Transition vs. Transform: Using M&A as a catalyst for HR transformation

A merger, acquisition, or divestiture (M&A) is typically viewed primarily as a means of transforming the front office to achieve revenue synergies or unlocking cost synergies through the size and scale of a new business. But there’s another, often missed opportunity that could be just as powerful: using M&A as a catalyst to launch the HR function onto a new path. It’s a chance to take advantage of disruptive business and workforce dynamics and transform HR into an organization that creates and delivers sustainable value, even in the face of disruption.

M&A transactions often place significant stress on an organization and its employees. The idea of adding HR transformation to post-deal integration activities may be daunting, but not doing so may prevent the new organization from realizing its full potential.

HR transformation can quickly become an imperative during M&A. Whether the transaction is a small bolt-on or a large “merger of equals,” the number of employees served by HR will increase. The newly combined population, coupled with M&A-related cost synergy expectations, often makes transformation a necessity. In the simplest terms, HR will be expected to do more while also spending less. Transformation may be the only way to achieve that expectation.

To use M&A as a catalyst, the HR function should start with understanding the drivers behind the deal. Why is your organization buying or selling? What is the intended impact to the business—is it about growing revenue, scaling costs, or both? What does the future strategy of the business mean for employees and customers? By connecting the deal value drivers to the future direction of the business, HR will have a starting point to make transformative decisions of its own.

Timing the transformation

HR’s first major decision is deciding when to transform: should it be before or during the M&A, or should HR transition its current model into the new business and then transform later? In an earlier post, we discussed why M&A should be a critical competency for HR, but whether or not an organization has strong M&A capabilities, the decision of when to transform will serve as a guiding principle for how to organize HR to support the business during the M&A.

Several factors to consider when making the transformation decision could indicate that transforming during or shortly after an M&A might be a smart move to make:

• Case for funding—M&A events often come with the opportunity to tap into one-time budget dollars for transformation related to the M&A transaction. Given that integration requires significant investments in contract resources, consulting spend, and system upgrades, executives typically carve out budgets specifically for the integration. This can present an opportunity for HR leaders to deliver a business case for why HR should transform during the M&A and request funding for transformation activities, especially if the transformation is aligned with potential synergies. By classifying transformation activities as a one-time integration expense, HR can concurrently fold the costs into the integration budget and potentially benefit from a large return on this initial investment.
• Synergy targets—If the M&A requires each function to find and contribute to cost synergy targets, HR should approach finding the synergy targets with an eye toward delivering a more sustainable, cost effective and efficient model, which will still enable and deliver value to the business through future disruption.
• Integration as a launchpad—At first glance, it may seem prudent to avoid a sweeping HR transformation on top of an already challenging integration. However, many integration activities can be a launchpad for transformation efforts, as long as each activity is viewed through a transformative lens. For example:
• – Identifying weaknesses. Integration provides opportunities to revisit HR programs and processes that may not be efficient. Integration typically includes a detailed analysis of current-state HR activities at both legacy organizations and, as a result, sheds light on areas of inefficiency. HR leaders can capitalize on this period of self-reflection and conduct a non-biased inventory of what’s working (and what’s not).– Optimizing vs. harmonizing. A common goal of integration is to harmonize HR programs and processes across the legacy organizations. In many cases, the focus is on maintaining business continuity throughout the transaction and achieving the “new normal” as quickly as possible. However, when HR leaders undertake transformation as part of integration, they can expand the focus beyond harmonization to optimization. For example, a typical integration may include consolidating legacy HR shared services centers. A transformative integration, on the other hand, may identify opportunities to more efficiently deliver HR services, including technology-enabled improvements and process redesign.
• Time of large-scale change—During an M&A, other business functions will likely be undergoing significant change to varying degrees as well. Transforming the entire business at the same time requires substantial coordination vs. staggering the functional transformations. However, it also shortens the overall timeline during which the business is going through tremendous change. Employees will also likely be looking for and better prepared for high-volume change than they might normally be.

Managing transformative change

Certainly, adding more change—even transformative change—during an already change-heavy time is challenging. But there are ways to overcome common hurdles. For example:

• Post-Day 1 uncertainty—M&A often generates a lot of uncertainty: employees may wonder if they will have a new job, a new manager, a new office, etc. HR, in tandem with Communications, is responsible for managing this uncertainty. Typically, organizations focus on pre-close communications, but post-close communications should be a priority as well. Creating a transparent, two-way communications process will likely help ease post-Day 1 employee anxiety and aid in retaining talent. Furthermore, a clear governance and decision-making model should be established to reduce role ambiguity among leaders.
• Departmental roles and responsibilities—Integration is an important time for all functions to work together. While HR typically leads people-related change management, communications, and organizational design, it requires significant input from all areas of the business. Engaging with functional leaders early in the M&A life cycle will give HR an opportunity to understand their needs and consider their input on how employees should be managed pre- and post-close.
• Employee mapping—Combining two organizations requires comparing HR processes and policies and determining new strategies for the combined entity. Differing salary ranges, titles, and benefits can be a hot-button issue. A good approach to successfully execute employee mapping is to research and evaluate industry standards and leading practices. Retaining both entities’ current compensation structures until the new year may provide enough time to complete necessary due diligence.
• Endless “to-do” list—Completing myriad M&A-related tasks may feel overwhelming to HR staff members, especially since they must do so while also conducting regular business activities. To help ease the integration process, staff should first tackle the tasks that align with the new business strategy and have the most significant impact on employees across the entire organization.
• Returning to business as usual—Once a deal closes, many employees will no longer view the integration as a critical focus area and return their attention to business as usual. While deal close represents the legal transfer of ownership, integration is not complete. HR leaders should charge their team with carrying out post-close responsibilities for both HR functional changes and enterprise-wide initiatives. Designating an integration leader to handle pre- and post-close responsibilities can help keep all processes moving forward.

With the proper mix of planning, process, and execution, HR leadership can harness the integration’s momentum to transform the function, optimize HR’s service delivery model, and better support the business and its employees. In our next post, we’ll look at more ways to make the most of HR transformation opportunities during an M&A.

Tom Joseph is a principal in Deloitte Consulting LLP and has more than 15 years of M&A consulting experience. He works closely to plan integration strategies, plan for an issue-free “Day 1,” manage enterprise-wide organization readiness, and design the cross-functional integration program.

Matt Usdin is a principal in Deloitte Consulting LLP’s M&A Practice and leads our US and Global Human Capital M&A practice. Matt has nearly 20 years of experience advising corporate and private equity clients on achieving M&A value in integration and divestiture transactions.

Kyle Forrest is a manager in Deloitte Consulting LLP and has 10 years of HR and M&A consulting experience. He works across the M&A deal life-cycle, partnering with clients on integration/divestiture strategy and execution and how to infuse digital behaviors and technologies within the HR organization.