Making Mergers Work in Government

One of the first official acts Bob McDonnell took last month as the newly inaugurated governor of Virginia was to create a Commission on Government...
by | February 9, 2010

One of the first official acts Bob McDonnell took last month as the newly inaugurated governor of Virginia was to create a Commission on Government Reform and Restructuring. This fall, more of his colleagues may take similar steps, given that 37 states will be holding elections for governor and about 20 of those seats are open because the incumbent will not be running for reelection.

Sometimes, restructuring can mean merging agencies or functions. Typically, mergers in the private sector are undertaken to increase profits. However, a 1999 study by KPMG says that less than a quarter of these efforts are successful. In government, mergers are typically undertaken to streamline services and reduce costs. It is harder to judge whether a public sector merger is successful, though. As a result, government reform observers, such as Kathleen Sylvester and Michael Umpierre, caution against focusing reform efforts on reorganizing agencies because of the high political costs and the distractions it can cause in delivering services to citizens.

Nevertheless, there are cases where a situation calls for a merger between two or more agencies. While much has been written about corporate mergers, public agency consolidation is somewhat more mysterious.

Public management expert Peter Frumkin has developed a checklist for merger managers to use in both making the decision to merge and then implementing the merger. In a report on public mergers he writes that as "public sector agencies seek to make a merger work, they do not have to start from scratch. Even though the literature on government consolidation is thin, there is a fairly broad base of experience to draw upon, particularly at the state and local levels."

Frumkin says "there is a natural attraction to the idea of combining services and resources, particularly during times of fiscal constraints or following operational crises." He examined a series of government agency reorganizations and concluded that managers can improve the likelihood of success if they focus on five critical areas:

· Choosing targets wisely. "Not all public agencies with overlapping responsibilities are ripe for merger or consolidation," notes Frumkin. First, "It is absolutely essential that the missions of the two agencies be compatible." There has to be a "fit" between the agencies in terms of culture and competencies. This lack of fit has been a problem, for example, in the merger between the State Department and the U.S. Information Agency (USIA). State is far more formal than USIA was, and this caused significant differences in approach.

· Communicating effectively. Mergers create anxiety and fear among both employees and stakeholders. "It is critical for leaders to communicate early and openly," say Frumkin. Communicating the new mission to employees is especially important, as employees will be trying to make sense out of the changes and want to know what they need to be focusing on, and who the customers will be.

· Implementing quickly. It is often tempting to assume that "going slow" will ease the stress of a merger on employees and stakeholders. However, experience shows that moving quickly with important operational changes - such as payroll, travel, and new logos - "is critical to building momentum and moving toward normalization," says Frumkin.

· Creating a new culture. "Mergers do not involve simple addition or deletion of agency features. The demand the creation of something new,' say Frumkin. Developing a new culture means breaking away from existing routines, traditions, and customs by selectively adopting different elements from each organization.

· Adjusting over time. Implementing a merger oftentimes takes years after the initial wave of change. Oftentimes, the focus is on a set of "100-day wins" after the initial implementation as a way of continuing the momentum of change and learning from unforeseen events. It is also a way of selling the merger to the public and stakeholders.

One example of a successful merger between two agencies was the creation of MassDevelopment in 1998 when two Massachusetts economic development agencies merged. In 1995, two economic development agencies - each with their own boards of directors -- did not work well together. Support for economic development was seen by the public as fragmented and inefficient. Michael Hogan was appointed to head one of the agencies, and when the executive director of the other agency resigned, Hogan was appointed to head that agency as well. This led to an informal merger. The formal merger into MassDevelopment did not occur until 1998, when the legislature adopted legislation to do so. Still there were different cultures that needed to be reconciled and the administrative infrastructure needed to be integrated once the formal merger occurred. This approach was seen as unusual because the informal merger focused on the operational face to the public and once that was operating smoothly, the formal merger integrated their legal, governance, and administrative structures.

Frumkin said the keys to success in the MassDevelopment case included the ability to gain stakeholder buy-in from the beginning. Hogan worked with the staffs and boards of both organizations and was able to bridge the differences. The second key to success was the ability to be very clear about the missions and desired results, keeping a focus on the customer. Customer satisfaction was adopted as their primary measure of success. As this increased, it provided the legislative support for moving from the informal to the formal merger.

In looking at several other case studies, Frumkin cautioned against mergers that had the characteristics of an acquisition. When a small agency is merged with a larger agency, such as was the case of State and USIA, the chances of failure are much higher. He says "acquisitions are to be avoided" and that "even introducing the concept of an acquisition will make employees and stakeholders in the acquired agency skittish."

In a report for the IBM Center, Dr. Frumkin also developed a concise checklist for merger managers covering the decision to merge, planning the merge, implementation, and follow up. It can be downloaded here.

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Jonathan D. Breul is the executive director of the IBM Center for The Business of Government and a partner with IBM Global Business Services. He is also a fellow of the National Academy of Public Administration and can be reached at jonathan.d.breul@us.ibm.com.

John M. Kamensky is a senior fellow with the IBM Center for The Business of Government. He is also an associate partner with IBM Global Business Services and a fellow of the National Academy. He can be reached at john.kamensky@us.ibm.com.

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