HR Carve-Out Best Practices: Protecting Employees and Deal Value
If you’re an HR professional involved in a carve-out or divestiture, it’s important to understand the ins and outs of the process to protect what matters most in the situation: both employees and deal value. In this article, we’ll explore how HR can navigate the carve-out process with confidence and create a comprehensive plan for success.
Navigating the Carve-Out Process: Tips From HR Experts
HR is an essential member of the carve-out team and plays a critical role. HR professionals act as a liaison between internal and external stakeholders while ensuring the success of the transaction, both in terms of deal value and for the employees involved.
Think of the role as that of a skilled navigator, guiding a ship through choppy waters. In the same way, HR must use its expertise to steer the carve-out process toward a smooth and successful outcome for all.
First and foremost, HR must develop a comprehensive understanding of the process itself and the unique challenges it presents. To some extent, this means being familiar with the legal and financial aspects of the transaction to work successfully with the relevant specialists. But more importantly, HR needs to understand the impact on the HR Target Operating Model (TOM), HR practices, and ultimately, the employees and their experience of change.
HR has the knowledge and experience to manage such a process, mitigate potential risks, and ensure that the carve-out is executed successfully. Let’s look at the key activities HR will need to undertake.
Protecting Deal Value and Employees: Essential Steps
Protecting shareholder value and protecting employees are inextricably linked. It is almost impossible to do one without the other. To master both, HR must focus on at least four critical areas.
Communication and transparency: HR must ensure clear communication and transparency throughout the process. Employees need to know what is happening and what it means for them, including any changes to their roles, responsibilities, and benefits. HR should provide access to resources and support during the transition period.
Employee retention: Retention of key employees is critical to the success of the transaction. HR should identify key employees early and develop retention strategies to keep them on board. This may include offering retention bonuses, providing career development opportunities or offering competitive compensation and benefits packages.
Compliance and legal issues: HR should work closely with the legal and compliance teams to ensure that all legal requirements are strictly adhered to, such as employment laws, benefits regulations, and data privacy. HR must also ensure that employee records are accurate and up to date.
IT: We live in a digitalized world, where nearly everything can and must be translated into a respective software solution. Thus, HR should consider what happens to its IT infrastructure in the case of divestiture. Which existing IT systems will be moved to the new organization? Which can be discarded due to inefficiency or inadequate fit? Which should or must be replaced, even for issues as practical as an expiring license or the termination of a vendor contract? Keep in mind that some systems are more crucial than others. Or in other words, we can only fathom the impact of a lack of functioning payroll software post Change of Control.
Culture: Whether the carve-out involves merging two different corporate cultures or building an entirely new one, HR has a role to play. The first three areas are helpful, but not sufficient. HR should help develop a cultural integration plan or build the pillars of a new culture based on a shared understanding of purpose and mission.
How to Build a Comprehensive HR Plan for Carve-Outs
A carve-out is made up of many moving parts. A structured approach is therefore the best guarantee of success. The details of a comprehensive plan will be the subject of another article. For now, take to heart the following key steps because they already give you a good understanding of what needs to be included in your plan.
Define the scope: Develop an understanding of what is being sold or divested and what this means for HR. Who are the people involved? What HR services will be delivered to them? This includes everything from compensation and benefits to recruiting, learning and development, performance appraisal, and software. As you define the scope, you will automatically identify the interfaces with other departments such as finance, IT, and legal. HR needs to work closely with stakeholders to develop a detailed project plan that includes timelines, deliverables, and milestones.
Define the Target Operating Model: In this step, you need to look at the current operating model and identify the gaps or redundancies that need to be addressed. Be aware that this may involve developing a new organizational structure and outlining new HR policies and procedures.
Manage HR transition activities: HR will oversee several transition activities, including ring-fencing the core population to be transferred and dealing with issues relating to this group, new hires, and potential redundancies. Depending on the deal, HR may need to help set up a new TOM, unit, and service offering in the new organization. This is also the time to develop a comprehensive communications plan together with PR and marketing to keep employees informed throughout the process.
Manage HR costs and risks: There are costs associated with a carve-out. By developing and monitoring a detailed budget, you can identify the risks that could affect the success of the transaction.
Implementation: Once the plan has been developed, you will need to put it into practice and monitor progress against key milestones. This will involve regular communication with stakeholders and continuous improvement.
The Art of Knowledge Transfer in HR Carve-Outs
During a carve-out process, there is always a risk that valuable knowledge and skills will be lost as employees transition to new roles or leave the company. This can cause disruption to operations and affect the overall success of the transaction. HR should ensure continuity and minimize such disruption by facilitating knowledge transfer. This includes identifying key employees and their areas of expertise, developing training programs for the incoming workforce, and establishing mentoring programs to facilitate the transfer of knowledge from departing employees. HR should also work closely with the management team to develop retention plans to incentivize key employees to stay through the transition and ensure continuity of expertise. By prioritizing knowledge transfer, HR can help ensure that the organization is well-positioned for success once the carve-out process is complete.
Working With Unions and Employee Representatives
Working with trade unions and employee representative bodies is an essential aspect of the divestment process. This is particularly true in Europe, where legislation provides a strong framework for the protection of employee rights. HR is at the center of working with union representatives and works councils to ensure that employees’ interests are protected throughout the process. You need to be aware of consultation requirements, such as works council agreements and information and consultation processes, which may vary from region to region.
It’s important to maintain open lines of communication and cooperation with employee representatives to build trust and minimize potential conflict. This includes transparent and timely communication, explaining the reasons for the carve-out, and highlighting the benefits for employees.
It also requires HR to respond quickly to any questions or concerns raised by employee representatives and to have a clear plan for dealing with any issues that arise. Working closely with unions and employee representatives will ensure a smooth carve-out process, minimizing communication risks and disruption to employees.
Navigating Cultural Integration
A carve-out is never just about the financial and operational aspects. The human element is one of the critical reasons why separation can fail. Some jobs are created, some are lost, others are transferred and uncertainty reigns. A company’s culture is a vital component of its success and needs to be addressed. This is as true for the newly created entity as it is for the organization from which it is being extracted.
Without going into the details of building a culture, let us – for now – focus on the key aspect of uncertainty. This can be addressed through transparent, timely, and complete communication. If you want to go one step further, you can include cultural expectations in the communication and start (re)building a shared understanding of values and beliefs.
But times of change also offer a unique opportunity to renew or strengthen a culture. It’s a time to shake off old perceptions and prejudices and embark on a new journey. Companies with a well-crafted change story have traditionally been more successful after a carve-out. HR can include the change story in its communications to build commitment and excitement. But HR is rarely responsible for creating the story. This is usually done at board level as part of the vision and decision process that leads to a carve-out. However, HR has a responsibility in making the power of a story come alive.
HR Is Well Positioned to Protect Employees and Deal Value in a Carve-Out
To conclude, navigating a carve-out process is a challenging task for any HR professional. But with the right approach and expertise, it can be a rewarding experience for everyone involved. By understanding the key considerations, building a comprehensive plan, and ensuring continuity throughout the process, HR can effectively protect both employees and deal value. With a strong focus on communication, collaboration, and cultural integration, a successful carve-out can create new opportunities for growth and development.
HR is in command on deck, responsible for hoisting the sails and charting the course. HR has expertise and can plunge into the carve-out with confidence and enthusiasm.