studies focused on revenue growth as a key driver for the deal. What of the cost reduction opportunities from greater scale and elimination of redundancies?  Referring to a study by Haarmann Hemmelrath Management Consultants^[3], Bekier, Bogardus and Oldham found that up to 40 percent of mergers fail to meet their cost synergy goals. So even if the cost saving opportunities seem more concrete and achievable, capturing them is difficult.

KPMG tracks the performance of international M&A transactions in bi-annual surveys^[4]. Even with the greater attention on the causes of failure, the percentage of deals that have reduced value has increased in the last four years (2010 vs. 2006) from 26 to 32 percent. In the most recent study period, only 31 percent of the deals managed to enhance value, 37 percent were value-neutral, and the afore-mentioned 32 percent destroyed value.

While the principal reason for failure in the KPMG study mirrored the McKinsey studies – overestimating the revenue synergies achievable – one other factor from the 2008 version of their study is notable. Survey respondents rate cultural differences the third most-cited post-merger challenge.   While this was partly driven by the increasing number of cross-border transactions, corporate culture differences within a similar geographic location were also an issue. KPMG’s advice to companies: “Rather than blaming cultural differences for problems experienced during post deal integration, organizations should pre-empt these issues. By identifying and analyzing cultural variances upfront and addressing potential hot spots early on, companies can begin to forge a workable, if not fully common culture quickly, post-deal.” In the 2011 study, “More focus on cultural issues” was the fourth most cited improvement that respondents suggested should be done.

 With the odds against success so high, one wonders why any organization would consider a merger or acquisition! On paper at least, there are many good reasons, providing the deals are executed properly and expected synergies captured. According to companies in KPMG’s “A New Dawn” study the key reasons to consider acquisitions or mergers are to grow market share and geographic presence.  Indeed, five of the nine most frequently cited reasons for initiating mergers or acquisitions relate to growth (69 percent). Achieving cost synergies only accounted for 10 percent, ranking fourth on the list of objectives.

Ensuring a Successful Strategy for Public Sector Mergers

Public sector and healthcare mergers rarely attract business media attention the way major corporate transactions often do.  They do, however, often attract a lot of mass media attention, due to their potential impact on individuals, and with healthcare, due to people’s personal interest in their local provider.

Public sector mergers are also financially driven, but are far less likely related to revenue and profit growth. More common is the desire to achieve lower operating expenses and capital expenditures through plans for eliminating duplication and redundancies in management, technology, infrastructure and other overhead.  In healthcare, frequently stated objectives include lower costs per patient, better patient flow, the spreading of fixed costs over more beds and patients, price reductions from higher volume purchases and application of best practices such as better purchasing processes and lean manufacturing concepts.  Additional resources applied to improved patient care, reduced calls on government funding and lower public and private health insurance costs are other objectives.

A 2011 KPMG study^[5] of global healthcare mergers identified the most frequently reported reasons to merge. This chart shows the distinct differences in the merger rationale in healthcare versus the private sector.

Both private and public sector entities must have a sound strategy beyond just getting bigger.  In other words, merging or acquiring simply to grow assets or revenue is insufficient.  Without sound strategic rationale, the deal is bound to fail.  But strategy is not the only consideration; equal attention must be put on implementation.

To ensure the merger or acquisition is successfully implemented, three key steps must be taken:

1. Prioritize change management starting with the merger’s rationale – Articulate the merger’s rationale and expected benefits. Ensure staff understands plan details and how it will affect them.  Encourage involvement in implementation planning. Identify the pivotal jobs – often front-line staff – to obtain their support and reduce resistance to change. Choose “change champions” to partner with the merger integration team and influence and motivate their colleagues.
2. Plan for both the pre-merger activities and the post-merger integration – Carry out robust due diligence to verify the fact-base supporting the merger and identify risks and additional opportunities. Do not get caught up in the excitement – if risks and costs outweigh potential benefits, walk away. Be patient. Mergers are challenging and integration won’t happen quickly. Act on urgent short-term issues so resistance is forestalled and momentum built.
3. Develop the organization and new culture – Beyond the formal organizational structure, ensure the new culture is in place and reinforced by the appointment of the right people in key positions. Use the most engaged staff to help assimilate others into the mix and to support the merger. Use every opportunity to mix members of the merging organizations in cross-unit teams and task forces.  Identify and appoint a new CEO and leadership team early in the process. This should indicate a break from the past, signal a new direction and eliminate or reduce indecision and conflicting interests. The balance of this article focuses on this third step.

THE CULTURE GAP

While cultural differences  have been identified as an M&A challenge, knowing that culture is a potential problem and knowing what to do about it  are two different matters.

What is Culture?

Corporate culture is a general social understanding that includes beliefs, assumptions, values and perspectives shared by an organization’s members.  In turn, it affects behavior within the organization in areas such as management style and ethics. Standards in dress codes, reaction to changes, and work environment would fall under the corporate culture umbrella.  At core, corporate culture is the way people get things done in the organization.

Corporate culture is often embodied in the personalities of  its top leaders, especially founders such as Bill Hewlett and Dave Packard of HP (described in their “HP Way”), the late Steve Jobs at Apple, Bill Gates at Microsoft, and in Canada, the late Ted Rogers, founder of Rogers Communications.

Many frameworks or models help identify and understand organizational cultures.  There is no right or wrong culture. But it must be one that will both fit an organizations needs at a particular time or stage in its evolution – and the one that fits the types of people the organization needs to accomplish its strategy.

Although employee engagement is not intended to substitute for organizational culture, it does measure how employees respond to the culture and other more physical elements of their work environment. As the following chart using TalentMap’s 12 employee engagement dimensions shows, it does align well with the four common dimensions of culture described by Nathalie Delobbe, Robert Haccoum and Christian Vandenberghe^[6] and thus can be used as a proxy for culture without introducing a new survey tool.

On this basis, the method used to assess culture in the Unison merger was a combination of results from the employee engagement surveys completed at the two organizations prior to their merger (both using  the TalentMap TalentGage survey), focus groups and surveys  following the announcement of a possible merger, and the Boards’ and management’s informal culture assessment.

Culture as a Success Factor in M&A

There are numerous studies describing how corporate culture can affect a merger‘s success.

In a frequently cited book entitled “Managing Mergers, Acquisitions and Strategic Alliances”^[7], Susan Cartwright and Cary Cooper say “people factors” are the forgotten contributors to M&A failures. They refer to a study by the UK’s Chartered Management Institute, which identified “underestimating the difficulties of merging two cultures” as the top ranked reason of nine identified^[8].

In studies described in “Mergers: Leadership, Performance & Corporate Health”^[9], David Fubini, Colin Price and Maurizio Zollo found that the national and organizational cultural distance between merger partners does not materially affect performance of the merged entity. Rather, the cultural aspects of the acquiring or leading partner in the merger are far more important than the traits of the acquired company or junior partner. The traits that matter the most – that correlate most strongly with merger performance – are the acquirer’s performance orientation, tolerance for risk and tolerance for diversity. They did identify more recent advances made by successful acquirers. They said “sophisticated integrators (1) identify strategic risks related to culture, (2) rigorously diagnose relative cultural strengths, and (3) factor culture into their integration planning.”

Two high profile case studies – one from the private sector, one from healthcare – illustrate how culture has affected the fortunes of merger partners.

Daimler-Benz–Chrysler

In 1998, Daimler-Benz and Chrysler Corporation united to form DaimlerChrysler.^[10] Pre-merger, Chrysler was the highest performing US auto company with a focus on low and medium cost cars and trucks. But it only boasted a 2 percent market share in Europe and far less scale than CEO Bob Eaton’s requirement.

Daimler-Benz on the other hand was primarily a high-cost luxury vehicle provider with only a 1 percent market share in the US. A merger offered economies of scale and a partnership with a very profitable company ($2.8 billion net income) with low design cost, an extensive US dealer network, and a cash hoard of $7.5 billion. On paper, this seemed the ideal corporate marriage.

The last thing on the minds of executives at Daimler and Chrysler was that a corporate culture clash could derail the business benefits of the deal. Despite the strategic rationale, numerous, and deeply-felt cultural differences asserted themselves post-merger. Many dated back to the automakers’ historical competition and led to uncooperative behaviour and poor or no communications between management groups.

Because Daimler management was against a fully integrated merger, the two organizations and senior management groups were never forced to come together. Nor was a new culture created to replace the two competing ones. This failure, along with the departure of key Chrysler executives, meant cost, efficiency and revenue synergies never materialized, and stronger competition (from Honda, Toyota, Ford and GM) eroded Chrysler’s market share.

In 2001, three years post-merger, the Chrysler Group was on track to lose $3 billion, and its market share had shrunk from 23 percent to 16 percent. Meanwhile, DaimlerChrysler’s market capitalization had dropped to $44 billion from $100 billion at the time of the merger. In 2007, Daimler agreed to pay Cerberus Capital Management to dump the money-losing Chrysler unit for which it paid $37 billion nine years earlier. (In 2009, Chrysler was acquired by Fiat after its bankruptcy and takeover by the US government.)

Women’s College Hospital-Toronto General Hospital – Sunnybrook Hospital

Historical Underpinnings of the Women’s College Hospital Culture

The original founders of the Ontario Women’s Medical College were led by Dr. Emily Stowe, a suffragist and the first woman licensed to practice medicine in Canada. At a June 1883 meeting held at the Toronto Women’s Suffrage Club she gained support to start a new medical school for women, which opened just four months later.  In order for students to gain practical clinical experience, a clinic called The Dispensary was opened in Toronto in 1898. It also filled a social void in the community by enabling female patients to obtain the unique services of women doctors in a field dominated by men. The school closed in 1906 after the University of Toronto Medical School decided to allow women to enrol, although the dispensary continued to operate.  In 1909, a group of prominent Toronto women formed the Women’s College Hospital Committee. They sought to develop a hospital and amalgamate it with the dispensary. This goal was achieved in 1911. The committee was transformed into the hospital’s board of governors, and the medical institution was incorporated as Women’s College Hospital and Dispensary in 1913.

The Fight Over Merging

In 1989 following years of deficit financing and the spectre of closure, the Women’s College Hospital’s Board voted to pursue a merger with the larger Toronto Hospital. The hospital’s staff opposed the merger, and the “Friends of Women’s College Hospital” group was formed to contest it. The “Friends” group shared an activist feminist leaning with the original founders of the Ontario Women’s Medical College^[11].

Instead of fighting the merger on the government’s terms, focusing on finances and operational consolidation, the “Friends” shifted to a more emotional fight over women’s rights, the need to ensure specialized healthcare for women and to preserve the legacy of the founders. Before the formal vote could be taken on the merger, the Board and CEO resigned, and members of the Friends group took over the Board. The final shareholders’ merger vote was easily defeated 648-52.

Finally a Merger

Six years later, the newly elected Conservative government in Ontario created the Hospital Services Restructuring Commission. It was empowered to close 12 of 44 hospitals in order to eliminate $12 billion in annual hospital expenses. The Commission recommended the closure of Women’s College, with its in-patient services moved several kilometres away to Sunnybrook Health Science Centre.   The hospital’s Board and the still active “Friends” group was able to put enough pressure on the HSRC to keep its doors open, but the battle to keep Women’s College Hospital independent and autonomous was lost.  Discussions to seek out a voluntary alliance with Wellesley Hospital, another institution threatened with closure were held, but the government had its way. In June 1998, the Ontario government passed legislation creating Sunnybrook and Women’s College Health Sciences Centre from the amalgamation of three formerly stand-alone institutions: Sunnybrook Health Science Centre, Women’s College Hospital, and Orthopaedic and Arthritic Hospital.

Then a De-Merger

Over the next eight years, opponents of the merger did not let up. They were adamant that the historic focus of Women’s College should be reinstated and the hospitals separated. They made it a provincial election campaign, not just a hospital restructuring issue, based on the broader feminist agenda, according to the author of a study on the hospital restructuring process.^[12] Liberal Leader Dalton McGuinty made a campaign promise to demerge the hospitals. After the election, the new premier followed through, albeit with the unexpected wrinkle of having the Obstetrics unit stay at Sunnybrook. The “New Women’s College Hospital” became an independently governed public hospital on April 1, 2006, thus unwinding the merger mandated by the previous government.

In retrospect, the resistance to merging (and the resulting loss of autonomy and independence) at Women’s College dates all the way back to it founding. Even a cursory examination of the culture gap between the two hospitals in the first merger attempt, and again in the merger with Sunnybrook, would have resulted in a fatal prognosis.

THE HEALTHCARE ENVIRONMENT

 Canada’s healthcare environment

The Canadian healthcare landscape is under unprecedented pressure.  First, provincial governments are struggling with their two biggest budget items – education and healthcare – while faced with increasing needs elsewhere, and a desire to avoid tax increases.  Second, the aging population has created a whole new category of age-related illnesses. Cases of diabetes, for example, are on the rise, the aging healthcare infrastructure continues to crumble, and Canadians are increasing their demand for better patient care.

Cost savings at the local site or hospital have been achieved. But system-wide inefficiencies caused by the multiplicity of types and numbers of care providers – from sole practitioner offices,  to family health clinics and teaching and research hospitals – and the duplication of physical assets, information technology systems, and specialist and management positions create unsustainable levels of cost, efficiency and effectiveness. Hospitals, as the largest providers, have had much difficulty balancing budgets. In Ontario, the Ministry of Health and Long-term Care has had to replace hospital boards and CEOs with provincial supervisors (e.g., Ottawa Hospital, Kingston General Hospital, Windsor’s Hotel Dieu Grace Hospital and in the nineteenth instance since 1981, the Niagara Health System).

While these issues are well recognized, the solutions are not always clear nor universally supported. For example, as far back as 1996-2000, the Health Services Restructuring Commission in Ontario recommended the amalgamation of numerous hospitals province-wide, and the restructuring of other health services. Benefits would have included not only cost savings, but better access, greater operational efficiency and improved quality of patient care. Not all have taken place, such as the recommended integration in Kingston, Ontario of Hôtel Dieu Hospital, Kingston General Hospital and Providence Continuing Care Centre. That merger continues to be stymied (to the extent of a Supreme Court challenge to the amalgamation) by the board of the HDH, who oppose practices at KGH that are at odds with the Catholic faith,  even though the hospitals  share numerous services and staff and are only 1.6 km apart. [Note: In 2015 the Boards of KGH and HDH finally agreed to a friendly merger which is being implemented in 2016.]

Community Health Centres

An increasing component of the provider landscape in Ontario are incorporated Community-governed Health Centres (CHC’s) that are non-profit and publicly accountable. They are funded primarily through accountability agreements with the Local Health Integration Networks.  Members include clients, residents, community leaders, members of the business community, and health and social service providers. CHCs are rooted in a care model that provides comprehensive primary care services, delivered by interdisciplinary teams of professionals practicing within a health promotion framework. More than 73 CHC’s operate in Ontario.

A fundamental strength of CHCs is their history of health care that is integrated with other social and health services partnerships and focused on local needs as determined by the community. CHCs grow in communities by encouraging the participation and involvement of individuals in decision-making about their health care and that of their communities.

Ontario – the LHSIA and other regulatory changes

In March 2006, the government of Ontario passed historic health care legislation. The Local Health System Integration Act changed the way Ontario’s health care system is managed by creating 14 Local Health Integration Networks (LHINs).   LHINs are required to enter into service accountability agreements with service providers including not only hospitals and Long-Term Care facilities, but also CHCs. They facilitate integration by, among other things, requiring service providers to develop strategies to integrate services and to comply with LHIN decisions on integrating services.

The term “integration” encompasses a range of activities, from program based partnerships, front-office integration, shared service agreements and back-office integration, to all-encompassing corporate mergers.  While partnerships are common among community based service providers corporate mergers are not.  For many community based organizations and CHCs, mergers are perceived as signifying a shift away from the values and principles of community based models of care. While this may be an outcome, it is more likely to be the result of management and Board decisions on how the merged organization will operate, and not due to the merger itself.

A MERGER IS BORN – THE UNISON CASE

Through its initial Integrated Health Services Plan (IHSP), the Toronto Central LHIN had identified a vision of integrated health services. It aims to achieve system efficiencies through overhead and service integration while balancing budgets and allocating resources to ensure affordable cost structure and to optimize health system capital and infrastructure.

It was commonly understood that with more than 200 service providers, the LHIN was looking to the service providers to take the initiative and demonstrate through their activities alignment with, and support for, the LHIN’s priorities. It is within this context that the New Heights Community Health Centres and York Community Services contemplated merging in 2009-2010.

Unison Health and Community Services (Unison) was formally established on July 1st, 2010. With more than 200 staff, Unison now serves over 12,000 clients from four main locations. Unison’s mission reflects its new integrated form: “Working together to deliver accessible and high quality health and community services that are integrated, respond to needs, build on strengths and inspire change”.

Motivation to Merge

In 2008, the New Heights Community Health Centre (NH) board of directors was undertaking a strategic planning process aimed at enhanced organizational effectiveness and efficiency. The Board recognized that the external environment at the time, with its focus on service integration, provided opportunities for the CHC to pursue strategic and operational goals while also becoming a leader in integration.

Early the following year, the NH Board began work to realize its strategic priorities and enlisted the support of an external consultant to explore integration options.  It decided that a merger was the best option, based on the significant growth it needed to achieve back-office organizational efficiencies and have a broader service and policy impact.

The NH Board spelled out the potential outcomes of a successful merger including increased availability of  primary health care and community services; better economies of scale and reduced costs; success as recognized by partners and the Toronto Central LHIN (metrics to include risk avoidance, sustained or increased service volumes, no labour unrest, reduced administrative costs); staff support for the merger and post-merger retention of front-line staff; shared values that people bring to work, and a combined budget in line with benchmarks to increase capacity in HR, procurement, IT, decision support, and fundraising.

 Merger Partner Selection

Having reached this decision, the NH Board of directors determined that for both practical and strategic reasons the preferred merger partner would need to be funded by, and located in, the same LHIN (Toronto Central).  With 200 LHIN funded organizations as potential merger partners, additional criteria were identified to narrow the search. Long-term care and supportive housing providers would not be considered; organizations in close proximity were preferable; the merger partner would need to bring infrastructure capacity; organizations with a budget comparable to NH were preferred, and; complementary services and alignment in values were mandatory. An implicit consideration was the potential partner’s quality of the talent, culture and performance ethic, although this was not published at the time. Applying these criteria against the list of LHIN funded agencies, the Board of directors ultimately identified York Community Services as potential merger partner.

 In September 2009, NH approached YCS to begin discussions on possible integration activities, including a possible merger. Coincidently, the YCS board of directors had just completed a strategic planning process of its own. YCS recognized that significant operational improvements were required to achieve organizational service delivery targets and address staff recruitment and retention issues.

The two organizations served geographic catchments that overlapped and included three of Toronto neighbourhoods with especially high needs and limited services. Each offered complementary services with the potential to increase the diversity of services across all communities. For example, YCS offered a legal aid clinic and NH offered a “Pathways to Education” program aimed at keeping kids in school. Both organizations offered Primary Health Care as a core service and were also building satellite health centres and community hubs.

Due Diligence

One month after discussions began, both boards of directors agreed to investigate how well suited the organizations were as merger partners. The following were agreed-upon objectives that motivated both boards to explore the merger, and were similar to the outcomes previously listed by the NH board.  “The merger:

• will improve programs and services delivered to each of the communities (and allow for growth in programs and services);
• will improve the efficiency of the organization and/or improve organizational capacity by (reducing costs in targeted areas and) creating opportunities for re-investment;
• must not adversely affect the programs and services (in terms of client access or quality); and
• will result in a stronger voice for the organization.”[13]

To manage risks related to staff and stakeholder relations, the boards agreed on a short timeline for reaching the decision to merge. In December, the boards met together for the first time to collectively articulate a common understanding of why a merger was being considered. They agreed upon these as mutual outcomes and benefits from a merger^[14]:

• Improve and increase services delivered to the community;
• Generate efficiencies and opportunities to strengthen organizational capacity; and
• Gain a stronger voice in the provision of health and social services for marginalized populations in Toronto’s West End.

 The two board working groups then formed a joint working group which met bi- weekly to determine areas of agreement and areas for discussion/resolution.  Having decided to work together to verify the merits of the merger, and to plan for the merger integration, the boards and senior management laid out an accelerated work plan to get to a decision point. The work plan’s key components were:

• Employee engagement – staff and management focus groups and surveys; a meeting with the union; weekly communications with staff, and monthly communications with partners and other community stakeholders
• Community engagement – meetings with the members; Q & A and comment cards for clients and program users
• LHIN engagement – board meetings and regular correspondence with the LHIN
• Board engagement – monthly meetings and retreats for the Boards as a whole; additional meetings as required; weekly meetings of the Working Groups; regular e-mail communication; development of a new governance structure
• Due diligence – each organization reviewed the other’s management information (financial, legal, technology, human resources and labour relations, facilities)

The boards jointly identified a list of pre- and post-merger guiding principles:

• Begin with a position of trust and collaboration and promote mutual transparency on all issues
• Maintain a collaborative approach and be open to learning and sharing about each other’s strengths
• Focus on longer-term client outcomes and experiences but ensure proper focus on the process as much as the outcome
• Value staff throughout the process

A key decision made was to select the merged organization’s CEO prior to the merger approval to allay staff concerns at both organizations and ensure business continuity. In selecting the CEO, the boards considered the candidates not only in terms of their operational and management abilities, but also on their vision and alignment with the success factors identified by the joint working group. That CEO was the Executive Director of New Heights, Andrea Cohen, who became the standard bearer for the Boards’ decisions and the key focal point for communications to both organizations on the merger plans and progress.

By February 2010, the organizations had reached an agreement to merge; by April 2010 both the Toronto Central LHIN and corporate memberships had voted to approve it.  It was from this date, versus the formal merger date of July 1, that the two organizations began the process of integration. Within the first 120 days, a new organizational name and brand as well as mission, vision, values and operational plan of the new organization were developed. The board of directors of the new organization, Unison Health and Community Services, met for the first time on September 2010.

THE NEW HEIGHTS AND YORK CULTURES

Early in the process, it was clear there were major cultural differences between the organizations. Traditional thinking saw that as an impediment to a successful merger, as it had at DaimlerChrysler. However, a thorough understanding of those differences could be used as a foundation for more effective communications and integration activities. For the YCS staff in particular, the differences in culture could be the incentive needed to overcome the fear of change.

Three sources of data were examined to gain a thorough understanding of culture differences.  First were the results of two Employee Engagement surveys conducted by TalentMap^[15] at New Heights in November 2008 and YCS in March 2009.  Secondly, a series of focus groups and anonymous surveys conducted at both organizations. They were part of the due diligence process that examined how staff and management groups, and in York’s instance, the union, viewed the proposed merger.  Finally, the more anecdotal observations that the two boards and management groups had previously made, and continued to make as the merger discussions progressed.

The three data sets underlined significant differences in the two work forces, in terms of their demographics (age, service, gender), their levels of engagement, how employees rated 12 engagement dimensions and what managers and staff were excited and worried about with respect to the merger.

Key cultural differences identified at NH and YCS, and how they were used, are as follows:

From the TalentMap surveys:

• Age and company service demographics at York leaned heavily toward an older work force with longer tenure. Some discussion took place as to the Gen X and Y versus Baby Boomer differences. A decision to use as many types of communications vehicles as possible, versus catering to the most prevalent demographic segments, was made.
• The strongest drivers of engagement^[16] in the two organizations were different. At New Heights, the top three drivers were Innovation, Teamwork and Management; at York, they were Work/Life Balance, Work Environment and Professional Growth. By knowing these different sensitivities in the two work groups enabled the merger integration team to understand the needs, wants, fears and motivators of each group, and customize management approaches.
• The overall engagement score was much higher at New Heights (83%)^[17] than York (67%), signifying that the New Heights staff could be a strong ally if the future at Unison looked to be more similar to the NH past than the York past. They would be the ambassadors to the York employees.
• Scores on all twelve TalentMap survey dimensions differed between NH and YCS. Both had Work Environment as the highest score. The next highest dimensions at New Heights were Innovation and the Executive Director’s Leadership, while at York, they were Work/Life Balance and Professional Growth. A key to gaining the support of the New Heights staff was to reinforce the desire to maintain Innovation as a key part of the culture of the new organization (Unison) and to keep the existing Executive Director in place as the CEO of the new organization. For York staff, the merger would create more professional growth opportunities, although it was made clear that part of the new culture would be a stronger performance ethic than that to which they were accustomed. This would not necessarily result in an improved Work/Life balance.
• The TalentMap employee engagement scores for the 12 dimensions are shown below. The largest gaps in favour of New Heights (Teamwork; Organizational Vision; Information & Communication) show some of the advantages in creating a new Unison culture around some of New Heights’ strengths.
• Compensation and Information & Communications had the lowest scores in both organizations. Although Compensation was a weak driver of engagement, the fact that New Heights had a higher level of compensation than the unionized YCS had a positive contribution to the post-merger union vote, which was ultimately decided in favour of having no union at Unison. Information and Communications was a stronger driver of engagement. The decision was made to significantly increase the frequency, comprehensiveness and transparency of all communications pertaining to the merger’s progress and how it would affect people, their jobs and the organization.

From the focus groups:

Focus groups and anonymous surveys were conducted following the merger announcement to identify issues that both excited and worried staff and managers.  Commonalities existed but the distinct differences between the New Heights and York employees and managers allowed the merger team to focus on potential sources of resistance, as well as more powerful motivators in their planning and communications. With job loss a common concern at NH and YCS, the decision to limit any layoffs to management positions gained much staff support, although job loss remained, of course, an issue for managers.

From Board and management observations:

Almost from the beginning, the New Heights Board was concerned about several aspects of the York organizational climate and culture.  For example, YCS was unionized, NH was not. The culture at YCS had become very fragile – some would characterize it as battered – and professional turnover was high. YCS’s labour relations environment was contentious, with 25 unresolved grievances, two pending arbitration cases and a history of difficult contract negotiations. While the nature of the YCS culture was viewed as a high risk to the NH Board, this became a positive factor in gaining the support of the YCS staff and managers who sought an improvement.

On a positive note, the York employees enjoyed a good work/life balance and worked only normal office hours. On the other hand, the culture had no rigorous performance element York’s senior leadership only had a 62% favourable score and 20% unfavourable score in their latest TalentMap survey. Perhaps as a result of their views on management, the York employees were extremely worried about losing their union, perceived as protection from management – if the merger occurred.

The New Heights situation was rather different.  There had been excellent results from the most recent employee engagement survey, staff and managers were proud of their organization, and the Executive Director was highly respected. In fact, the 2008 engagement survey showed her with a remarkable 81 percent favourable / 1 percent unfavourable rating.    (York did not have the same question in its survey.) The NH workforce was non-unionized, and enjoyed a slightly higher level of compensation than the York employees. The NH staff and managers had an opportunity to ‘show off’ their culture, and took pride in creating the new organization. This was also the first merger of CHCs in the province; there was a sense of pioneering and innovation.

Based on this information, and other factors, the Boards decided to appoint the New Heights Executive Director as Unison’s inaugural CEO. This alleviated some of the fears of negative change on the part of NH staff, and created optimism at York that positive changes would emerge from the merger. The union status at York created, in the short-term, an extra need for communication with the union, but also created an unstated objective of the merger – to provide conditions to support a non-unionized workplace for all staff at Unison. The pride that New Heights staff had in their organization became the basis for a series of open houses designed to expose York staff to a more positive work environment.

What had been learned about the two cultures was applied to build and brand a new vision. It began with employee participation in choosing a new name. A point was made to overemphasize people issues; prioritize change management and follow a cultural transition strategy; celebrate successes in change, innovation and growth to reinforce their importance; commit to creating something greater at Unison than either New Heights or York could achieve independently; and empower employees in decision making and involvement through joint integration teams and multiple communications events and vehicles.

THE RESULTS

As of October 2011, eighteen months after the merger, the results are in. By the following  measures, it has been an unqualified success:

 Financial: Combined expense budget on plan

• Timetable: Merger implemented on schedule
• Service metrics: Six out of 6 performance indicators in the year ending March 31, 2011 improved over the pre-merger base, and met or exceeded the first year’s post-merger targets.

1. Client Service per Physician FTE at Keele-Rogers (KR) site (former York Community Services site).
2. Service provision to clients through interdisciplinary care.
3. Number of patients receiving primary care service delivery at the Lawrence Heights and Keele-Rogers sites.
4. Capacity to provide primary care services for key clinicians at the Lawrence Heights and Keele-Rogers sites.
5. Registered patients with a Mental Health condition at the Lawrence Heights and Keele-Rogers sites.
6. Overall Client Satisfaction at the former NH and YCS sites.

• Client Satisfaction: 71 percent of respondents in the 2011 client satisfaction survey agreed the merger had an overall positive impact on programs and services.
• Employee engagement: Overall employee engagement scores at Unison (86 percent favourable) exceeded the pre-merger scores at YCS (67 percent and NH (83 percent), despite the expectation that the resulting engagement level would be a blend of the two organizations – a drop from the New Heights score and a potential increase at York, and would be negatively affected by the high amount of change. The fact that Organization Vision and Senior Management popped up as the top two drivers of engagement reflects the extra attention placed on defining and communicating the vision for the new organization, the appointment of the CEO both staff groups preferred and the retention of the New Heights executive team in key Unison roles. The Unison engagement score is 5 percent higher than TalentMap’s benchmark of 16 Ontario CHC’s.

KEY SUCCESS FACTORS

Three key factors contributed to the merger’s success:

1. It was voluntary: The pressures in the environment created the proverbial “burning platform” to encourage change and seek a new organizational paradigm. Both parties saw the mutual benefits of a merger and had progressive boards committed to making it work. They also saw the difficulties implementing hospital mergers mandated by the Provincial government and were eager to avoid them.

2. It adhered to a deliberate process: A comprehensive plan including a solid due diligence process with firm deadlines was adopted. An escalation plan (to the board chairs) was in place if issues between management groups could not be resolved. The process was facilitated by an impartial third-party consulting firm. Corporate culture differences between the two organizations were assessed and used in the planning process. The new CEO was appointed early and acted as the integration team leader and joint spokesperson.

3. There was comprehensive stakeholder consultation and communication: A common understanding and buy-in for the merger outcomes and benefits was reached at the beginning of the process. All stakeholders were included (the LHIN, two boards, both management groups, staff, CUPE Local at YCS, community users and corporate members). The LHIN and boards visibly demonstrated their endorsement and support for the merger, the rationale and planning steps. Newsletters and town hall meetings were scheduled on at least a monthly basis with staff, backers, partners and clients. The process principles were stated up front and both Boards and management groups coordinated their application. There was significant engagement and collaboration between the new board, CEO, and senior leadership team during the first 120 days to develop and articulate the Unison mission, vision, values and culture, along with staff to select the new Unison name.

LESSONS LEARNED AND KEY MESSAGES

Although the Unison merger occurred within the Ontario healthcare environment, most of its lessons could apply to any organization. These include:

• Despite frequently cited studies on failed mergers and acquisitions, mergers need not be feared. The benefits of a strategically sound, well-executed merger should far outweigh the risks of a partially thought-out and poorly implemented one.
• The parties must fully understand and commit to the objectives and benefits of the merger.
• Organizational culture needs to be considered in the due diligence process before a final decision to merge. It can also be used as a tool to assess merger barriers, and the most effective implementation levers during the pre-merger and post-merger processes.
• Effective change management – especially related to stakeholder identification and communications – is essential.

For public sector organizations, the Unison merger offers additional considerations:

• Merger benefits, while differing from those in the private sector, can be just as quantitative and financially-driven. For example: cost reductions in labour and purchasing; decreased capital needs; faster, higher quality processes, higher resource utilization and lower funding requirements.
• Benefits are not only financial or based on one simple metric such as Total Returns to Shareholders. In the public sector, benefits are more likely to include non-financial but still quantitative benefits such as improved customer, client or stakeholder service, and the impact on taxpayers – the public sector’s version of shareholders.
• Stakeholders and their expectations and priorities are more complex and diverse, and potentially in conflict. There are not only shareholders and customers but also government and political masters to satisfy. There is also the potential for more personal and emotional interests from the public (users of the organization’s services) and media.

Within the healthcare system in Ontario and elsewhere,

• Pressures on the healthcare system are increasing due to the provincial government’s fiscal imbalance, increased operating costs, people’s longer lifespans and more age-related illnesses, healthcare worker supply shortages and higher patient expectations. This will encourage more mergers of primary-care providers, including Community Health Centres, in addition to the already common hospital mergers. Outside Ontario one study^[18] indicated that nearly three of five hospitals in the United States were involved in some form of consolidation between 1995-1999. While the environment in the US is different from Canada, and there are many American private sector providers driving the M&A activity, the cost benefits are just as compelling in Canada.
• Both parties must buy into the benefits and agree to a voluntary merger. Government mandated hospital mergers have faced public, political and emotional resistance, spotty implementation (late, over-budget, failing to meet objectives), and in some cases have been undone years after the fact.
• Healthcare provider boards and senior management groups should actively consider merging with appropriate partners to better carry out their mission and achieve goals. This may enable providers to jump-start their plans for overcoming the financial challenges created by reduced or fixed funding levels, increased operating costs or raised client or patient expectations.

SUMMARY

In a world characterized by new technology, regulatory and legislative reform, reduced resources, increasing customer expectations, sharper competition from traditional foes and new entrants, accelerated speeds of communication and change, and global shifts of consumers, labour supplies, power and influence, standing still is not an option for any organization.

Combining resources in a formal merger may be the preferred strategy to achieve revenue and profitable growth goals, to increase economies of scale or scope, to gain greater influence in, or to reshape the industry or sector, or to bring better management to under-performing organizations.

Despite the reports of merger and acquisition failures – those where the transaction failed to deliver expected results or worse, destroyed value – there are now many prescriptions for improving the odds of success. We saw a new tool introduced for overcoming one of the greater impediments to M&A success: the use of employee engagement surveys to examine cultural differences between organizations, and the use of those differences in the merger pre-planning and post-merger integration activities.

This should give confidence to leaders that they can achieve their goals and aspirations through a merger or acquisition without falling victim to one of the  greatest risks, culture rejection. In Ontario’s healthcare environment in particular, there are many opportunities to improve client (patient) outcomes using less resources through mergers of entities such as hospitals and community health centres. We hope the lessons learned from the Unison merger can provide the extra courage and confidence needed to consider sensible mergers or other combinations.

*  *  *

JEFF CHAN is Principal of Growth Alchemy Group, a consulting firm focused on corporate growth strategy and organizational performance.  He developed his interest in mergers and acquisitions and corporate culture from a corporate human resources career in which he has worked through acquisitions, mergers and joint ventures on both sides of the transaction, and from his consulting career at McKinsey & Company where he served a diverse client base in more than 30 countries on growth, corporate strategy and organization performance issues.

^[1]  Where Mergers Go Wrong, S. Christofferson, R. McNish, D. Silas, The McKinsey Quarterly, 2004 Number 2, pp. 93-99

^[2]  Why Mergers Fail, M. Bekier, A. Bogardus and T. Oldham, The McKinsey Quarterly, 2001, Number 4, pp. 6-9

^[3]  Haarmann Hemmelrath Management Consultants, Stahl und Reisen, Volume 119, Number 8, pp. 131

^[4]  A New Dawn: Good Deals in Challenging Times, KPMG International, 2011

^[5]  Taking the Pulse – A Global Study of Mergers and Acquisitions in Healthcare, KPMG International, 2011

^[6]  Measuring Core Dimensions of Organizational Culture: A  Review of Research and Development of a New Instrument, Nathalie Delobbe, Robert R. Haccoun and Christian Vandenberghe, 2000

^[7]  “Managing Mergers, Acquisitions and Strategic Alliances”, S. Cartwright and C.L. Cooper, Butterworth-Heinemann, 1996.

^[8]  The other 8 being: underestimating the problem of skills transfer; demotivation of employees; departure of key people; expenditure of too much energy on doing the deal at the expense of post-merger planning; lack of clear responsibilities, leading to post-merger conflicts; too narrow a focus on internal issues to the neglect of the customers and the external environment;  and insufficient research about the merger partner or acquired organization

^[9]  Mergers: Leadership, Performance & Corporate Health, David Fubini, Colin Price and Maurizio Zollo, INSEAD Business Press, 2007

^[10]  The DaimlerChrysler Merger, Prof. Sydney Finkelstein, Tuck School of Business at Dartmouth College, no. 1-0071, 2002

^[11]  http://www.womenscollegehospital.ca/about-us/our-history152/

^[12]  A Critical Examination of the Hospital Restructuring Process in Ontario Canada, Toba Bryant, Elsevier Science, 2002

[13] Internal Unison document

^[14]  The final version communicated to staff by the Joint Integration Team which demonstrated the alignment between the York Board and the original objectives of the New Heights Board.

^[15]  TalentMap is a consulting firm that designs and deploys employee surveys, and provides consulting support to help client organizations in Canada and the US improve employee engagement, organizational performance, and business results.

^[16]  The strongest drivers are those dimensions (of 12 in TalentMap’s TalentGage^TM survey) that have the highest Pearson correlation to employee engagement. These differ for each organization, and can also shift over time. Making improvements on the strongest drivers will have the greatest impact on engagement scores and through them, on organizational performance. Conversely, effort and other resources invested in the weaker drivers yield minimal engagement improvements.

^[17]  Score is the mean percentage across six key engagement questions of Favourable ( Strongly Agreeing or Agreeing) responses

^[18]  Hospital consolidation: Applying stakeholder analysis to merger life-cycle, Baker CM, Ogden SJ, Prapaipanich W, Keith CK, Beattie LC, Nickleson LE., Journal of Nursing Administration, 1999.