The 7 Crisis Driven C-Suite Questions

As we are seeing some daylight in respect to the economic crisis my Discussion Partner  colleagues and I have identified the top questions we are hearing from our C-Suite Questions.

  1. What am I missing?
  2. Do I have the right people to get me through this crisis?
  3. After the crisis, what type of managerial skills should my executives possess?
  4. What do I do to plan for the shifting demographics?
  5. How do I exploit the Social Network phenomenon to improve Employee Engagement?
  6. What will the future HR model look like?
  7. Do I have the right skills to be a CEO? During the next several weeks we will communicate our findings via this blog on the above questions.

Question 1-What am I missing?

The CEO community has been heads down for the last 18 months on coping with the economic crisis. In our Executive Advisory work we are finding our CEO clients becoming less focused on restructuring, stock price, and governance pressures. Our discussion has now shifted to address issues of growth and globalization. The common theme among all of the CEO’s whom we have been working with is that the economic crisis has changed the business fundamentals. This has led to our response when addressing the question “what am I missing” by replying “it is hard to say…..we are all navigating as yet unchartered waters” The growth and global issues are interrelated for self evident reasons. To level set expectations in an environment that is at best unclear the determination of strategic intent is focused on the following questions:

  • Do we focus our acquisition efforts outside our host country
  • How do we manage a truly global workforce
  • Given the parochialism of Americans…..how do we promote a sense of enterprise community
  • What is a reasonable ROI in the context of forecasted turbulent stock market conditions
  • Will the ultimate measurement of intangibles be a benefit to our enterprise

These 5 filters are leading he CEO’s to be highly reflective as they ponder their next steps. An additional finding from our client work is that the consideration of the above will promote improvisation and creativity in human capital strategy

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Critical Position Worker Shortages

Rising unemployment cannot abate workforce shortages for some critical positions.

While March brought a rise in the unemployment rate to 8.5%, the supply of workers for several critical positions continued to fall.

Data from the Bureau of Labor and Statistics shows that several occupations may have too few workers to satisfy current demand. In January, the most recent month of detailed data, several occupations recorded an unemployment rate below 4%. 4% unemployment is commonly associated with “full employment,” a term to describe a phenomenon where everyone who wishes to work is employed.

While full employment doesn’t sound like a problem during an economic recession, the reality is that several industries, such as electric utility, mining and oil & gas extraction, are growing. A shortage of critical position workers for an expanding company would have a significant financial impact because these workers hold positions that have a high business impact or mission criticality.

Attracting and retaining critical position workers is a strategic competency for today’s business leader. Below are four groups of critical positions with unemployment rates below 4%. Three groups represent industries. The fourth identifies critical positions within Information Technology. IT is a functional department that two colleges and I maintain is the first corporate area severely impacted by demographic trends (click here to receive a pre-publication copy of our white paper on this trend).

Electric Utility                                          Mining
Nuclear Engineers 0.0%                       Maintenance, Heavy Equip. 0.0%
Nuclear Technicians 0.0%                    Mining & Geological Engineers 0.0%
Power Plant Manager 1.3%                   Roof Bolters 0.0%

Oil & Gas Extraction                               IT Department
Civil Engineers 3.0%                              IT Engineers 3.3%
Maintenance, Heavy Equip 0.0%          IT Hardware Engineers 3.5%
Petroleum Engineers 0.0%                   IT Managers 3.0%

 

What can employers do if they face a shortage of critical position workers? Three things:

Understand the Risk Exposure:  Determine the severity by conducting an internal and external workforce assessment along five risk categories: Supply, Age, Retirement, Turnover and Generational Friction.

Prepare for a Mindset Change:  Change how you think about your workforce. Instead of viewing it as a homogenous labor pool, segment the workers who are in critical positions in a similar fashion as marketers segment consumers. Determine which workforce segments represent growth, attraction and retention opportunities.

Look for Nuggets:  Collect and share success stories where your organization and others are successfully attracting and retaining critical position workers.

Coal Mining Workforce Growth Achieved in Exchange for Retirement Surge

During 2008, workforce growth in the Coal Mining industry came mostly from recruiting aging workers.

 

Surprisingly, while the industry was expanding, younger workers were exiting.

 

This trend is a problem.  While current labor demand is being satisfied, the tradeoff is a future retirement surge.

 

Furthermore, because so few younger workers are being attracted, the labor supply to fill the vacancies will most likely be insufficient.

Recession Affecting Retail Hiring Trends

During 2008, the retail industry satisfied an immediate labor demand by hiring highly educated workers.  Unfortunately – that only solved one half of the problem.  

 

While executives are well aware of the global economic recession’s affects on sales and profitability, few may realize the full implications for their workforce.   

 

A trend emerged in 2008 of highly educated workers taking positions in hourly customer service positions.  Last year, more college educated workers were hired into retail sales positions than any another other occupation. 

 

This trend poses problems.  While immediate labor demand was satisfied, hiring college educated workers into these roles only shifts the labor challenge from today…to tomorrow.  When the recovery begins, retailers can expect to see high turnover as these workers return to their pre-recession occupations. 

 

What can retailers do?  Three things:

 

  1. Determine Your ImpactCollect data to determine how this industry-wide trend is showing up in your stores.
  2. Monitor Turnover DataMonitor turnover for this worker sub-group.  Watching the trend may give you an opportunity to prepare replacements.
  3. Hang On To ThemCollect information from the sub-group to see what it would take to retain them, if not in their current position, possibly in another.

Employee Concessions Could Give Rise to Labor Union Membership Growth

The end of The Great Depression saw a significant rise in union membership.  From 1935 to 1940 labor union membership as a percent of the workforce rose from 13% to 26%.

 

While union membership has declined to 12% in 2008, the global economic recession may usher in a resurgence of union membership.

 

Recent news reports include stories of companies requiring workers to accept employment concessions, most commonly involving:

 

  • Health benefits
  • Federal Legislation
  • Salary & performance bonuses
  • Vacation & time-off

 

While concessions are being advocated as a way to help the company remain afloat, overtime workers may become dissatisfied.

 

As the level of dissatisfaction rises, union leaders may find conditions ripe for organizing and recruiting new members.  In this scenario, it would be very difficult for management to reverse things once momentum built.

 

What could tip the momentum in favor of Unions?  Three things:

 

  • Worker Safety Concerns
  • Continued Job Losses
  • Management’s Failure to Make Significant Concessions

 

While the current downturn may give many workers no choice but to make concessions, these conditions could lead history to repeat itself:  huge growth in union membership and a new reality for management.

Demographic Trends – The U.K. Workforce…..Brewing Risks

The UK is a country of 60.6 million citizens that has fallen into the trap along with most other developed countries.  Its population growth has fallen below replacement levels.  The U.K.’s current fertility rate of 1.8 births is below the the replacement rate of 2.1.  At this point, the U.K., like its counter parts in Central and Eastern Europe need to brace for an on-coming set of workforce issues.

 

 

U.K. Demographics.

 

The 2006 U.K. labor force is about 30.3 million workers, roughly the same size as the combined labor forces of California and Texas.  Four workforce risks are visible in the attached age distribution chart.

 

Age & Retirement Risks

With a workforce where one in four is 50 years of age and older, employers are susceptible to both age and retirement risks (Circle 1).  Age risk is the potential productivity loss associated with an older worker and is a function of the worker and the job.  Retirement risk is the potential loss of an employee to retirement.  With 26% of the population in the 50+ category, employers need to move quickly to counter the effects of productivity changes and retirements.

 

Generational Friction

Generational friction is a term used to describe situations resulting from the differences in behaviors and styles among different generations.  With such a disparity in workforce numbers between the aging boomers and the younger Gen Y workers (Circle 2), I anticipate in some situations significant friction because of the dramatic differences in these generations.  The “new guard” is not always interested in following the ways of the “old guard.”

 

Vacancy Risks

Vacancy risks are a function of labor supply and demand and capture the potential of an open position going unstaffed (Circle 3).  It is expected that a portion of the entry and mid-level positions will go unstaffed in the coming years because of the low percentage of workers in the 16 to 34 age groups.  These vacancy risks will result from not only from labor supply challenges but also from labor demand issues as companies increase turnover by poaching their competition.

 

 

If the U.K., like the U.S., was surprised by the effects of oil shortages, then it needs to begin preparing for the next economic asset shortage its eroding workforce.  Beginning with a workforce plan that focuses on alternative career paths, automation, collaboration would be a step towards mitigating the ensuing risks.

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.