HR’s Leadership Role in Organizational Spin-Offs - - talentreadiness.wordpress.com - June 23, 2008 by Tom Casey

HR’s Leadership Role in Organizational Spin-Offs

Introduction

Organizational
spin-offs offer companies the chance to “reinvent” the business while
keeping a core of the familiar. Start a new company (NewCo), yet keep
the advantages of existing customers, products, operations, and people.
Re-focus an existing company (Parent) around a tighter core of business
and a new cost/operating model.

It is an exciting time of opportunity and possibility.

Yet
the opportunity in a spin-off is balanced by the challenges. These
include splitting up the two organizations, refocusing the Parent, and
launching NewCo, all the while keeping both organizations operating
profitably and serving customers. Furthermore, all of these things must
be done in a short time frame to respond to the expectations of
shareholders, analysts, customers, and employees. Execution of the
spin-off significantly affects cost savings, employee motivation, and
speed of mobilization to business performance.

For
Human Resources, a spin-off is almost unparalleled in the opportunity
it provides for significant impact on the business. HR must contribute
and lead in the following areas:

•      Business
Strategy: Define the organizational vision and culture for the Parent
and NewCo organizations, focusing on “people” as a business
differentiator.

•      HR
Strategy: Align HR programs, services, and costs with business
strategy. Choose what to keep and change from the prior organization to
increase competitiveness.

•      HR
Operations: Split the HR organization and operations into two distinct
businesses while delivering HR services to employees without
interruption.

•      Organizational
Transition: Migrate leaders and employees to the right roles in each
organization. Maintain morale and build buy-in to the new direction.

Experience
and research show that managing people issues is a key driver of
spin-off success. An examination of the challenges and lessons learned
from previous spin-offs will help senior managers and HR leaders
capitalize on this unique opportunity.

To
that end, we first provide some background on spin-offs to aid in
understanding and planning. Next, we discuss the “Top Ten” issues in a
spin-off. Finally, we describe a recommended approach and principles
for ensuring business success in the spin.

 

 

 

The Planning Challenge:

No Two Spin-offs Are the Same

Although
the term “spin-off” always means a separation of one part of the
organization from its Parent, spin-offs vary greatly from company to
company. They differ in scope, time frame, strategic intent,
organization, and many other factors. Success of the spin-off requires
an understanding of these factors so that a process can be designed
that will produce the desired business results.

Business Rationale

One
of the most important factors to consider in preparing for a split is
the business rationale. Reasons for spinning off an organization can be
grouped into three categories:

Financial              Increase market capitalization, improve market analysis, raise capital, improve debt to equity ratios, reduce liabilities, etc.

Performance     Shed
under-performing business units, resolve past issues, increase
entrepreneurship and accountability, increase speed and agility, etc.

Strategic              Compete
in new markets, acquire new technology or R&D, take a new marketing
or distribution approach, focus on narrower strategy, etc.

Most
spin-offs are a hybrid of these reasons, but understanding the specific
drivers of a particular spin-off is essential to constructing an
effective plan.

Size and Scope

“Size
and scope” refers to the number and size of the business units to be
spun off (e.g., revenue, people, customers, products), as well as the
characteristics of those business units. Characteristics include the
number of countries in which the businesses operate, the degree to
which they share infrastructure with the Parent (e.g., information
systems, support services), and/or the extent of overlap of customers
and products between the Parent and NewCo.

Size
and scope have tremendous impact on the speed, resources, and processes
needed to complete the spin-off successfully. Most companies
underestimate how significant these differences can be. For example,
meeting legal requirements in multiple countries (e.g., financial
reporting, labor law) may require double the amount of work in a
strictly U.S. transaction. Similarly, a decentralized unit with its own
infrastructure may be able to spin off under a much more ambitious
timetable.

 

 

 

 

Spin Structure

Another
key factor is the type of divestiture chosen for the NewCo to split
from the Parent. Strictly speaking, a spin-off occurs when the Parent’s
stockholders are given new stock representing ownership in what is
established as NewCo. A new board of directors and officers are chosen,
and NewCo becomes a stand-alone company. Stockholders then own shares
in two companies (Parent and NewCo), but no cash is transferred.

By
contrast, a straight divestiture is the sale of some of the Parent’s
operating assets, usually an entire business unit, for cash and/or
stock of the acquiring firm.

Third, liquidation occurs when the assets of a business unit are sold off piecemeal, rather than as an operating entity.

The
focus of this discussion is on spin-offs, but there are many
similarities in tasks and requirements with all of these different
transactions (including a merger or acquisition—the reverse of a
spin-off).

Note:
Spin-offs can be further segmented into pure spin-offs and equity
carve-outs. In an equity carve-out, the Parent sells an interest of
less than 20% in NewCo to the public in an initial public offering
(IPO). (An equity carve-out is typically done to raise capital and may
be a prelude to a full-fledged spin-off of the remaining interests.)

Organizational Culture

A
final difference across organizations that significantly shapes the
spin-off process is organizational culture. Culture is especially
important to consider because although its influence is harder to see
it has a tremendous effect on results.

For
example, while some companies struggle with tough people decisions,
such as filling key leadership positions and transitioning employees
into new roles, other companies struggle with the level of execution
needed to conduct a successful spin-off within timeframes, thereby
missing key details or deadlines. Finally, some companies are slow to
recognize how centralized their decision-making has been in the past
and have difficulty operating as an entrepreneurial NewCo.

A
successful spin-off requires that the Parent consider all of these
factors in forming a plan tailored to its organization and business
goals.

Transition and Transformation: Managing Competing Tensions

There
are two apt metaphors for the challenges facing HR in dealing
simultaneously with both transformation and transition: “changing the
tires on the car without slowing down” and “redesigning the airplane
without crashing.” Achieving these competing objectives is the most
difficult–but also the most satisfying—part of a spin-off.

 

“Transformation”
refers to the challenge of refocusing the Parent and/or launching NewCo
to function as a more competitive, market-focused organization. HR
clearly plays a role in shaping the new organizational vision and
culture as one that motivates employees and engages their skills. HR
must also transform the HR function itself, which typically must tailor
itself to better reflect the business needs and cost model of an
updated organization.

“Transition”
refers to the challenge of maintaining all necessary HR processes and
services during a time of great uncertainty and change. During this
period, employees still need to get paid and receive benefits and
services. Employees and line managers need more communication as more
benefit questions arise, and more help is needed with workforce
planning and staffing decisions. This requires creating at least an
interim HR function for two organizations from what had been a single
HR department.

Operationally,
the competing tensions of transformation and transition show up in
decisions about time and resource allocation, both for the HR leader’s
role and for the HR function as a whole. While all of the work needs to
get done, there are big differences for HR in terms of prioritizing
each task versus defining how it adds value.

For example:

•      The
HR leader can work with senior management to define the future vision
of the Parent or NewCo. This may include the desired culture, values,
talent, customer service, and performance. But it can go beyond that to
include matters traditionally outside HR, such as cost reduction or
restructuring of the sales and distribution strategy.

•      The
HR leader can focus on ensuring high levels of performance during the
transition. This may include playing a key role in shaping employee
communications, creating short-term incentives and rewards, or
supervising program management for the overall transition effort.

•      The
HR leader can focus on the HR function itself, ensuring that HR
services meet all transition needs and leading the transformation
toward the future HR.

These
same tradeoffs apply to the HR function as a whole. What resources
should be directed toward the exciting opportunities to design the
future HR function? Should the “best and brightest” work on
transformation, while the “steady and reliable” work on transition? To
what extent should HR focus its energies internally on its own
operations versus helping line managers and employees deal with change
in the business? A clear set of priorities is essential to effectively
manage these tradeoffs and promote business success.

 

 

 

 

What Needs To Be Done:

The Top 10 HR Requirements in Spin-offs

 

A
spin-off is much more than just a checklist of tasks, but it is helpful
to understand the major categories of work that HR must lead or help
facilitate. Below is a “Top Ten” list of HR requirements. Appendix A
includes a more detailed listing of each.

This
Top Ten list is not arranged in priority order because priorities vary
significantly from company to company. Yet each requirement is
important in its own right and can produce significant problems if
poorly managed.

We
also encourage HR staff to work closely with senior management and
other support functions (finance, legal, IT, corporate communications,
etc.) in a coordinated effort to manage the “Top Ten” requirements.
Action will be faster, more effective, and executed with greater buy-in
with this type of coordination. Some organizations establish a
cross-functional Program Management Office (PMO) to provide this
coordination for the Top Ten requirements, as well as overall for the
spin-off.

 The Top Ten requirements are:

1. Communication

Advise
internal and external stakeholders of the direction, objectives, and
progress of the spin-off. Communicate information on compensation and
benefits, job implications, and HR programs and policies to managers
and employees so they can stay focused on their core competencies. Use
communication strategy and media to address concerns and increase
commitment, appropriate to business goals. Enable the needed attitude
and behavior shift from transition to genuine transformation and
reinvention.

2. Maintaining Productivity

Establish
goals, plans, measures, and incentives to keep the business operating
effectively and to ensure customers are served during the spin-off. Use
celebrations, rewards, visible scorecards, and executive/manager
communications to keep employees’ “eye on the ball.”

 

3. Organization Structure

Determine
which business units to spin off and how they will be organized and
structured. Design geographic and organizational roles and reporting
relationships. Split each of the Parent support units into two separate
teams, one tailored to the Parent and one to NewCo.

 

4. Leadership and Governance

Establish
a governance structure for NewCo and update the governance structure of
the Parent, including roles for senior executives and the board. Assess
internal and external candidates. Staff executive roles and the board
of directors. Launch the new leadership structure to align with the new
roles and direction.

5. Retention of Talent

Retain
key employees during and after the spin-off. Position both companies as
an “employer of choice” to help with the recruitment and retention of
top talent. Adjust workforce/leadership staffing levels and skill sets
to meet new business needs.

6. Executive Compensation

Benchmark,
design, and financially size compensation, equity, and benefit packages
for executives, staff, and the board of directors. Communicate the new
packages to promote commitment and performance. Model costs and provide
input for S-1 filing.

7. Stock/Equity Planning

Address
the change in equity ownership resulting from the spin-off. Maintain
the intrinsic value of existing option grants. Define new approaches
for qualified plans, stock purchase plans, and restricted stock plans.
(Equity arrangements are especially complex globally.) Assess the
legal, regulatory, and financial impacts. Draft the necessary legal
filings and new plan designs.

8. Employee Benefits and Liabilities

Split
and/or assign all existing liabilities and tax treatments for pension,
deferred compensation, long-term disability, retiree medical, and
accrued vacation benefits. Develop a new benefits structure for NewCo.
Model costs and liabilities and draft language for filings and plan
designs.

9. Compliance Domestic/International

Identify
and resolve any HR legal compliance issues. Domestically, these pertain
to qualified plans, ERISA, EEOC, COBRA, HIPAA, excess parachute,
confidentiality, and employment contracts. Internationally, they
pertain to works councils, data protection, severance triggers, and
unions.

10. HR Strategy/Service Delivery

Align
HR strategy with the Parent’s and/or NewCo’s business direction.
Determine the plan/approach to delivering HR services, both short- and
long-term, including cost, infrastructure, and technology. Deliver
priority services tied directly to the spin-off (talent, change
management, etc.). 

 

 

 

These
Top Ten requirements together represent a significant amount of work,
and it has to be accomplished in a short period of time. HR should lead
much of this work, while partnering with senior management and/or other
support teams on the rest. See Appendix A for further detail on each of
the Top Ten requirements. 

Recommended Approach and Principles

Our
experience with organizations during spin-offs shows that an overall
approach is essential to organize the wide range and complexity of
activity required. A framework for orchestrating a spin-off is shown
below.

A spin-off can be thought of as having three distinct phases: Pre-Spin/Deal

Closure, Transition Management/

Transformation Plan, and

Implementation/Optimization.

HR’s role in Phase 1 is primarily due diligence. HR’s major activities begin toward the end of

Phase 1 and extend through  Phases 2 and 3.

In Phase 1, HR’s due diligence activities focus mainly on the financial and certain operational

implications of the proposed spin-off. Knowledge of  employee benefits and liabilities is particularly important  at this stage, to understand the financial  burden that will be assumed by the Parent and NewCo following the spin-off.

Other key issues  include projecting the strength of each company’s  leadership team and estimating the HR infrastructure cost of each company.

Phase 2 is extremely intense because  of
the tight schedule and the huge amount of work to be completed. HR must
simultaneously perform transition management for today and
transformation planning for tomorrow. Transition management affects all
aspects of the Top Ten, from communication through talent retention and
from stock/equity planning to compliance. Transformation planning in
Phase 2 focuses on HR service delivery, talent, and compensation and
benefits.

 

Phase
3 requires careful implementation management and measurement of
increased value to the business. This phase is less about vision and
design; it’s all about execution. Achieving some “quick wins” is
essential while building longer-term capabilities.

 

 

Program
management and communication/change management span all three phases.
Program management is responsible for the overall spin-off plan (either
for HR alone or as part of an organization-wide PMO) and for ensuring
that deadlines and milestones are met. Communication and change
management ensure that all stakeholders understand what is occurring
and are motivated to participate in and support the effort.

 

In
addition to the spin-off framework, our experience suggests that five
principles are particularly important to successful spin-offs. These
principles are based on our first-hand experience helping clients to
lead people and organizational action during a spin-off. They are
crucial to managing such a complex undertaking in a brief time frame.

 

Capitalizing on a Unique Opportunity

Human
Resources as a profession has worked for years to position itself to
have significant impact on the business. Spin-offs represent a rare
opportunity to achieve this reality through:

•      The ability to participate in new company, culture, and HR strategy/design

•      The unusual opportunity to engage senior management, business units, and other support organizations

•      The
opportunity to achieve tangible business outcomes in sum, a spin-off
can provide Human Resources with a significant showcase for its
capabilities, enabling it to build credibility in the organization.

But
executing well on this opportunity requires leveraging the lessons from
other companies that are documented in this paper. It also requires HR
leaders to play a centrally positioned role of influence in a spin-off.
By doing so, HR can demonstrate a higher level of performance and
thereby help the business deliver significant increases in shareholder
value.