Merger integration programs pose demands on the HR team collectively and on HR executives individually that are typically tough and sometimes unreasonable. It is the unavoidable result of the dual pressures of simultaneously having to provide business support to help get right the myriad “people decisions” in the merger, and having to deliver significant synergies by combining and streamlining the HR functions of the two merging companies.
This article describes why and how HR is critical in a merger integration program, the challenges the HR function will face, and what HR executives need to know and do to help make the merger a success for the company, for the HR team and for themselves.
The Criticality of HR for Merger Success
Mergers can be risky and expensive, are time consuming to plan consummate, and almost always extremely difficult to execute correctly. Mergers often tax even the most well run and experienced companies, and demand all of those involved to be at the top of their game.
That’s especially true of the HR organization.
While other functions in a company play important roles in a combination, HR is at the heart of any merger integration program will have a critical role in several of the most important aspects of the integration.
Organization and appointments
Quickly getting a combined organization in place following the completion of a transaction can be critical to minimizing the employee uncertainty that will otherwise become a drag on company performance. That uncertainty may be felt both by the highest-ranking executives of the two merging companies whose future career prospects may have been thrown into jeopardy the moment the merger was announced, and front-line employees who might fret over the importance of their line of business as well as their own roles going forward.
Therefore, deciding on the combined organization structure, appointing management, and launching the combined organization is often the top priority of the CEO. At the same time, management appointments should be considered in a way that is perceived to be fair by employees and that leverages the combined talent pool in the most efficient way. Further, in many countries, the process and outcome need to be embraced by employee representatives. Getting this process wrong could have a lasting impact on company performance and on the willingness of executives to stay with the company. In fact, research shows that mergers can have a negative impact on management attrition up to nine years after the merger.
In most cost-focused mergers, the vast majority of synergies are expected to come from elimination of overlaps, best practice transfers between the two companies, and transformational efforts in select areas to further drive performance beyond that of either of the two companies. Invariably, that can result in redundancies. Managing the severance process swiftly and smoothly can have a significant impact on company results due to the time value of money: For an acquirer expecting to reap $500 million in yearly cost savings from a deal, speeding up synergy capture by one month could increase the deal’s net present value by more than $150 million (assuming a 10 percent cost of capital).2 Severance expedience also can allow the remaining employees to move on and focus their energy on attaining the merger’s objectives, rather than worrying about their own future and that of their colleagues who will leave.
As described above, organizational changes and redundancies can both generate deep uncertainty among employees. Not only should the processes surrounding them be implemented quickly and professionally, but a big effort will likely be needed in communications with employees to reduce this uncertainty.
While suppliers and customers are also important stakeholders who require communications, our experience is that their needs are dwarfed by the needs of employees.
One best practice is to leverage a multitude of channels for communicating to employees — including (for example) town hall meetings, memos and webcasts at key points in the integration process, a weekly newsletter to force a continuous flow of information from the center of the integration program to the periphery, and a website consolidating available information and providing a forum for questions and answers. Sometimes creativity is required to reach all employees, particularly if workforces are not IT-enabled. We have worked with clients that placed information about the progress of the merger in the envelopes containing the employees’ pay slips to ensure the information would reach the recipients.
HR should be among the functions at the core of this work and play at least two critical roles: feeding information about the HR aspects of the integration into the communications team, and being the advocate of the staff, pushing for rich and frequent information.
Synergies within the HR function
Finally, the HR function itself likely is a rich source of cost synergies. Synergies of 10 percent to 30 percent of the combined HR cost base in a merger of two similar-sized companies with overlapping activities are typical. However, achieving these synergies while ideally improving the HR services to employees can require skilful identification of opportunities to eliminate duplication and transfer best practices between the two HR organizations, not to mention robust execution. Further, getting to the upper end of the range frequently requires changing the HR delivery model to increase the use of shared services for transactional HR, often combined with offshoring.
The Challenges for the HR Function
Each of these areas alone would require significant work from an HR team whose resources usually are thinly spread to begin with. Having to handle them all at once makes the workload daunting, as HR tries to balance the need to provide day-to-day HR services of uncompromised quality with the need to support the people aspects across the entire integration program and the requirements to realize synergies in the HR function.
Not only will the workload typically be massive, but it is likely to be emotionally draining as well. Redundancies and selection decisions will have a significant impact on the career outlook for the executives involved, who may be long-time personal friends of HR executives. In addition, many HR executives may realize they have a shortage of skills on their teams—far more people tend to go into HR because of their interest in leadership development than because of their interest in managing severance programs.
Key Success Factors for the HR Executive
Given all this, what can HR executives do to deliver on such a massive challenge, and help turn it into a success for the company, the HR team and themselves? In our experience, there are six rules HR can consider.
Rule 1: understand what is expected of HR and of you
If you work for the acquiring company, whether HR has been involved in the pre-deal process or not, the announcement of the deal presents a good opportunity for a meeting with your CEO to thoroughly discuss the deal and understand factors such as how important it is to the company and to her personally, what the expectations are for HR, and where HR can make the greatest contribution. It may well be that the CEO has staked her career on the success of the deal and expects the entire executive team to swim or sink with her. On the other hand, in the rare occasion that the deal is not one of the CEO’s top priorities, it is certainly good to understand that, too.
If you work for the acquired company, the HR function of the acquiring company may likely take the lead. However, given the amount of work that team will have in front of it, it will appreciate all the support you can give. Therefore, a meeting with your CEO is an appropriate next step in this situation as well. Use that meeting to understand matters like the protocol for interaction between the two companies in the period between announcement and close, what HR issues are expected to be of particular importance, how you personally and your team can contribute to make the merger as successful as possible for your company’s employees, and how you should interact with the acquiring company’s HR team. With those discussions in mind, you can better decide whether to proactively approach the acquiring company to discuss how you can support the integration (and whether you should do that directly with that company’s head of HR or go through its deal team), or whether to wait until they approach you.
Rule 2: Position HR and yourself as a contributor
As the first section of this article argues, HR is at the heart of any merger integration program. Still, many HR executives do not seem to play the central role that they could play. Often, this is due to a vicious circle that starts at the early stages of the integration project: for example, HR is approached as an afterthought by a financially driven deal team, and therefore does not get enough attention on a CEO agenda that is packed with deal-related work. As a result, the HR team is brought into discussions late and in limited capacity, and does not have the full picture of how it can contribute. The resulting HR plans are put together with unclear objectives and limited resources, reinforcing the perception that HR is a secondary contributor to integration activities.
To put yourself in a position to be a contributor, you should consider keeping a close dialog with your CEO by maintaining a perspective on what integration topics are her priorities and how you can contribute to them. With that position established through the first meeting described above (see Rule 1), you can reinforce it by proactively presenting solutions to the HR issues that can be expected (typically people retention, organization design, and appointments and redundancies, in that order) for your CEO and integration leadership to react to. That way, the HR team will be the ones helping with the answers, not the ones asking the questions.
Rule 3: use your resources wisely
Handling the workload that a merger puts on the HR function entails strict prioritization of HR activities. One of your more immediate priorities would therefore be to decide which ongoing HR transformation activities should be put on hold to free up resources for integration. At the early stages of a merger, HR executives tend to under-rather than over-estimate the work that will be required from the HR function, so don’t be afraid to create some slack.
It will also likely require efficient use of the HR team. Clear roles and responsibilities are important to make this work. Among the measures we recommend is identifying three different roles and staffing them with separate groups of HR people:
• HR integration support activities, i.e., working across the integration process, driving organization design, and managing appointments and severance activities
• Integration of the HR function, i.e., creating the future combined HR function, typically with synergy targets
• Business-as-usual HR activities, i.e., monitoring HR services to see that they are provided seamlessly despite the integration activities
Further, recognize that the focus of the HR work will shift over the course of the integration program, and along with it the type of HR skills required. For example, for the HR integration support activities, at the early stages, a greater emphasis will be put on talent retention and management appointments. Over time, this can be expected to shift to managing severance processes. The HR team member who is the best at talent management is not necessarily the best at managing a severance process and at negotiating severance packages with employee representatives.
Finally, you might consider setting up the integration activities as a joint effort by the HR teams of the two companies. Involving the HR team of the acquired company can provide deep insight into the acquired company as well as sorely needed additional resources. It also can increase the chance that target employees perceive the integration as fair to them.
Rule 4: use the unprecedented opportunity to change HR
The uncertainty and large-scale change in a short time period that organizations go through in a merger can have the paradoxical benefit of reducing the resistance to additional change. A commonly used analogy is that the organization is unfrozen for a few months after the acquisition.
This presents an opportunity to make long-desired changes to the HR function that may not previously have been possible due to internal resistance.
It may be as simple as using the requirement to deliver synergies as the reason to dust off the outstanding items on the to-do list from recent HR change programs that were only partly implemented. But more transformative change, such as a setting up a shared service center for transactional HR, may be required to meet the synergy targets. In many companies, this has been a desire for many years before the merger. The combination of additional scale from the combination of two HR functions and synergy requirements may be what finally creates enough momentum to make it happen.
Of course, the timing of HR transformation activities will need to be carefully considered in light of overall HR resource requirements (see Rule 3).
Rule 5: Don’t mess up execution
HR will be driving or closely involved in activities that not only have a significant impact on people, but are also seen as key indicators for how well the merger is progressing by both internal and external observers due to the visibility. That makes flawless execution all the more imperative.
To compound the challenge, HR often does not have control of all elements of many processes—think of business units that need to provide draft organization charts in an organization design process and employee representatives that have to be consulted.
Some surprises are avoidable, though. We know of one merger in which the announcement of the combined management team had to be postponed by one week because the originally announced timeline did not take into account the need to accommodate the partner conference(!) of the third-party recruiting firm that performed independent assessments of the executives. This anecdote shows the importance of carefully testing time plans before they are communicated. Proper testing requires input from a range of sources, often including experienced HR professionals or consultants and employment law specialists.
Rule 6: Take care of your people
There is one final important rule with implications for the HR resources: Take care of them.
The monumental workload and pressures the HR team will experience during a merger will likely require more personal attention to the well-being of HR team members than what’s normally required during day-to-day business. To make sure that this is not forgotten in the intense heat of the battle, consider creating a regular check-in process. A simple tool such as the painometer (see Figure 1) is an effective trigger to discuss how people feel about the workload. In addition, simple gestures to celebrate successes—for example, taking the HR team to dinner to celebrate the completion of the first-wave organization design—often go a long way toward making people feel appreciated.
An HR executive’s daily job is no day at the beach during normal circumstances. Providing ad-hoc HR support to other executives, running an efficient HR function and getting the most out of the HR team are just some of the myriad challenges HR executives must address. During a merger, those challenges are intensified many times over, and are joined by others that many HR executives have no prior, direct personal experience with. Thus, it’s not a stretch to say that mergers, while difficult for all involved, are disproportionally challenging for HR functions.
By following the six simple rules just discussed, HR executives can actually better position themselves to turn the challenge of a merger into a raging success—for the company, for the HR team and for themselves.