SPX3,825.33+39.95 1.06%
DIA310.85+3.03 0.98%
IXIC11,127.85+99.11 0.90%

How To Prevent The Loss Of Institutional Knowledge When Acquiring A Company

By Ingrid Alongi, General Partner, Stage

Benzinga · 06/09/2022 18:22

By Ingrid Alongi, General Partner, Stage

The decision to acquire a company is often lead by spreadsheets and numbers. Some of the questions that may go into the decision might include: Does the company have an advantage in the market? Is revenue on the right track? Can any financial missteps be solved? One of the most important points to consider is the institutional knowledge held by the team; the inherent fear surrounding the safety of that knowledge often dictates strategy when it shouldn’t.

Transitions, terminations and changes to the team at the time of an acquisition transaction, while sometimes necessary, is scary and often accompanied by fear about losing institutional knowledge. This fear often contributes to the continued decrease in morale when trying to keep the people for a mismatched reason. Furthermore, a recent study from The Wharton School shows that about 33% of acquired employees leave after the first year. But it doesn’t have to be this way. We can look at acquisition induced attrition and retention in a different way.

Quick Left was a software development agency started in Boulder in 2010. When members of the original engineering staff left after the company had experienced an initial growth spurt, it felt devastating.  With added structure and accountability within the organization, it was no longer a small boutique dev shop from the 2010s “brogramming” while looking at lolcats and drinking beers. The company was becoming a diverse, multi-million-dollar software services business and that shift to professionalism wasn’t a fit for everyone.

Having what felt like a mass exodus during a time when companies were doing whatever they could to retain talent, (kegerators, snacks, “paid” paid vacations, foozeball tables, etc.) this felt like a huge personal as co-founder and CEO, but it ultimately proved to be an opportunity. The company was given the chance to rebuild a team with people who were excited to join the business we were becoming. Positive attitudes, fresh perspectives and a lack of institutional baggage helped the transition Quick Left into the multi-million in revenue organization

After an acquisition by Cognizant in 2016, leadership had the same concerns about losing key team members. They were able to keep about half of the 50 employees. This move again turned out to be a positive outcome. About a third of the team was based in another state, and a small, core team based in the Boulder office allowed the team to grow and meet the specific needs of the acquiring company post-acquisition—namely to build an innovative product accelerator.

This experience profoundly impacted leadership’s approach to employee retention and company growth from then onward. Certainly, the focus on retention is important, but attrition can be healthy for a growing, changing, or transitional organization.

Being an employee of a company going through acquisition can be an intimidating experience with many questions and unknowns. It is unpredictable who will react to these fears by leaving the organization. At the same time, it may make sense not to offer all employees a place at the new company. In some instances, investors look to focus on investing in orphaned venture-backed companies that need right-sizing at the time of acquisition. This can mean cuts to staff and difficult decisions. Here are some of the critical points stakeholders should keep in mind when faced with a challenging task:

Focus on Rebuilding 

Losing leadership can open the door to rebuilding culture. It is often said that culture comes down from the top. Replacing leadership team members and conducting team onboarding interviews gives the ability to create positive change.

Reconnect with Customers

Losing customer-facing staff can create new opportunities and reasons to connect with customers. Not all customer relationships are great and there can be customer service fatigue from burnt-out employees. Having a change in staff can be a great time to forge new relationships with customers and listen to their concerns about service, to improve the business. 

Embrace a Fresh Perspective

Losing engineering staff can feel very scary because there is a fear that no one else will understand how a system works. There always seems to be that one engineer who is the only one that knows how the patchworked codebase works. While there may be a learning curve, no one can get into a codebase without spending time with it, no matter how well-written it is. Fresh eyes bring perspective to technology problems that the previous team may have accepted as “just the way it is.”. People with a new sense of purpose addressing old issues without the fatigue of seeing them on the to-do list for months are a great way to get those code cobwebs finally cleaned out. 

Reassess Priorities

Cutting back to a small team can force the team to focus on important goals and priorities of the company and gives the team a chance to question where they have been putting their time. There is a clear opportunity for company goals to be clarified and vision solidified and re-invigorated. A smaller team also leads to more access between the employees and the leadership team further increasing collaboration and awareness. Finally, existing employees can be given new opportunities for growth as the company stabilizes and grows again.