Talent Practices: Leveraging the Power of Collaboration

  One of my favorite quotes comes from Rob Cross in his book The Hidden Power of Social Networks, ” Research has consistently shown that whom you know has a significant impact on what you come to know, because relationships are critical for obtaining information, solving problems, and learning how to do your work.”  That, is a powerful statement about social networking . . .echoed in this comic selection from “Zits.” As I said in my earlier post, we have just finished a piece of research designed to explore in what ways can organizations leverage the power of collaboration across the talent processes.  Social networking itself is not new, what is new is the impact of Web 2.0 technology on collaborative behavior.  In this post, I wanted to offer just an ‘appetizer’ of insight from that research and talk about it in the context of the current economic issues.

We surveyed over 75 organizations, and overall we found that:

  • Social networks are an important component of an organization’s core talent processes . . . While social networking was important to the successful execution of all talent processes, they are considered critical for engagement, on-boarding — transitioning — and off-boarding, and leadership development. 
  • Furthermore, respondents believe that networking is important for all levels of the organization, but particularly so for senior executives.  As Michael Watkins so often points out in this book, The First 90 Days, no leader, no matter how capable, can do it all.  Leaders need networks that are constantly being refreshed and renewed to be successful.
  • Finally, despite the fact that social networking is not a new behavior pattern, our respondents indicated that they don’t think they are as effective as they could be at leveraging the power of collaboration.  Their organizations may be leveraging the technique and/or tools in selective ways or within functions — creating pockets of excellence.  But overall, many organizations are still experimenting with collaboration tools. 

So, in what ways are companies leveraging the power of social networking across the talent processes?  Let me share just a sampling of what we’ve learned:

  • Recruitment: Of all the talent processes, this is the area that has seen the most visible change as a result of social networking and web 2.0 tools.  While I find networking sites like LinkedIn and Facebook interesting, I am far more intrigued by sites like “Beyond.com” and “Jibe.”  Before the recession we were seeing the emergence of ‘talent brokerage.’  But the recession has accelerated a new approach to employment –‘gigonomics,’ the act of being employed on a ‘gig’ basis.  Social networking tools allow active communities to form around project based work creating a new type of long term employment experience.  Social networking sites like Jibe, on the other hand, is interesting in that it uses social networking to create transparency around an organization’s culture, allowing potential employees to find a ‘great fit.’ 
  • On-boarding/Transitions/Off-boarding: As the recession deepens and we see talent moved in/out/ and around the organization, effectively managing the employee life cycle becomes more important.  Social networking can become a key tool to enabling that process.  Given the short tenure of senior leaders these days, robust on-boarding and transition management becomes a strategic intervention with real impact on organizational performance.  What if you can speed time to effective performance by 3 to 6 months for a Senior Leader through accelerated on-boarding? In a tough economy where performance runways are short, time matters.  Finally, many of us have had to say ‘good-by’ to talented people as organizations are reforming themselves.  Off-boarding with care and keeping connected through social networks is an effective way to ‘keep your talent close’ in anticipation of future opportunities.  Over time, more of our talent will move in and out of our organization on a project or ‘gig’ basis.  Keeping talent networked with us through their employee life cycle, will be an important enabler for organizational agility.  So who does this well?  Look to companies like Baxter,  Capital One, and Johnson & Johnson who have Leaders Transition Programs.  Consulting firms, not surprisingly, have the most interesting approach to employee life cycle management by leveraging 2.0 tools to keep alumni connected — E & Y and Deloitte, for example. 
  • Employee Engagement: At any time, particularly in tough economic times, employee engagement is a key enabler to organizational performance, now and in the future.  As organizations have cut their way to survival, they may have already lost their most important asset — employee hearts, minds, and hands.  An effective internal social network is the glue that binds the organization together, keep talent engaged, and facilitates transformation.  As organizations fight for precious customer revenue, engaged employees can provide that point of competitive advantage.  My favorite example of good old fashioned social networking comes from Ford Motor Company . . .clearly a company fighting for survival.  As they introduced the new product line-up for this year, they invited all of their HQ employees down to ‘test drive’ the products . . . hoping that they would ‘activate the purchasing power of their social networks.’  What a simple but powerful way to engage, inspire, and enable employees. 
  • Training and Development:  As I prepare my my thoughts for the Winter Professional Development Consortium this week, I am convinced that social networking will have the most profound impact on this talent process.  New social tools will change the fundamental role of the CLO.  We will transition from being ‘content enablers to context enablers’.  These tools will enable employees to access the information they need when and where it is needed — through instant messaging tools, blogs, wiki’s, expertise locators, and so on.  Employees will be able to zero in on the specific information they need to solve problems, perform specific tasks, or quickly update skills.  Our role will be less about creating information/skill content, and more about enabling the context for employess to access information/skill when and where they need it . . . pulling it together quickly and easily to create knowledge. . . experimenting with it. . .creating repeatable transparent processes.  Responsibility for learning will shift to where it belongs . . . with the employee. 

Social networking is real work.  It is not unusual for leaders to think of social networking as a supplemental acticity, something that augments ‘real work’ or ‘personal development.’  For those organizations that actively use social networking and associated tools to share information, cooperatively develop insights or event collectively create product(s) it has become a fundamental work process that adds value to the organization. 

As your organization takes its own unique journey, where do you think it will engage first?  How is your organization harnessing the power of collaboration?

Talent Practices for a Tough Economy

11/09/08

In the course of my normal early on-line shopping for the holidays, I ordered shoes from Zappos.  Being curious, I followed the CEO on Twitter.  For those looking for a great example of how to talk about tough issues with employees check out the CEO blog at Zappos.  This is a company known for developing an exquisite culture of customer delight that extends back inside the company.  They have just had their first lay-off in 9 years and it hurts.  But they’ve done a beautiful job of articulating (inside and out) why they are taking this action now, their financial condition and what they expect in the near future, and how they are going to treat their employees.  Most notably, the are: (1) providing higher than normal severance for ‘short-term’ employees, and (2) assisting with COBRA benefit payments for those impacted employees.  Equally important, they are encouraging people to ‘talk’ or in this case ‘twitter’ about the situation inside and out of the company.  I was struck by the outpouring of care for impacted employees that was coming from the loyal customer base.  As I have said before, as employees, we can deal with tough issues if (1) we understand the logic behind the decision, and (2) believe impacted employees are being dealt with in a caring and compassionate way.  I look forward to continuing our relationship Zappos . . . I’m impressed. 

8/28/08  Update

When I wrote this blog, I thought I had a very nice array of talent practices.  After posting it, I’ve continued to come across some interesting talent practices, so I have continued to ‘update’ as information comes across my ‘virtual desk.’  I’ve chosen to group the new information under the original post so that you can see how the ideas have developed.  Interestingly, the most active searches by readers have been in the compensation space . . . so I’ve added some examples as the financial performance information has evolved through the back end of this year.

Jim Borgman’s cartoon in the Chicago Tribune last week was priceless . . . because it spoke volumes.  Set aside the question of are “we really in recession or just how bad is it,” the current US economy presents some significant challenges for organizations.  So what are some of the interesting ways organizations are responding:

Recruiting Previously Unavailable Talent: Seizing an opportunity is easier said than done.  But for financial institutions, this is the time to recruit top talent . . . talent you could not touch before. And none know this better than the Chicago financial market.  Wall Street talent who would never have considered career opportunities in Chicago are now finding the comfort of a steady security and commodity market attractive.  Seizing opportunity is not just about sourcing talent from organizations in distress.  Employees impacted by rising cost issues and unrealistic organizational demands are evaluating their current employment propositions very carefully and making strategic choices about their future.  Gas prices and long commutes give way to considering attractive opportunities to work closer to home or even in the home.  Even the most resilient of road warriors are looking for relief from the grind of tough air travel while suffering the burden of over restrictive cost cutting travel policies.  Indeed, this is the time to put your unique employee proposition to work in the recruitment of talented employees.  This is a great time to strategically up-skill the organization.  Likewise, internally it’s a time to make sure that you are not eroding what is important about your employee proposition as your own organization responds to tight economic times — your ability to recruit and keep top talent is most certainly at risk. 

Changing the nature of work: Law firms are not known for their innovation, particularly when it comes to a very traditional career path . . . but even that is changing.   In tough times, organizations tend to farm out project based or seasonal work more aggressively rather than hire regular employees to manage through what appears to be a limited engagement.  But leveraging consulting from traditional legal firms can be quite expensive.  Enter a new kind of law firm — Axiom, Outside GC LLC and Phillips & Reiter PLLC are examples of legal organizations who act more like talent brokers than law firms.  What’s different?  Well at Axiom, lawyers are employed full time and receive benefits, but no pay between assignments.  According to the Wall Street Journal, the cost to clients is about 50% less than traditional law firms.   So what’s attractive from an employee point of view?  Some people are in transition.  But even more people are thinking about alternative work arrangements wanting a break from the pressure of traditional large organization career.  Others are ‘slash workers’ and want project based opportunities while they pursue a variety of different work experiences.  Others simply want more family time.  And some are Gen Y’s right out of law school who are looking for engaging opportunities right out of the box.  I think we will continue to see more ‘talent brokerage’ with high end niche knowledge workers as a way to flex talent pools in general and as a way to tap into top talent who are in transition in a cost effective way.  This is, of course, a type of workforce in transition . . .meaning, most hiring managers have not yet caught up to the real nature of the talent opportunity and are still thinking of ‘brokered talent’ as low level temps. And time will certainly tell, but I think we are seeing an important talent trend emerging. 

Offering Flexible Work Place Practices:  Tough economic issues have offered flexibility advocates a golden opportunity to push new work place practices into place in ways that demographic challenges of the talent pipeline have not.  Helping employees squeeze more out of a tight family budget have prompted a whole range of flexible workplace practices.  Examples include . . . “4 day work weeks” or other forms of compressed work weeks and regular telecommuting or “work from home Fridays,” or van pools.  Talk about taking work at home to the next level, at Write2Market, an Atlanta based marketing firm, employees must ask permission to ‘drive into the office’ for work.  There are even novel programs like “bring your child to work.”  While I certainly applaud flexibility, there some challenges.  Woe to the manager who uses this as an excuse to abuse employees . . . disengagement will certainly follow.  Thank you Jim for your comic reminder.  Likewise, flexible practices can be great solutions when they are not imposed.  Bringing your child to work is not appropriate for every environment . . even in the same organization.  And requiring all employees to work from home on Friday’s without thought to customer needs, is not an effective long term business response.  ‘Rigid workplace flexibility’ becomes an burden when it is not driven by real employee need and does not effectively facilitate the requirements of the business.  Flexible workplace practices are just that . . . they are supposed to be flexible and they do require a plan . . . a plan that serves both the organization and it’s employees.  And finally, managers often need help understanding how to effectively manage in flexible arrangements. 

Changing the Compensation Game: Need to put a bit more skin in the game to accelerate growth in a tough market . . . well, Skyline Construction, Inc.  offered managers an opportunity to pick their own salaries with in a range.  The deal?  The lower the salary, the bigger the shot at a large bonus.  What’s different? Skyline let their managers put a portion of their salary at risk.  The idea has proven popular . . . now in its second year, 12 of 15 managers choose lower salaries this year, increasing their personal motivation to succeed. 

A while back Best Buy, started an experiment in performance management called ROWE (results oriented work place).   No more fixed schedules, no mandatory meetings, no impression-management or forced face time . . . Best Buy reshaped it’s work place practices to focus performance on output instead of hours worked.  Putting employees in charge of their own work — time, place, and results — places responsibility where it belongs.  Yes, it means managers need to be crisp and focused when developing performance objectives, and that’s not a simple task.  But look at the results — productivity is up 35%, average voluntary turnover has dropped dramatically, and employee engagement is up.  What started as an experiment is now becoming the norm. 

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Broadening the Benefit Portfolio:  Not a surprise, in an effort to keep top talent who may be challenged by difficult commuting conditions, organizations like Grossbard & Associates are offering just a little extra in the paycheck to offset rising gas prices.  Some companies are increasing their mileage rates in reimbursement policies while others are offering higher cost of living raises.  EFC International is being even more proactive by subsidizing employee fuel costs on a ‘miles commuted’ basis.  Maritz, on the other hand, decided to offer employees a discount on Sam’s Club memberships as a way to help employees access lower prices at the pump.  Finally, TransitCenter, Inc. helps employees use pre-tax dollars to pay for parking and public transportation needs. 

In some cases, simply having access to benefits is important . . . especially for an employee population who may impacted by downsizing.  Companies like Starbucks and Border’s who offer benefits to part-timers fill a very important employment niche.  Paying attention to employees well being in tough times pays off.  They tend to be more committed and engaged.

“Off-boarding” with Care:  Sometimes the business is such that we need to say good-by, even to valued employees.   I am convinced that how we transition people out of the organization speaks volumes to those impacted — those who are left inside as well as those who are leaving us.  One of my clients has changed their HR job to include ‘on-boarding and off-boarding.’  Putting the same amount of care into helping people transition in and out of the organization can pay large dividends in your ability to attract and keep top talent over the long haul.  And who knows, today’s internal talent may be tomorrows key client.  Off-boarding with care, also keeps current talent engaged.  We can handle tough news . . . if we think it’s fair (meaning we understand the logic behind the decision)  and it is handled with compassion.  It’s important to remember, whether employees continue with us or leave us, they will always be alumni of our organization.  And those alumni can be valuable long term assets for the organization.

Finally, when we change the composition of our workforce, let’s remember to also think about the impact of the re-structuring on the work of the organization.  This is where I put the plug in for all of those who are left absorbing additional work when we loose valued colleagues.  Doing more with less?  Not really . . .there’s a limit to what any organization can do with resource constraints. So when re-structuring think not just about those who leave, also think deeply about the impact to those who stay.  Remember to also take work out of the system. 

As culture expert Edgar Schein reminds us, what leaders do in ‘tough times’ often speaks more loudly about the character of the organization than what leaders do in ‘good times.’  And employees do listen . . . very carefully . . . and take action on what they see. 

What is your company doing in these tough times?  In what ways are you seeing companies respond to the challenges of this economic climate?

08/11/08 Addition: Listening to What Employees Think

A survey in USA Today’s weekend addition asked: Should employers help workers with surging gas prices? Interestingly the responses were . . . 66% with a “no” response, 32% with a “yes” response, and “2%” don’t know.  What do you think?

08/12/08 Addition:  Changing the Compensation Game

Today’s Wall Street Journal reports more changes in compensation.  Given the economic and company performance turndown, one would expect that bonuses would follow.  Not so . . . according to Mercer and Hewitt. In an effort to keep top talent and employees engaged,  companies are still offering large bonuses.  In fact, the number of companies who offer one time bonuses has increased.  So, what’s changed?  Well, employers are starting to use their dollars more wisely, reserving the bigger payouts for higher performing talent.  Instead of rewarding the broader population with the usual average ‘feel good’ bonus, companies are going for ‘higher highs’ and ‘lower lows’ to distinguish and drive increased performance in tight economic times.  For example, highest rated workers may see upwards of 14%, while average workers may see 3.5 to 3.8%.  For the average workers, inflation, gas, and grocery increases may simply eat up any gain in the paycheck.  What’s your company doing?  What are you seeing and hearing in the area of performance management?

8/15/08 Addition:  Changing the Structure of the Organization

Doing more with fewer staff?  Very interesting article in the Wall Street Journal again today.  Dana Mattioli reports on a new ‘tough times job trend.’  Companies are not eliminating jobs altogether . . . they are creating what I call “job mash-ups.” In this case, they are combining job levels and types into new mash-ups. . . and yes, you guessed right. . . at lower salaries.  In an effort to stretch their assets, companies are combining jobs vertically . . .and horizontally.   

Not a surprise, tough economic times prompt us re-think the fundamentals . . . and one of those fundamentals is how the organization is structured.  It’s the moment to confirm what is core to the organization and what should be left behind.  It’s an opportunity to reinvent the what and how of work . . .to eliminate the redundancies . . . or streamline.  What’s interesting about the trend is the blurring of functions and roles . . . offering people an opportunity to develop cross functionally by moving into white spaces or to seize more senior roles based on capability or appetite.  Job mash-ups have real appeal from a development point of view.  And sometimes, job mash-ups propel us into finding new growth engines for the organization. . . opportunities we could not have imagined until we see what could be combined.

Having said that, what is disconcerting about the trend is the potential for abuse.  Jobs poorly combined don’t help the individual or the organization.  Pushing employees far beyond their capabilities leads to burn-out, turnover, and taint your ability to recruit top talent.  Can one experienced professional do the work of a team — not without changing performance expectations or the fundamental nature of the work itself.  So my challenge to HR is to act as that ‘voice of reason’ for those who don’t have a voice in this conversation. . .make sure ‘mash-ups’ make sense for everyone.

8/20/08 Addition:  Creating Employee Engagement: A Reason to Believe in the future

“Ford Offers Workers a Ride” . . .  interesting article in the Chicago Tribune today.   One of the toughest ‘sells’ we make is not to customers but to our own employees, particularly in tough times.  And Ford is certainly weathering some tough times.  The hard part of the ‘sell’ to employees is creating confidence in the future . . . as Rosabeth Moss Kanter says, when you are in the middle of a turnaround, everything looks like a failure . . . (and I’ll add my own thoughts here) because you aren’t close enough to the future to touch and feel it.  So Ford is doing just that!  It’s giving employees a reason to believe in the future.  In an effort to engage employees, they are letting them drive their new vehicles around the test track.  Pulling 4,000 of their workers from their Dearborn HQ desks to the test track, Ford hopes to show employees that their new models are going to put them on the road to success.  Engaging employees by letting them ‘touch, feel, and drive’ the new 2009 to 2010 vehicles, Ford hopes that they will then ‘talk up’ the vehicles to others . . . engaging their social network as a potential growth engine.  Giving people evidence of a positive future serves to reinforce confidence which can become a powerful platform for positive performance.  And as Kanter says, confidence can become infectious!

8/26/08 Addition:  Paying Attention to Employee Mental Health

Today’s Wall Street Journal article on health by Elizabeth Bernstein was a good reminder that in tough economic times people get worried . . .and that fear will work its way into the organization in unexpected ways.  As the economy continues to tighten, people worry about job security for themselves and other family members, their ability to pay the mortgage or other loans, the cost of gas and just plain living expenses. . .never mind worrying about the value of their homes and their ability to pay for college in the future, and so on.  Not everyone can handle stress effectively and we may see it in general morale, illness or absenteeism, productivity, or disengagement.  This is the time to pay attention to the subtle and not so subtle changes in those around you.  HR can take the lead.  Look for the warning signs that something might be wrong and offer access to the various policies and program available inside the organization . . . options might run from expressing concern to changes in workload, vacation, fitness programs, unpaid time off, employee assistance programs, and so on.  If you are tempted to ignore it . . . remember, morale issues are contagious. 

8/27/08  Addition:  Workforce Planning

What have you done to protect your talent today?  In general US companies are not giving much thought to workforce planning according to a new Watson Wyatt study, referenced on Workforce Management.  Meaning, they are not giving much thought to protecting their talent should the economy worsen . . . protecting key talent when times are bad, you say.  Indeed, this is not about restructuring or downsizing the organization.  This is about identifying critical constituencies (those essential to the core of the business) and putting contingency plans in place to make sure you don’t loose them . . . period.  And a lack of planning puts US firms at a disadvantage to their global counterparts.  Asian counterparts for example have been dealing with this issue for some time . . . currency crises, coups, or just plain competition for the same key talent across Asia Pac.  According to the same study,  84% of employers in Asia-Pacific and 80% of employers in Europe have workforce contingency plans in place.  Do you?  If you don’t do workforce planning in the tough times, when the good times come again you will be at a distinct disadvantage . . .chasing top talent paying premium dollars.  When you loose top talent, you have also lost the seeds of your future growth.  So, I ask again . . . what’s your organization doing?

8/28/08 Addition: Senior Leader Compensation

Finally, some interesting compensation information on the senior leader front as challenging financial results continue to pour in through the back half of the year.  We are starting to see more interesting compensation plays . . . ones that are more closely tied to performance . . . ones that are giving higher highs and lower lows . . . ones that are extending senior leader time horizons beyond the quarter or year in an effort to drive effective long term performance.

Starbucks just announced that it will slash bonuses for senior leaders this year as it continues its reassignment program in an effort to increase profit.  According to the WSJ, Chief Executive Howard Schultz will not get a salary increase this year . . . nor will any US employees Vice President and above given year-to-date performance.   Moving lower in the organization, eligible district managers, store managers and most coffee-roasting plant workers in the US will get a 3.5% annual pay increase.  For all employees in the US, the plan calls for a 2% flat salary increase for those whose performance is at the meet or exceeds level.  This excludes store baristias who are on a separate compensation plan that adjusts salaries on a 6-month basis.  Now that’s a statement. 

Might I add as we move toward year end, the company to watch on the Senior Leader front will be American Express.  You may remember Amex received well deserved praise for their CEO compensation play at the beginning of the year.  They have given CEO Ken Chenault an options bonus schedule based on clear aggressive financial metrics over a 6 year time horizon.  The financial hurdles as laid out are quite high for EPS, revenue and ROE, and a lesser performance will only give him a fraction of the total grant.  Furthermore, the total return to shareholders must be at least 2.5% above the S&P 500 average — so he cannot simply ride the market.  A senior leader compensation play clearly tied to performance over time — what a concept. 

8/28/08 Addition: Off-Boarding with Care

Earlier I wrote about the importance of ‘off-boarding’ with care.   There are times when we need to say goodbye to valued employees . . for a variety of reasons.  In those cases, it’s our hope that at some time down the road, our paths will cross again. 

The best examples of off-boarding come from companies trying to keep top talent . . . in the hopes of their return.  Deloitte and Touche (USA) makes it easier for employees to return after career breaks of up to five years, whether family or education related, by offering a range of benefits like . . . access to the company intranet, subsidized training to keep skills current, access to a mentor or career coach.  Cost effective, the program costs a fraction of the cost to recruit and develop a new employee.   Likewise, Gensler welcomes talent back via a return program . . . symbolically welcoming talent back with a ‘boomerang.’  Other companies keep in touch with previous employees through formal alumni networks using vendors like Select Minds. . .while others leverage grassroots social networks that spring up when companies are forced to downsize groups.

Increasingly we need to be comfortable with the fact that talent is unlikely to stay with us for their entire careers . . . there will be a series of ‘on and off ramps’ for a variety of reasons . . . some company driven others will be driven by individual needs and wants.  Keeping in touch with great talent can be a source of long term competitive advantage.  Whether employees continue with us or leave us, they will always be alumni of our organization.  And those alumni can be valuable long term assets for the organization.

9/13/2008 Addition: When Times get Tough, Increase the Travel Budget

I just returned from the Network Roundtable meeting and had an opportunity to listen to Larry Prusak talk about the power of culture and networks.  A colleague asked Larry a question . . .”in tough economic times, what would be your #1 recommendation for the organization.”  His reply . . . increase the travel budget.  Interesting . . .certainly not what most organizations do.  First thing to go is the travel budget.  His point, if knowledge is truly the driver in your growth engine, why would you cut the travel budget ?  Knowledge is massed in networks where people share trust, perspective, and a culture over time.  Knowledge is a social thing . . . not an individual thing . . . which requires care and feeding.  The cost of knowledge is the ability to create shared experiences so that people can share . . .absorb . . .and build anew.  Can technology do this for us . . . yes, to an extent. . . it can certainly accelerate information sharing and even knowledge development.  But ‘being together’ is key at critical points is key to a network’s ability to develop trust . . . enable collaboration . . . create knowledge . . . to drive innovation.  It’s hard to create a shared culture of ‘asking for information and sharing knowledge’ when you are physically isolated. 

Ok, so who really does that in tough times . . . well MWH Global did.  In fact, they rearranged the travel budget . . . they decreased executive travel and increased travel at the mid-level in the organization where the dollars could have the greatest impact.  And the outcome . . . a measurable increase in organizational capacity and ultimately revenue.  Interesting indeed.  What do you think? 

10/28/08 Addition: Leveraging the lull to develop skills and spark innovation

Like many of our organizations, Toyota is facing a significant lull in manufacturing for a significant portion of their workforce.  With a tight economy and changing gas prices, Toyota like the other car makers is experiencing the same challenges as the other auto makers.  Their response to that challenge is what makes them unique.  Rather than send workers home like the other auto makers, Toyota is keeping their workers on the line to sharpen their skills and look for innovation opportunities.  And they are already seeing the potential cost savings benefits to keeping employees engaged in processes they have redesigned.   What a concept . . . use short-term idle time to keep employees engaged, trained, and looking for incremental productivity savings and innovation opportunities. 

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.