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Coal, Cost and Culture: the hidden value in acquisitions

World Coal,

In mining acquisitions, most of the focus is on valuing reserves and assets (plants, mobile equipment, etc.) of the company being acquired. The reason for this is simple - assets and reserves make up most of the dollars on the balance sheet and create most of the value. Employees operate equipment and execute policies and procedures. They tend to be viewed more as costs or liabilities than a source of value-generation, not only in mining but in most companies. Little attention is given to the potential of a culture to contribute directly to the bottom line, perhaps because many companies are not familiar with a methodology to calculate the value associated with that potential.

My simple definition of culture is ‘how people interact with equipment and each other’. If management and the workforce are good at fire-fighting, finger-pointing and hiding problems, we call the culture ‘reactive’. Trust is low within the management team and between management and the workforce. The management team is not aligned with each other, appearing weak and lacking power to make good decisions. Such a culture will wait to be told what to do and wait until problems occur before taking any action. In this environment, costs will be higher and production will be lower.

However, if the management team AND the workforce is actively focused on problem resolution, we call the culture ‘proactive’ (i.e., focused on preventing problems and minimising losses if problems occur). Trust is high between the workforce and the management team and the management team is aligned, appearing united, strong and capable of good decision-making. Such a culture can significantly reduce the incremental cost and lost production associated with recurring problems and unplanned events, which increases revenue and cuts variable/fixed costs in the short and long term.

Defining people as a cost and being unfamiliar with a methodology to assign dollars to problems dramatically increases the chance that the bottom line contribution of a proactive culture is overlooked or discounted by most companies, not just those involved during an acquisition. If a proactive culture that created amazing value with the reserves and assets is replaced by a reactive culture in the acquiring company, culture-driven incremental gains will be lost, not just that year, but for years to come. Additional costs and production losses tied to problems no longer being prevented will be thrown into the same accounting bucket as value-added production costs, hiding the potential for improvement related to culture change and making it difficult to analyse reasons for post-merger cost increases.

We have already talked about the connection between trust and culture; let’s expand that discussion here. A culture that contributes positively to the bottom line is frequently grounded in trust, great communication and a responsive management team. Without trust, communications are not open and management disregards employee feedback. When the feedback is disregarded, the feedback stops and so do the opportunities to get better. People must be free to speak (without retribution) about problems that need to be fixed, including problems that are born from poor management practices and relationships between departments. Only management can fix these problems; when they don’t, trust stops, open communication stops, problems that used to be fixed go unresolved, and the millions of dollars that were discovered and captured in the past go back into hiding.

Acquired employees that survive the merger will be frustrated, saddened and demoralised because they know what is possible to achieve. Managers that survive are forced to lower expectations of what their people are capable of doing. Some managers and employees will leave because fitting into the new culture will be a ‘lose-lose’ (i.e., their feedback on problems or ideas for improvement will be regarded as a thorn in someone's side instead of constructive feedback that could be worth thousands or millions of dollars to the company. These employees know that they could even be demoted for being proactive about pointing out problems that the new management ‘does not want to hear about’.)

Thought for the month: If acquiring companies are more concerned about replacing a proactive culture than preserving it, they risk losing its benefits, maybe forever.

Author: Kay Sever CMC, CQIA, Sustainable Improvement Consultant and Coach. Kay Sever is a leader in sustainable improvement for mines and plants. She combines over 30 years of mining experience with a common sense approach to improvement that raises awareness about lost opportunity and hidden barriers that prevent improvement success. Her new management training program, The Change Revelation, shows management teams how to remove the barriers that are holding them

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