The Crucial Role of HR in a Successful Carve-out
The highly competitive environment and rapid market changes are forcing companies to adapt their business strategies. Cutting corporate or business units that are strategically less relevant from the overall organization can strengthen a company's market position and add great value.
However, successful portfolio adjustments require well-defined processes and a deep understanding of interdependencies within an organization.
For big global companies, these interdependencies can get very complex due to topics such as shared services and shared employees or the use of different production sites and locations, for example. There is also often a lack of accurate information at the "push of a button" about resources, employees, contracts or financial figures. This can result in certain risks, such as underestimating the need for resources and time, or some negative legal consequences. It´s comparable to playing a game of "Mikado": when trying to move sticks, it is very difficult to know which other stick will be impacted.
Depending on the complexity and size of the carve-out, project phases vary. In general, however, there are three major phases:
- Ring-fencing (sometimes also called Baselining): Identifying the right assets to carve-out
- Carve-out: Setting up the legal frame
- Stand-alone: Making the new company independent
All these phases have one point in common: the human component is crucial to their success. The cliché often applies, that "HR's role is only to transfer employees". This is far from the truth, especially in a complex global environment.
How does HR contribute to ensuring a successful carve-out project?
In this article we will focus on the role of HR in phases 1 & 2.
Identifying/Ring-fencing: Whom to transfer & How?
Ring-fencing consists of identifying which employees shall be associated with the business to be carved-out and should be transferred. It involves:
- Identifying all business employees, employees in delegations in another country or contractors that will help the new company achieve its strategic objectives while making sure that the old company can pursue operations. Generally, the "core employees" which support the business directly are identified first. After that, the focus is put on support function employees, who usually belong to shared functions such as Finance, HR, IT... This is much trickier as it requires a good understanding of what percentage of time is spent for which business unit and a decision on how to split that in the future.
- Identifying the employee transfer method which differs from one country to another or one legal entity to another. The two most common forms of transfer are: automatic transfer or termination of existing employment and signing of a new contract with the new company. Depending on the form of transfer, different legal implications and administrative burden can apply. It should be noted that the working conditions should not be worsened because of the transfer, at the risk of giving employees the right to object in some countries, as well as leading to severe legal consequences.
- Managing organized forces such as work councils and unions. Depending on the country, informing, or consulting them might be required, with minimum period which could put a whole carve-out in peril if not respected.
- Determining current and intended benefit packages to ensure no loss of entitlement – if that is the case, a well-crafted communication strategy is a necessity! Benefits include pensions, holiday entitlements, bonuses... including them as a central part of the project is crucial for maintaining a successful attraction and retention strategy.
Given the complexity and legal impact of these steps, it is crucial to carefully plan their execution by separating them into timed and tracked work packages to ensure a successful project deployment.
Carve-out: Setting up the legal frame
After identifying the employees for transfer and the right parties to involve, the next step is to prepare day-1 readiness. What does that imply?
- All employee contracts, business and IT licenses and relevant work equipment (buildings, machinery, properties, etc.) are transferred to the new company latest on day 1.
- All employees have signed an employment contract with the new company effective from carve-out day.
- Payroll is ready on day 1: all employees are set to receive payments from the new company bank account, the registration to the relevant authorities and social security institutions has been done and all data has been correctly transferred and updated in the payroll system of the new company.
- Service Level Agreements (SLAs) are useful for the service to be provided and the goals to be achieved. Either existing SLAs can be used as a guide or new ones are to be defined.
- When the new company is not able to continue providing its services directly and a "turnaround time" is needed, some TSAs (Transition Services Agreements) can be put in place. This is a better alternative in some cases than to break timelines or delay the carve-out effective date.
- Work permits are issued for the employees requiring them: during a carve-out, work permits usually must be renewed to reflect the new employment relationship. This often causes delay in transferring some employees as it is highly relying on administrative tasks that are out of the organizations control.
In this case, HR plays a crucial role as the link between all involved functions, as well as between buyer and seller, with its highest priority being the protection of employees and maintenance of the working conditions or agreed benefits.
Following the carve-out phase, the new company enters the stand-alone phase where it must run independently and continue generating value. Maintaining the same HR operating model as before is often not strategic and the new company needs to define a new target operating model. This presents its own challenges and opportunities and will be the topic of our next article on this page.
What success criteria of a global carve-out can HR support?
- Constant employee communication:
- Early and clear internal and external communication with employees to avoid rumors and speculations. This will help prevent nervousness right from the start and reduce employee stress, resulting in higher retention
- Being as clear as possible about predicted impact on working conditions, the organization, processes, and daily business
- Creating excitement for the deal by helping employees identify opportunities that the stand-alone brings - resulting in more employee engagement.
Communication is really key in divestitures. In fact, it is the least expensive thing that can be done to accomplish the goals!
- Team and cultural sensitivity – Especially in large-scale carve-outs that include employees from all over the world, it is crucial to be aware of differences in working cultures to avoid misunderstandings and disappointment through the whole process. Keeping employee representatives in the different countries informed can help prevent unplanned delays and establish trust.
- Reasonable timelines - Sellers and even buyers can be overly optimistic about how quickly and easily separation will occur.
- Focus - Not all issues are critical
- Sufficient resources – Making sure the team has the right knowledge, skills, and capabilities but also capacity
- More TSAs is sometimes better – Instead of breaking timelines, setting up additional TSAs can ensure a smoother start and transition after day 1.
- Cross-functional alignment – To be aware of interdependencies and manage them.
binder|consulting has a long-term history in successfully planned and supported carve-outs – as well as mergers & integrations. Our experts are looking forward to your contact.
Written by: Hind Ayachi