hr transformation in m&a

8/6/2019 HR Transformation in M&A

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Beyond HR integration - Is a merger the right time to launch a

transformation?

Adrian Grosu, Bucharest University of Economics ASE

Florin Grosu, Bucharest University of Economics ASE

AbstractThe term HR transformation is starting to play increasingly strategic role in any

integration process as more and more companies the importance of the HR integration forthe success of the overall integration process. This paper sets out to examine key factors

to consider when deciding whether to pursue HR transformation as part of a merger andhow far to go. We will be focusing on the factors influencing the decision of whether to

transform HR as part of a merger or to wait until the environment is stable. We will also be presenting the evolution of the HR transformation from the First Generation HR

Transformation to the Next Generation of HR Transformation. Results suggest that byspending a little time thinking about M&A led HR transformation early in the planning

process and by consciously looking for opportunities to improve (not just combine) itscapabilities throughout the merger lifecycle HR can pave its own path to success.

Keywords: Mergers & Acquisitions, HR function, HR transformation, Synergy

Introduction

A typical merger integration process involves major decisions and significantchange. One new approach that we are seeing start to take hold is to think about

transforming support functions such as HR during the integration process instead ofwaiting until after the organization is stable. This approach is driven partly by immediate

integration needs, and partly by the increasingly strategic role that HR is expected to playin business today. For many organizations a merger may be the right moment for HR to

boldly develop the services and capabilities it needs to support the companys futuregrowth objectives changes that go far beyond basic integration. Also, thinking about

HR transformation as early as possible in the M&A lifecycle can help the integration

team make short-term decisions that position HR for long term success. Of course, everysituation is unique. Some companies may already be in the midst of HR transformationwhen the merger begins. Others may still be in the thinking or planning stage. In all

cases, its important for a company to determine exactly how much HR transformationmakes sense during the course of a particular integration.

The moment the merger is starting HR responsibilities literally triple in number.

First, HR must continue to provide the day-to-day services and transaction processing


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that keeps the company running. This is normally HRs full-time job. Second, HR mustsupport the critical people-related merger integration needs for the entire enterprise.

Often, an issue-free Day One hinges on HR moving mountains to tackle challenges suchas leadership selection, organization design, staff consolidation, employment terms and

conditions rationalization, communications and of course, making sure HR data, benefits

administration, and payroll processing are fully tested and operational upon deal close.HRs third role, like every other support function, is integrating and preparing its ownoperations, including consolidation policies, programs, systems, processes, and staff. In

addition to expanding responsibilities for HR, the operating environment for everyonechanges resources are scarce, employees (including HR staff) are uncertain about their

future, and legal restrictions and organizational politics can supersede rational decisions.

Defining HR Transformation

HR Transformation initially focused on making HR operations more efficient and

effective through process standardization and technology. The next generation of HRTransformation is more tightly linked to corporate strategy and to creating business valuethrough HR services that address a companys most pressing strategic challenges. That

means anticipating critical workforce trends, shaping and executing business strategy,identifying and addressing people-related risks and regulations, enhancing workforce

performance and productivity, and offering new HR services to help a company improveand grow. The practice of human resources management has evolved dramatically over

the past ten years. Some might even argue that those changes are sufficient to satisfytodays business requirements. But will they be enough to meet the critical challenges of

tomorrow? We believe its unlikely.

The First Generation of global HR Transformation began to take shape in themid-1990s, gradually evolving from HR strategy presentations to full-blown

transformation initiatives and enterprise- wide implementations by the middle of thedecade. First Generation HR Transformation focused on changing the existing

relationship between employees, managers, and HR. With technology as a key enablerand process re-engineering as a mantra, this First Generation effort sought to help make

employees more self-sufficient, whilst asking them to take more responsibility for theirown careers. It also sought to help remove HR from the middle of the employee/manager

relationship by making managers more responsible for handling their employees HRneeds. Over the past ten years, HR Transformation has led to a major restructuring of HR

operations and processes transforming the way HR services are delivered. Yet, there is

still much work to do. Companies today face significant HR challenges that barelyexisted a few years ago, much less a decade ago. Global competition and an ageingworkforce are combining to create a talent shortage that is expected to last well into the

21st century. Companies are already struggling to find people with critical skills, and theproblem will only become worse. As a result, companies around the world are turning

increasingly to non-traditional sources of labor, such as offshore workers, retirees, GenYers, and telecommuters.


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HRs effectiveness will hinge on anticipating workforce trends, finding the right talent,and learning to harness the full potential of workers whose values and work habits are

very different from those of the existing workforce. First Generation HR Transformationwas focused inward: finding ways to manage and deliver existing HR services more

efficiently. The Next Generation of HR Transformation will look outside the function to

help companies achieve their desired results and growth in an environment wherecompetition is global and talent is scarce. Next Generation HR Transformation shouldfocus on developing specific services that are directly linked to strategic challenges such

as increasing revenue through new market entry or mergers and acquisitions. This shiftwill require HR to build services in new or non-traditional areas, such as workforce

planning, talent management, mergers and acquisitions, global workforce security,change management, and global mobility. The next decade will provide HR with

significant opportunities to help make a difference to the company; it will be interestingto see how HR steps up to the challenge.

Reasons to consider HR Transformation

Despite these challenges and contrary to conventional wisdom we believe thestarting shot for a merger can also be the starting shot for an HR transformation. The

reason we believe so is that most significant mergers have a material impact on everyaspect of HR from customers served to ongoing operational strategy. Most companies

are proficient at addressing each of these angles in isolation and through the lens of asingle merger. However, we recommend taking the process one step further and

considering these decisions holistically and as part of a larger vision for changing the wayHR operates. We call this more complex, yet thoughtful approach an M&A led HR

transformation.Thinking about transformation during the integration rather than after can help

the HR integration team find the right answers to critical integration questions that haveboth an immediate and long term impact, such as:

y What HR capabilities are required to support the mergers growth goals?

y What HR technologies are needed to efficiently handle increases in transactionvolume and an expanded global footprint?

y What HR services are needed to acquire, develop, and retain new and criticaltalent?

y What skills and experiences will HR staff need in order to support the newstrategy?

y What is the right price point for the services that HR needs to provide?y M&A led HR transformation can enable HR to develop services and capabilities

that better address the combined entitys short- and long term business needs.


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Next Generation HR Transformation

Companies today face significant business and HR challenges that barely existed

a few years ago. Ageing workforces and shifting demographics are creating a major talent

crisis in Western Europe and North America a problem that is expected to endure forthe better part of this century. At the same time, emerging economies, such as those ofBrazil, Russia, India, and China, are becoming increasingly important both as sources

of skilled labor and as potential markets for new revenue growth. Accounting scandalsand other misconduct have led to increased public scrutiny and new legislation, such as

Sarbanes-Oxley, raising the bar for reporting and compliance. And, of course, companiesface never-ending pressure to cut costs, even as payroll and benefits spending rises

unabated.

Figure 1. The evolution model for the HR transformation

The HR function plays a key role in tackling these challenges. HR must help

companies identify and tap new sources of labor. It must develop capabilities andinfrastructure that can be easily scaled in response to mergers and divestitures. And, it

must improve its ability to get up and running quickly and effectively in new markets.Most important, it must establish a process of continuous improvement, constantly

adapting to the shifting requirements of the global marketplace. First Generation HRTransformation focused on restructuring HR operations and establishing a new HR

service delivery model with a strong emphasis on technology, process design, andefficiency. The result was a solid base of HR capabilities and an efficient infrastructure

for the future. Next Generation HR Transformation will build on that foundation by

expanding HRs roles and capabilities and by developing HR solutions directly tied tobusiness issues (See Figure 2).

y Many companies have implemented only some of the foundational components ofthe HR service delivery model. In the Next Generation HR Transformation,companies will complete their operational restructuring.

HR

InfrastructureHR Capability HR Solutions

First generation HR Transformation

Nextgeneration HR Transformation


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Evaluating the need for transformationM&A led HR transformation can be a powerful tool; however, many factors come

into play when deciding whether to transform HR as part of a merger. The followingframework includes a wide range of decision factors grouped into five broad categories:

y External Factors

y Merger Scopey Stakeholder Support

y Time Limitations

y HR-Specific Factors

This decision framework can help understand the when and why of an M&A led

HR transformation.

External Factors

The need for HR transformation is often driven by external factors that go far

beyond the Day One merger requirements. Companies that expect to pursue afundamentally different strategy after the merger are likely to need fundamentallydifferent HR services and capabilities particularly in strategic areas such as talent

management, succession planning, rewards management, and recruiting. The same is truefor companies facing aggressive growth and synergy targets, or significant increases in

competitive pressure. To help the business tackle these challenges, HR will need to shiftits focus and transform the way it operates.

Less mmed ate need for H

transformat on

More mmed ate need for

H transformat on

Compet t ve env ronment Stable compet

t

ve env

ronment. Thecompetitive environment is stable andthe combined entity will have a strong

position against competitors.

Chang

ng compet

t

ve env

ronment.The combined entity will operate in anew, highly competitive and

or

changing environment.

Strateg Stable strateg . The strategy of thecombined entity is similar to eachlegacy company's strategy.

e

Strateg

.The strategy of the

combined entity is f undamentally newand different.

Merger goals S mple gro th. rowth and synergytargets can largely be achieved simply

by combining the

businesses and capitalizing on

economies of scale.

ggress

ve gro

th and s

nerg

targets. The company is expected to

delive r significant revenue growth and

cost sav ings over and above what can

be achieved simply by combining thebusinesses.

F gure 2. ........................

Merger Scope

If the merger will involve fundamental changes to the business e.g. newoperating model, larger global footprint, increased workforce size and complexity HR

must adapt itself accordingly. For example, an expanded geographic footprint requiresHR to address a wide range of new challenges, including local hiring and staffing, local


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Conclusions

To better understand the key success factors in an integration process, we mustfirst understand the reasons why most M&As fail to generate added value for their

shareholders. According to a study from Hewitt Associates cited by Galpin and Herndon

(2007), the way HR issues are managed right from the beginning will determine thelevel of success or failure after the M&A is completed. However many organizationsignore or pay little attention to HR integration, mostly because it is the most difficult one

to manage.But what is the role of the Human Resources department during merger

integration? The role of the HR department is a bit different than others and plays acrucial role in the overall integration success. That is because the HR department is

responsible both for its own integration and for a smooth transition of the otherdepartments.

In 2006 Greenspan pointed out that many failure reasons in M&As integration can be traced to the exclusion of human resources professionals in the pre-deal planning

phase and the functions last minute inclusion after the transaction has closed. Its aclassic case of too little, too late.

If the greatest difficulties in most mergers are people, the HR department can play

a crucial strategic role and positively influence the outcome of the integration process,resulting in creating added value for the shareholders.

A merger can place the HR function under tremendous pressure; however, it canalso provide an unmatched opportunity for HR to shine. During a merger, HR is at the

center of important conversations about leadership, culture, and talent management. Webelieve that by spending a little time thinking about M&A led HR transformation early in

the planning process and by consciously looking for opportunities to improve (not justcombine) its capabilities throughout the merger lifecycle HR can pave its own path to

success.

References:

Galpin, Timothy J., Herndon, Mark. The complete guide to mergers and acquisitions:

process tools to support M&A integration at every level. Second Edition. 2007 JohnWiley and Sons, Inc, pp. 219-221.

Greenspan, D.S. HR& M&A: 10 Critical Success Factors for Planning &Implementation. GlobalHR, 2006. Retrieved Aug. 23, 2006, from www.bound4.com/b4

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