A Competent Leader in Times of Uncertainty
Carve-Outs are Complex and Out-of-the-Ordinary
I would like to feed the stigma related to consultancies and start this article with an analogy: It is always messy when you carve a pumpkin. And in fact, this can equally be transferred to organizational carve-outs: There is a lot of mess, uncertainty, and complexity involved.
Before going into the specifics, let me define the scope of this article. First, I will address carve-outs in large companies and corporations. This is because carve-outs work quite differently in small- to medium-sized companies and should thus be dealt with in a separate article (added to the to-do list). And second, I will focus on the carve-out scenario in which the divested business units (hereafter: the target organization) become legally standalone . In this (very interesting but equally daunting) case, the entire HR set-up of the future organization can be delineated from the ground up. A key element of this set-up – that is (most often than not) associated with a great deal of complexity – is the HR IT landscape. But what exactly is so complex about the HR IT landscape in the context of carve-outs? And how should it be dealt with?
HR and IT may seem like polar opposites. The former is typically denoted as soft, human (very literally), and sometimes not entirely tangible, whilst the latter is known to be hard, non-living, and concrete. However, in times of digitalization, HR and IT have become unquestioningly closely connected. So how can the HR IT landscape be approached when the objective is to carve out the target organization from its parent company?
 For reference, two alternative scenarios are that the target organization is either sold to an investor or will be fused with another company.
Three Steps to Transfer the HR IT Landscape
Step 1: Understanding the As-Is State
First, one must understand what the HR IT landscape looks like at the moment (i.e., prior to carve-out). Even this first step can be difficult, either because consolidated lists are outdated due to lack of regular maintenance, or because there are no lists providing information on the HR systems used in the target organization at all. Thus, to obtain insights into which systems are employed and whether they are valuable additions to the HR process chain (or if they are instead a nuisance to the organization, superfluous gadgets implemented by the parent company in times of ludicrous creativity), one ought to consult someone who is responsible for and knowledgeable in the daily business related to HR IT.
Step 2: Determining the To-Be State
Second, once an overview of the HR IT landscape has been gained, one has to determine going-forward strategies per HR IT system. There are four options: Move, Exit, Replace, and Copy. And these options ultimately affect how complex the transfer of the HR IT landscape will end up being: Move means that a system can be taken over by the new organization because the parent company can do without it. In contrast, Exit implies that the new organization waives its claims to uphold the system. This often applies to applications  that do not add substantial (or any) value to the HR process chain. If a system was chosen to be replaced, the new organization must decide on an equivalent (or even better-suited) substitute. And copying a (typically central) application means continuing to use it – either through service agreements with the parent company or an actual system copy to the new organization. With regard to transfer complexity, replacement decisions are particularly fiddly since they require (lengthy and possibly tedious) tender processes for new service and system providers.
Step 3: Initiate the Procurement of Critical Systems to be Replaced
In fact, as a third step, the systems to be replaced can be ranked according to their criticality. This task should not be too difficult: If a payroll system is included, it will most definitely lead any priority list. And once priorities are set, the new organization must choose between
- outsourcing all (or some) services related to the system as well as the system itself to an external provider,
- procuring a new system that will be owned by an external provider but operated by the organization, or
- procuring a new system that will be owned and operated by the new organization itself.
Regardless of which option is selected, the procedures associated with each are typically time-consuming. Neither tender processes nor provider selections are walks in the park, and implementations can yield additional challenges. Thus, starting as early as possible should be the motto.
 The terms “system” and “application” are used interchangeably in this article.
Further Elements to Consider During Carve-Outs
Seems complex? Well, transferring the HR IT landscape is only one out of many activities that determine a carve-out’s success. In fact, here is a selection of additional elements to the carve-out that can be characterized by complexity and a lack of clarity:
Special cases pertaining to all HR functions will make you (finally) understand how complex and multifaceted HR really is:
- Consider special employee cases, such as long-term absences, people on working permits, or deferred compensation cases. Should these employees’ contracts be handled separately? Must existing working permits be continued or renewed?
- How does the current compensation and benefits landscape look like? Are there special benefits requirements (e.g., health and social insurances, bonus payments, sports programs)? How crucial is it to retain (or even improve) employees’ current benefits-related conditions? The range of criticality is wide – whilst some families’ well-being is dependent on the bread winner’s benefits, other employees might mourn the loss of merchandise branded with the parent company’s logo.
- Are there any local practices or requirements in place regarding payroll processing, learning and development, business travel, etc.? One may truly underestimate the complexity of employee-group-specific time recording…
- What do the relationships with the works council and/or workers union look like? Are there any (locally caused) information-related obligations? Are any collective bargaining agreements under way or currently being negotiated that might become relevant shortly before or after the planned closing date?
Responsibilities in Project Set-Up
- Who can and who should be consulted on a certain matter? Has this person who might hold valuable information signed a non-disclosure agreement?
- To whom can what be communicated? It may be the case that the affected employees may be informed about the carve-out and a potential standalone solution but should be left in the unknown regarding potential buyers being involved.
- Who knows what? Are all members of today’s meeting really providing relevant insights?
No date is set in stone and the entire project is a moving target. If you think that closing will be on day X, this day may be rescheduled multiple times over the entire project duration.
What Makes a Competent Leader in Times of Uncertainty
Regardless of all challenges and complexities, we firmly believe that carve-outs are doable. Thus, we have collected a set of selected skills that an organization should build, borrow, or buy  to competently clear the chaos in all kinds of carve-out projects:
- Being able to differentiate between different carve-out scenarios (e.g., standalone vs. merger cases, asset vs. share deals) and knowing which of the aforementioned as well as additional special cases applies to or is especially crucial for which carve-out scenario.
- Possessing a deep knowledge of HR and knowing how to systematically scrutinize an organization’s current HR services and HR IT landscapes. These analyses are crucial to assess a business unit’s standalone readiness prior to carve-out. Is it already mostly self-sufficient or – on the contrary – still highly dependent on services and systems provided by the parent company? How profound are those links, that is, how difficult will it be to cut them? If every detail is captured from an HR perspective, pitfalls during the period of separation can be avoided (as best as possible).
- Knowing how to prioritize: What is essential for Day-1 (i.e., HR functions and related services we refer to as “hygienic”) vs. what is nice-to-have, but can be implemented later (i.e., HR functions and related services we refer to as “value-add”)? Making sure to steer organizations in the right direction can facilitate the process of prioritization for them.
- However, once the deed is done, a competent (and – in the most positive way – ambitious) leader should be excited to support an organization in this once-in-a-lifetime opportunity to rethink their HR from a strategic perspective. Which processes are long outdated and could be replaced with more state-of-the-art, agile solutions (e.g., by moving from manual to web-based, self-service time and attendance management)? How can the standalone organization develop an attractive employer brand and position itself in the market? An ambitious, future-oriented approach to HR will go a long way, making organizations fit for what is to come.
- Last but certainly not least (we just cannot continue endlessly with this enumeration), it is essential to communicate effectively and consolidate the interests of different stakeholders (e.g., M&A, HR, management).
Overall, we ascertain that a competent leader should thrive in states of uncertainty. And we bet that based on the aforementioned odyssey that a carve-out is most likely characterized by, you agree.
 But perhaps not bot – yet…
Interested to learn more about our approach to carve-outs in particular and M&A projects in general? For details, see here. And if you want to approach us directly, do not hesitate to reach out – either via our contact form or through one of our managing partners Andreas Letto.
We are excited to dig deep into HR with you. And who knows – we might turn it inside out in due course as well.
- Andreas Letto
- Managing Partner