Human Capital Due Diligence


Two like-sized B2B consulting companies were being merged to create more profitability from synergies and increased scale. Neither company, alone, was as profitable as it needed to be in the current economy. Without a merger, one or both of the organizations may not have survived.

The two companies both had a national presence and had virtually identical service offerings. Prior to merging, they were direct competitors. As would naturally be expected, they served some overlapping markets. In some instances, some of the duplicate offices could be merged allowing all local team-members to continue with the new, larger company (Newco). In other instances, duplicate positions were targeted for elimination.

Making the right decisions regarding which individuals in sales and service delivery roles would be part of Newco was critical to the merger’s success. Individuals in these roles created the transactions that comprised the organization’s revenue and cost of sales – they controlled the magnitude and profitability of the gross margin line.

Only a very limited number of employees of the acquiring company were aware of the timing of the transaction. These select individuals were responsible for all merger activities. Even fewer of the employees in the acquired company were aware their organization was being purchased. Only those necessary for supplying information for due diligence had been “brought over the wall.” All decisions had to be made quickly and accurately.

Team-member decisions were the last to be made because of the sensitivity of the topic and in order to minimize any information leakage. Even though the story to be told was a positive one, uninformed speculation typically leads to negative predictions, and negative thoughts, once entrenched, require substantial effort to reverse. Therefore, controlling how the story was shared with Newco employees was the surest way to gain buy-in and a quick return to business as usual.


Operant staff drove the process of making the final team member selection as well as created and timed much of the communication going to Newco team-members. The team member selection process included objective and subjective assessment processes. Given that 75% of the decisions being made were for existing employees with direct production output to their credit, performance information was available, such that predicting “on-the-job” success was not necessary, as it is when making hiring decisions. The primary issue with the objective data was making sure production numbers represented measuring the same thing in both organizations. Failing to normalize information would result in wrong decisions being made serving to undermine the very premise of the acquisition.

The dataset from the acquiring organization was selected as the standard and the data from the other organization were manipulated with the proper algorithms to create parallel information.

The algorithms that were created resulted from intense investigation and analysis by Operant staff. Failing to be anything but completely thorough would feed decision-makers with inaccurate information. The investigation uncovered the following discrepancies:

  • The organizations did not calculate gross margin (revenue less cost-of-sales, but before SG&A) in the same way. Given that gross profit dollars generated by the individuals was a primary metric for assessing performance, this difference was extremely important.
  • The organizations used different methods for crediting revenue and gross profit production to individuals. In one organization, revenue dollars from transactions still in place, but developed by team-members no longer with the company, were labeled as “house accounts” and no individual received credit for them. In the other company, in some instances, individuals inherited business that was developed by others. Failing to understand this crucial difference would have resulted in some individuals with less ability to develop business being ranked above those who were more capable.
  • In the acquired company, some individuals were getting credit for production of other individuals, due to their tenure status. In other words, some revenue was double counted, as more than one individual was receiving credit for it. This was partly due to the lack of sophistication in accounting procedures and discipline in building fair performance systems. Managers throughout this organization were able to make decisions without concern for the overall system. In the long run, this created an extremely complicated and unfair system.

Without this thorough due diligence, that included combing financial reports, reviewing individual production, and working closely with the organization’s IT and accounting staff to intimately understand how production information was compiled, inaccurate information would have been used to make decisions. With this information in hand, the acquired company’s data were broken down into their smallest building blocks and rebuilt to be comparable to the data being reported by the other organization. The final output of the objective assessment process was comprised of two lists. One list included all sales team-members ranked in order of revenue and gross profit production. The other was a list of all delivery team-member in ranked order. The nature of the two roles required separate rankings.

The subjective assessment process was added to give Newco leaders the ability to offer additional, structured, commentary about their team-members. Rather than allow free-form commentary, an assessment survey was created. The managers responded to identical statements about each of their sales and delivery team-members by responding to 5-point scales. The statements were specific desirable or undesirable activities that were positively or negatively related to success in the role. Responses indicated the degree to which the individual being rated engaged in the behaviors. By controlling the type of subjective information collected, superfluous, irrelevant and unverifiable information such as “she’s a great person,” or “clients love him,” or “he needs his job more” were eliminated before they were provided, removing the need to “clean” the information.

The final information provided to the managers, who were allowed to make final decision on their new teams, included:

  • Normalized revenue dollars generated in the prior year and the current year- to-date.
  • Normalized gross margin dollars generated in the prior year and the current year, to-date.
  • The overall rating, based on the individual responses provided in the subjective assessment process. Detail-level information was provided as well.
  • Date of tenure.
    The number of clients being served.
  • The number of new transactions generated in each of the last 24 months.
  • The managers were introduced to the information through a web-based meeting where they were trained on how to use all of the information provided to them to make their final decisions. During this session, Operant staff worked with the managers to agree on which pieces of information were the most important, so that each was following a similar protocol. Operant staff members were also available after the session, during the one-week decision period to counsel the managers.

The decisions on the Newco team were translated into a reduction-in-force plan. The day the merger was official, all reductions were made with fair separation packages provided to those leaving the organization. The new team received detailed communication on Newco, including a list of all team-members by location. Operant staff created the communication program to share the details of the event. Both written and live media were used to present information simultaneously with the staff reductions. The full rationale for the decisions was shared with the remaining team members.


The new organization was quickly functioning in business as usual mode and virtually no disruption to production was experienced. The new organization experienced top-line growth during the first three months of integration. This is contrary to typical mergers, which often show an immediate decline in performance.

  • The new management team, who had to learn and act quickly once they were informed, rated the merger as extremely well coordinated. Their challenging job was made as easy as possible because of the integrity of the information they had at their disposal. All were confident they had the right go-forward teams.
  • The non-management team-members of Newco found the decision rationale to be very prudent. Virtually all were comfortable with the new team. This is one reason business as usual was at a steady state throughout the transition and no ground was lost to the competition.
  • Executive leadership was able to move rapidly towards developing a culture but on trust and integrity.

The outcome of the merger surpassed the expectations of the board and executive team of the acquiring company.