Stars and Keepers

About half of all mergers and acquisitions fail to deliver value, depending on what study you're reading. This high failure rate has persisted despite the fruits of experience, such as today's emphasis on faster, smarter integration and better due diligence. Of course when things do go wrong, the usual suspects are rounded up-poor synergy, incompatible cultures and so on. There is one culprit that's seldom identified but is especially important when the deal involves not the acquisition of physical plants or new geographic markets, but something softer and more difficult to manage-intellectual capital. 

Despite the best efforts of knowledge management vendors, the real expertise about innovative products, services or processes still tends to be carried around by employees in their heads. Unlike an assembly line, such employees are portable: They can walk out the door and never return, especially if they've already sent their résumés. Once talent is gone, it can't be called back. And if enough talent leaves, there goes the value you spent so many millions of dollars on acquiring. The merger is considered a failure. 

The very fact that merger literature pays little notice to this issue should be enough to signal its importance, since what's ignored is often what goes wrong. This article summarizes the talent retention strategy created and executed during Borland Software's $100 million acquisition of Segue Software in 2006. This strategy is applicable for any company that desires to grow through the acquisition and integration of intellectual capital, regardless of sector. Borland is a software company that helps IT organizations transform software delivery into an efficient and predictable business process. 

Learn from the Past

Borland announced the friendly acquisition of Segue in early February 2006. Segue was a Lexington, Mass-based provider of software quality and testing solutions. Its product line would bolster Borland's suite of enterprise-level application lifecycle management tools. More than four fifths of Segue's roughly 200 employees were expected to prove important one way or another in preserving value. This included not only key sales and support talent, but a core group of 40 software engineers based in a separate facility in Linz, Austria. 

Borland had more than the usual share of reasons for wanting the merger to succeed. Not only was it one of the biggest bets the company ever made, and the biggest move to date by CEO Tod Nielsen, but several merger attempts under previous management had fallen well short of expectations. Reflecting on that experience, an A.T. Kearney team and Borland executives Tod Nielsen and Chris Barbin (then CIO) agreed that the task was to develop and execute not just an integration strategy, but a strategy specifically for talent retention. 

Sometimes, knowing the opposite of what you want is a very good beginning. Whatever the tactical de - tails, the strategy would need the attention of C-level executives; pragmatic guidelines for assessing the value of Segue employees to the future enterprise; and communications that were transparent, rapid, synchronized and persuasive. 

An additional requirement was meeting a tight timeframe-roughly 10 weeks or so starting with the announcement of the transaction in early February and ending with the scheduled closing of that transaction on April 20. By that date or before, all retention issues needed to be settled, with ideally everyone on board who was wanted for the journey. This needed to be accomplished across a dozen functions, from the critical (research and development in Linz) to the redundant (support functions such as finance and legal at Segue). 

Creating the Framework

With CEO Nielsen and CIO Barbin personally committing themselves to a retention strategy, Borland had already taken a long step toward success. The next step was to design the framework for evaluating Segue's employees, in relation to what would become the new Borland. (For some functions, Borland employees were also thrown into the mix.) All retention decisions would flow out of this framework. 

What emerged is deceptively simple: a two-by-two grid, with each quadrant representing a category into which to sort employees (see chart, p. 46). The logic of the grid is contained in its two axes: "criticality" (running vertically) and "future fit" (running horizontally). The usefulness of thinking along these two dimensions is clear. An employee may be critical to easing the transition over the next six months, for example, but relatively unimportant beyond that. Conversely, another employee may not contribute much during integration but have great potential down the road, as the company grows into its new value proposition. Together, the four categories encompass all the retention possibilities that matter: 

Transition. Regardless of performance, these employees won't be needed, typically because they fill support roles that will be redundant. A plan is needed to assist them in phasing out of the new company.

Integration keys. Possessing critical skills for the transition period, these employees don't have a long-term future in the organization. Their potential role needs to be made clear to them, and offers need to be created that will serve as appropriate incentives.

Keepers. These strong performers in needed roles are not yet stars; their real potential lies in the future. They don't require special retention packages in monetary terms, but their potential should be explained to them as an encouragement to come on board for the journey.

Long-term stars. These are the people central to many of the synergies on which the transaction was based. They possess the unique skills or intellectual capital required to grow the business, and their future performance will likely be as strong as their current performance. Your offers will make clear their value and will often be personalized. 

How the Plan Played Out

Executing the strategy generated an enormous amount of administrative detail. For the sake of brevity, we'll bypass this detail and summarize the process and the important decisions. 

Dividing up the incentives pot. Out of the total retention budget, the bulk was reserved for compensating top-level executives. The remainder, to be divided between Stars, Integration Keys and Keepers, needed to be spent wisely for greatest effect. 

At the start, rough allocations between the four categories were made simply by counting heads expected to fall into each category and multiplying by simple factors based on category and location. For example, it was known in advance that there were 37 software engineers in Linz, all of whom needed to be retained as either Stars or Keepers. As the evaluations proceeded, the allocation numbers were likewise adjusted. Enough wiggle room was left so that a superstar could be given a larger financial offer, if that turned out to be crucial-as indeed it did in several cases.  

Throughout, the discipline of the process helped guard against overinvesting in noncritical talent. This can be seen by examining overall totals for dispersal: Most incentives went to retaining Stars, next to retaining Integration Keys and least to retaining Keepers. 

Communicating the message.

The unique nature of this strategy extended to how it was communicated: As just one example, Borland teams informed their counterparts at Segue early on of the two-by-two framework guiding evaluations. This unusual transparency caused some initial head-scratching, with the "Transition" category in particular seeming stark in its frankness, but was ultimately welcomed. 

Another unusual step was the creation of weekly integration news - letter sent to all employees at both companies. This newsletter was coauthored by Chris Barbin and Mike Sullivan, with production overseen by Borland's head of public relations. Regular communication of this sort helped keep rumors to a minimum. 

But perhaps the most important communications undertaken by Borland were personal: Virtually everyone on the steering committee and functional leads team made frequent trips out to Segue's headquarters in Lexington, Mass., the R&D center based in Linz, and the support office based in Belfast. Rather than rely on letters from HR or even the integration newsletter, Borland made sure everyone at Segue got plenty of face time-especially Stars, Integration Keys and Keepers. 

A part of the strategy that turned out to be helpful in making clear Borland's commitment was that for sales and marketing in particular, Borland employees would be evaluated as well, with the best from both companies being retained. Given that Borland would now be selling an integrated product line, this best-of-breed approach was well-suited to developing a top sales team. 

A final element of the communications  strategy, jointly insisted on by Nielsen and Barbin, was to set a date  of March 15 for officially letting everyone at Segue know their future  status with the company-well be - fore the transaction was scheduled to close. This would be done not by impersonal letters from HR, even for those being let go, but via face-to-face meetings.

Generalizing from the Borland- Segue Experience

The final scorecard for the Borland- Segue merger was exemplary. Not only were all 34 Stars, 104 Keepers and 29 Integration Keys retained as desired, but as the merged company went forward, Borland was well on its way to achieving financial targets.  New and old employees alike appreciated the openness of the process. 

How much of what we've discussed was specific to the Borland experience? How much can be generalized to any merger involving key talent or intellectual capital? It's our opinion that the key strategic guidelines should hold true regardless of the nature of the business. Stated informally, here are the guidelines: 

Develop a pragmatic retention plan and stick to it. Make sure to engage all functions and develop a crossfunctional governance team to resolve issues as they arise. 

Identify the "crown jewels" and other talent categories. Use the framework of Stars, Keepers, Integration Keys and Transition to guide all subsequent decisions. 

Focus on best-of-breed, not just home-grown talent. Make clear to all that the goal is to protect the value of the merger, not favor existing employees for the sake of it. 

Adapt the package to the employee. Best practice here is case-by-case, not one-size-fits-all. Learn what motivates Stars and Integration Keys, and respond appropriately. 

Communicate early and often. A key is to get the commitment of the CEO and other top executives; their attention will be seen by top talent as a strong, positive message. 

Yes, human capital will always be harder to manage than physical capital- and we can all be glad of that. But as more mergers include talented employees as prime assets, the motivation increases to tackle this difficult terrain in disciplined fashion. The world may be consolidating, but the possibilities for growth and synergy can keep expanding, too.