Putting HR at the Centre of Turnaround Strategy

Undertaking swift HR due diligence during a turnaround results in investment benefits rather than cost implication.

Financially-focused turnaround investors often underestimate the importance of stabilising key employees during turbulent times.

In an economic climate set to remain challenging, the number of business turnarounds is likely to continue to be high. In such situations, every element of the organisation must be examined to determine which areas can quickly be improved and made more efficient, to save it from failure. In the majority of these cases HR is not given the same priority as finance or operations, which can result in potential disadvantage to the organisation. We look at the implications for businesses of not involving strategic HR in turnaround situations, in conjunction with Helene Francis. Helene is a senior HR professional with extensive experience of UK and international HR consultancy, who specialises in turnarounds and M&A. Her assignments include HR management and organisational development for blue-chip companies in the UK, US and Far East.

When a business is preparing for acquisition, restructuring or is moving into administration, financials are often understandably top of the agenda. How to reduce costs, preparation of full financial reviews, and negotiations with equity partners are the focus of the transition by finance and business turnaround experts. Many of these specialists leading the organisational reviews are also expected to handle the implications to human capital as a result of a business turnaround – often because the scale and nature of the HR challenges are underestimated.

The question is ... the cost to your business of not considering HR at this critical stage.

Given that turnarounds by their very nature involve organisational change on an extensive scale, it makes financial and strategic sense to involve someone whose main priority is managing these complex people and change issues. When a business is being acquired, especially one in administration or other formal insolvency process, potential new purchasers need to understand exactly what they’re taking on – from more than just a numbers point-of-view.

Some of the potential pitfalls if an objective HR professional isn’t involved at the outset of a turnaround:

• Redundancy processes not handled legally or fairly
• Poor management of the costs and risks of litigation as a result of the above
• Complex employee issues genuinely overlooked – resulting in costly implications
• Potential fraud regarding modification of contracts
• Potential cost saving initiatives (benefits, compensation
• etc) not recognised
• Failure to identify key employees and key ‘problem’ employees early enough
• Ineffective people management resulting in disengagement of employees that should be retained
• Lack of legal compliance regarding employment contracts and other T&Cs

To mitigate this risk, Helene believes that the following aspects of HR should be reviewed as a minimum in a turnaround situation:

• Checking individual contracts of employment for any ‘golden parachutes’ such as enhanced pay in lieu of notice or other severance arrangements (which in some cases may have been inserted into the contract in the weeks leading up to the sale).
• Checking the payroll for any anomalous employees such as paying retainers for senior ‘advisory roles’ which do not require the individual to attend the workplace or carry out any specific activities.
• Ensuring that all N.I and PAYE payments, as well as pension contributions, life assurance and other employee benefits have been paid up to date.
• Termination of any senior executives whose services are not required by the new ownership. This is best carried out by an HR consultant, not least to ensure that the process is legally compliant, in order to avoid costly employment tribunal claims. Furthermore, an existing HR manager may find it difficult to negotiate a termination agreement with his/her former bosses, and asking for the return of company property, cars, and even keys to the premises are tasks best undertaken by someone from outside the business.

Additionally, once these initial checks have been undertaken, further HR due diligence should include:

• Systematic review of terms and conditions for all grades of staff, together with costings for integration into the parent business.
• Review of employee relations issues – the business may have fulfilled its obligation to declare any ongoing or pending litigation, but not notified the new owners of impending employee relations issues which could have the potential to hinder a business turnaround.
• Review of HR policies and processes, then steps taken as promptly as possible to cover any gaps; performance management and staff development are likely to have been severely impacted in a failing company.
• Analysis of organisation culture and degree of ‘fit’ with parent company; there is often a high degree of insecurity and lack of trust towards the new ownership if a business has been in administration. This can hamper the integration process and lead to a ‘brain-drain’ of the more able and more mobile staff.
• Review of reward structure – this is unlikely to have been closely managed if the business has been in administration or prior financial difficulty for any length of time: there may not have been a salary review for many years; paid overtime may not have been well-managed; it is not unusual for ‘ad hoc’ pay elements to have been introduced in an organisation that has been in financial difficulties.

Operating conditions remain tough for many organisations and the numbers of businesses going into formal insolvency is on the rise. As a result, Helene has witnessed evidence of increasingly desperate measures, resulting in higher costs to new owners. Carrying out HR due diligence as quickly as possible identifies these potential dangers to reduce risk and cost.

Helene has become something of an expert in the complex and delicate HR issues around company turnaround – understanding what turnaround investors need to see from restructuring processes, understanding how to identify and retain key individual drivers of the business’s future success, and very experienced in providing senior management with the tools to manage employees’ fears, anxieties and expectations through all the turmoil inevitable in corporate turnaround.

- Neill Cotton, former MD, Silver Spring Soft Drinks.

 

Moreover, the issues of retention, motivation and integration of the key staff within the acquired business are often glanced over by fi nancially-driven purchasers. Whatever the nature of the business being acquired, it is essential to reach a rapid understanding of which senior staff or uniquely skilled staff will be critical to the turnaround.

Managing the emotions, expectations and retention plans for these staff is often as crucial – or more crucial – than any of the cost savings or financial engineering involved in true, lasting turnaround.

The question is not what it costs to engage an HR turnaround specialist, but rather the cost to your business of not considering HR at this critical stage.

To find out how Helene and executive level interim managers like her could add value to your turnaround situation, please get in touch with Jessica Whitehead, HR practice principal at Page Executive Interim.