Human Capital in transactions
We are currently living in an era characterized by organisational changes. Transactions in terms of acquisitions and mergers are high on the management agenda. Financials and legal aspects often constitutes the core of the decisions and consequently, they become the “deal breakers” when transactions are not completed. But what about the human capital?
A wise colleague of us once said; «you will have to ask yourself the question; what would have been left of the company if all employees disappeared? » The answer in most cases is probably; “as good as nothing”. The choice of completing a transaction is often a strategic decision based on the expectation of obtaining synergies and profits. Experience shows that the objectives of the transaction are hard to obtain if the human capital side of the transaction is insufficiently attended to.
The challenges of the integration process
In the wake of an acquisition, merger or other types of company transactions, starts the integration process where – in an ideal world - employees from different corporate cultures are to be melted together into one uniform organisation. One focuses on target oriented 100 day’s plans, system- and process integration, management team set-up, etc. And yes; these are critical tasks which requires explicit attention. However, we know that the risk of loosing key personnel are imminent during this process. Evidently, several organisations struggles with loss of motivation and sense of belonging as well as high turnover at all levels of the organisation, even long after the integration is formally completed.
So; how can this be prevented?
Information need related to the human capital of the organisation
Our experience is that a critical success factor for a transaction is sufficient knowledge about the human capital of the organisation. Thorough planning upfront and during the process increases the probability to succeed in obtaining sufficient knowledge about and insight into the human capital aspects.
As in everyday life, it is easier to make a qualified decision the more information one have available. Our wise colleague said in the same conversation; “in its most simple terms, this can be compared to acquisitions one makes as an individual, e.g. a car. In such situations, you would want to know as much as possible and be able to assess the expected and potential consequences based on the available information. Are there any potential challenges with the motor which requires specific attention, one would need to assess which measures that would need to be taken to get the car on the road”.
Indeed, a very simplified illustration, but still, a sensible one. The human capital is in most cases the “motor” in the organisation and it will be wise to assess all aspects where there are available information.
The buyer can learn quite a bit about its new «partner» through due diligences and other initiatives for mapping. But, which information should one search for in such a process?
Which assessments should be conducted?
Culture; so important, but still so hard. Research shows that “culture- crash” is the main reason in half of all “unsuccessful” integration processes. This is not only the case for the typical cases, such as cross boarder integrations, but also for transactions within the same country and even within the same industry. There can be hidden culture differences even where the environments which are to be merged appears “similar”.
In most companies, it is possible to conduct a cultural assessment during the pre-transaction phase. Typically, the cultural assessment can be aimed at revealing the core elements of the corporate cultures, and which similarities or differences exists between the two organisations. Which core values exists in the two organisations and how are they alike? To be aware of the similarities and differences upfront of the transaction and subsequent integration can be very helpful on the way towards a common multiple.
Employment contracts and compensation; analysis of the current employment contracts and compensation models is essential to understand the human capital of the organisation, but can also work as an “indicator of culture”. How are the employees compensated? What are their attitude towards working hours and overtime? How do the employee’s bonus agreement look like and which liabilities will they bring about? Are there any individual special agreements and if so; why? Is the organization bound by any tariff agreements? Which benefit programs exist and will it be possible to combine or merge this program with the buyer’s existing program? Does the pension agreements provide for better terms and conditions than those provided by law, and how is the benefits and compensation-model composed? The answers to these questions will give you a hint of what would be the key drivers in the organisation, and indicate how the management has utilized available tools to drive the organisation forward.
Hidden ghosts; and other «shady» aspects can be revealed through a thorough assessment of the human capital of the organisation. Important aspects to assess can be related to current disputes or lawsuits, the dialogue with the unions and claims from employees towards the company, as well as the expected risk of future claims from employees ,e.g. in relation to organisational changes, changes in pension schemes or similar.
Workforce demographics; an overall analysis of the age structure and competence can give answer to rather commonplace, however critical, questions. The number of senior personnel with critical competence and experience is growing rapidly in Norway. Their competence and skills are to be replaced and the transfer of knowledge will need to be taken into consideration. Organisations characterized by such demographics will meet challenges related to both expectations and requirements. The younger generations will occasionally have other expectations and requirements than their more senior co-workers. A mapping of the workforce demographics can indicate consequences – financial and procedural – which can be expected, and non the less an overview of possible awaiting liabilities.
Talent management and retention; the way organisations procedurally work with talent development and management often differ extensively. Are there any established processes and systems for employee dialogues, employee development, competence management and succession planning, etc., and how can this be integrated and continued in a sufficient manner? Does the company have contracts with critical providers who can support such implementation going forward?
In particular, one should focus on keeping those employees considered critical for future value creation, who can also contribute to realise the expected synergies and effects of the transaction. Such efforts are often referred to as «retention initiatives”.
The organisation run the risk of loosing key personnel, if measures are not taken to keep them. There are many ways to ensure that employees stays with the company through a transaction and subsequent integration, including both financial and more immaterial instruments.
New empirical data points in the direction of reduced effect of financial instruments, and that Norwegian employees are more motivated by working for a company which holds congruent values with their own, with a clear strategy and which focus on the «whole employee». What would be the right measure to take to ensure retention will depend on the type of organisation, which implies that the answer will not be given in this article. A tip though, can be to assess and plan for these aspects in the pre-integration phase and ask yourself; how do I know who is critical? What motivates the employees, what is the culture for use of financial instruments and what is the leeway for using such instruments, etc.?
Communication and information
Often, the more you know, the more at ease one can be. Consequently, we believe that open and clear communication and information throughout the process – as early as possible – is positive. Easier said than done – yes – but it can be worth the while. To receive information about which potential changes one will face, which consequences it will have and an assurance from the management team that critical aspects are considered, can be crucial. Of course, timing will be a question, and it can differ from situation to situation, as well as be dependent on the need for confidentiality.
We have pointed out some of the key aspects related to the human capital of the transaction. The list in not exhaustive and the challenges will differ based on type of company, size, geography and industry. However, organisations will be well equipped to obtain a successful transaction if time is dedicated and focus is set on aspects related to the human capital and culture. And yes, during the pre-transaction and integration phase.
Jeg heter Anne-Lene Festervoll og er Partner i PwC’s Consulting enhet i Stavanger. Jeg har igjennom de siste åtte årene bistått flere av våre kunder i større omstillingsprosjekter, og har igjennom dette blant annet fått anledning til å jobbe mye med HR relaterte utfordringer. Jeg leder i dag vårt arbeid innen People & Organisation hvor vi bistår våre kunder i deres arbeid med relevante prosjekter og utfordringer.
Vi befinner oss midt i en periode med organisatoriske omveltninger og til daglig søker vi å bistå våre kunder med å besvare spørsmål relatert til organisasjonsendringer, effektivitetsanalyser og transformasjoner, sentrale aktiviteter relatert til humankapital i oppkjøps- og integrasjonsprosesser, strategisk styring av kompetanse, talentutvikling, lederutvikling med mer. Vi jobber målrettet med å møte våre kunders behov og tilpasser løpende våre tjenester for å gjøre dem mest mulig dagsaktuelle. Dette bidrar til kontinuerlig tjenesteutvikling og spennende utfordringer hver dag!
Ta gjerne kontakt med meg dersom du har kommentarer, innspill eller ønsker en uforpliktende prat rundt temaet.
My name is Anne-Lene Festervoll and I work as a Senior Manager in PwC’s Consulting department in Stavanger. Throughout the last eight years I have been part of larger transformational projects, where I – amongst others – have had the opportunity to work with several HR related challenges. Today, I am heading our work within the service area People & Organisation in Stavanger.
Today’s market is characterized by large organisational turn-arounds where we support and advise our clients on topics related to organisational change, efficiency analysis and transformations, aspects related to human capital in transactions and integrations, strategic competence management, talent management, leadership development, etc. We work to meet our clients need and adjust our services to make them relevant to their current challenges. This leads to continuous service development and exciting challenges every day!
Please reach out if you have any comments, questions or wish to have a non-binding conversation related to these topics.
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