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

Abstract
The 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 for the 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 and how 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 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 just combine) its capabilities 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 significant change. 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 of waiting 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 play in 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 future growth 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, every situation is unique. Some companies may already be in the midst of HR transformation when 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 transformation makes 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

that keeps the company running. This is normally HRs full-time job. Second, HR must support 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 such as 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 own operations, including consolidation policies, programs, systems, processes, and staff. In addition to expanding responsibilities for HR, the operating environment for everyone changes 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 HR Transformation is more tightly linked to corporate strategy and to creating business value through 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 improve and 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 satisfy todays 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 the mid-1990s, gradually evolving from HR strategy presentations to full-blown transformation initiatives and enterprise- wide implementations by the middle of the decade. First Generation HR Transformation focused on changing the existing relationship between employees, managers, and HR. With technology as a key enabler and 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 their own 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 HR needs. 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 barely existed a few years ago, much less a decade ago. Global competition and an ageing workforce 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 the problem 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, Gen Yers, and telecommuters.

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 Transformation was 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 where competition is global and talent is scarce. Next Generation HR Transformation should focus on developing specific services that are directly linked to strategic challenges such as increasing revenue through new market entry or mergers and acquisitions. This shift will 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 interesting to see how HR steps up to the challenge.

Reasons to consider HR Transformation

Despite these challenges and contrary to conventional wisdom we believe the starting 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 every aspect 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 a single 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 way HR 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 have both 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 transaction volume and an expanded global footprint? y What HR services are needed to acquire, develop, and retain new and critical talent? y What skills and experiences will HR staff need in order to support the new strategy? 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.

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 for the better part of this century. At the same time, emerging economies, such as those of Brazil, Russia, India, and China, are becoming increasingly important both as sources of skilled labor and as potential markets for new revenue growth. Accounting scandals and 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, companies face never-ending pressure to cut costs, even as payroll and benefits spending rises unabated.

HR Infrastructure

HR Capability

HR Solutions

First generation HR Transformation

Next generation HR Transformation

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 and infrastructure 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 HR Transformation focused on restructuring HR operations and establishing a new HR service delivery model with a strong emphasis on technology, process design, and efficiency. 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 to business issues (See Figure 2). y Many companies have implemented only some of the foundational components of the HR service delivery model. In the Next Generation HR Transformation, companies will complete their operational restructuring.

Evaluating the need for transformation

M&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 following framework includes a wide range of decision factors grouped into five broad categories: y External Factors y Merger Scope y 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 a fundamentally different strategy after the merger are likely to need fundamentally different HR services and capabilities particularly in strategic areas such as talent management, succession planning, rewards management, and recruiting. The same is true for companies facing aggressive growth and synergy targets, or significant increases in competitive pressure. To help the business tackle these challenges, HR will need to shift its focus and transform the way it operates.
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e Strateg . The strategy of the combined entityis fundamentally new and different. g gress ve gro th and s nerg targets. The company is expected to deliver significant revenue growth and cost savings over and above what can be achieved simply by combining the businesses.

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Stable compet t ve env ronment. The competitive environment is stable and the combined entity will have a strong position against competitors.
Stable strateg . The strategy of the combined entity is similar to each legacy company's strategy. S mple gro th. rowth and synergy targets can largely be achieved simply by combining the businesses and capitalizing on economies of scale.

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F gure 2. ........................ Merger Scope If the merger will involve fundamental changes to the business e.g. new operating model, larger global footprint, increased workforce size and complexity HR must adapt itself accordingly. For example, an expanded geographic footprint requires HR to address a wide range of new challenges, including local hiring and staffing, local

HR operations, and local workforce regulations. Similarly, a larger and more complex workforce requires HR to serve a much broader range of stakeholders with new and different needs. A significant merger is likely to drive changes in all aspects of the HR function, including HRs organization structure, staffing, technology platforms, services, delivery models, and more. Executing these discrete changes as part of a broader transformation vision for HR will help HR grow and adapt effectively over time.
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Figure 3. ........... takeholder upport Any fundamental shift in operations is a long-term undertaking that will have both ups and downs, as well as fundamental leaps forward. o achieve or exceed expected objectives, a transformation needs strong support from senior management. he most effective approach is to paint a realistic picture and then engage the CEO and other top executives in the new vision. At the same time, it is important to gain the trust of middle management, since they are the stakeholders most responsible for making the daily changes that will lead to the transformation. he pitch for HR transformation as part of a merger should be as natural as the assumption that a deal will require a new I strategy. Armed with the right message and a strong business case, proposing an M&A led HR transformation can actually enhance HRs image as a strategic, forward-thinking business partner.

    

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HR Specific Factors At the highest level, HR organizations worldwide provide the same types of basic services, track the same types of data using the same types of systems, and are organized to operate in similar ways. On the ground floor of any organization, the HR function can vary significantly, even within the same company. Over time HR organizations evolve into different shapes and sizes based on the unique needs of the businesses they support. In a merger situation, these differences need to be identified, analyzed and then rationalized. The case for HR transformation is strongest if one or both HR functions are already at an inflection point. In these situations, an M&A led HR transformation can be a welcome springboard for change.
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Ver different models.The two HR organizations have fundamentally different models for service delivery and staffing. The may include disparate organizational models, as well as a complex mix of in-sourcing, outsourcing, and off shoring. eeds improvement.One or both companies believe HR could significantly improve its efficiency and value. Dissimilar roles or the rong focus. The two HR organizations play different roles in the business, and o r their competencies dont align well with the companys future strategy. Different and difficult to integrate. The two companies have HR systems and technology strategies that are significantly different and integration is expected to be a ma or challenge.
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Similar models. The two HR organizations have similar models for delivering services, and their staffing models are closely aligned in terms of organizational roles, performance ob ectives and compensation.
Solid HR operations. oth companies are satisfied with their HR operations and the value that HR provides. Similar roles and strong usiness alignment. The two HR organizations play similar roles in the business and their competencies align well with the companys future strategy. Similar or easily integrated. The two companies have HR systems and technology strategies that are similar and or relatively easy to integrate.
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Conclusions
To better understand the key success factors in an integration process, we must first 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 the level of success or failure after the M&A is completed. However many organizations ignore 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 a crucial 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 other departments. 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 a classic 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 can also 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. We believe 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 just combine) 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 John Wiley 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