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HR Magazine - September 2000: Merging HR Systems

By J. W. Dysart  9/1/2000
 

HR Magazine, September 2000

Vol. 45, No. 9

Don't overlook the impact of mergers and acquisitions on HR information systems and the people who use them.

 When two companies are merging, or one company is acquiring another, pondering the implications for the new organization's HR information systems is not necessarily high on management's to-do list.

In the short term, legal questions, business decisions, relocations and layoffs loom larger than questions about data conversion, employee self-service options or technical support.

But companies going through mergers or acquisitions ignore the impact of HR systems at their peril, according to merger?experienced employers and consultants to merging organizations. Incompatible HR systems can produce error-filled paychecks, botched reports or glitches in benefits enrollment. And personnel problems can accompany those technical problems as employees lose trust in the HR capabilities of combined organizations.

"Employees need timely and frequent information about the merger and the emerging company's direction," says Ed Bickley, a merger veteran and information technology (IT) manager for accounting systems with TransCanada Pipelines, based in Calgary, Alberta. "An HR [systems] strategy, integrated with the overall business strategy for the merger, can really be effective" at providing that information, he adds.

You may end up choosing one participant's existing system as the new standard or scrapping both participants' systems in favor of something new. You may base your choices purely on speed and convenience, or you may take time to assess both companies' decision-making styles. Whatever your choices, you will have to press top management to ensure that HR systems decisions get the budgets and attention they need.

Keep HR in the Loop

HR and IT managers might as well accept take-over frenzy as business as usual. In a 1999 survey of 105 companies, the New York-based Conference Board found that 70 percent of the HR executives surveyed who had trudged through mergers in the preceding year also had been through mergers or acquisitions before—an average of four times since 1990.

With all this activity, analysts say, dealmakers often wait too long before bringing HR and IT departments into the merger loop. "This puts [HR and IT] in the position of being forced to react," rather than allowing them to plan ahead, Bickley says.

Gale D. Sroelov, SPHR, vice president of A&S Computer Services in Union City, Calif., agrees. "I have seen instances where HR in one of the acquiring firms had no inkling that there was even an acquisition in progress," she says.

Such ignorance could have serious results for information systems and the employees they serve. HR and IT executives may not be able to earmark funds fast enough to make necessary systems changes. Occupied with myriad other issues, corporate management may overlook HR systems for so long that resources required for HR technology get committed elsewhere, leaving no budget for HR information systems (HRIS), says David Sroelov, president of A&S Computer Services.

Systems shortcomings also can contribute to the flight of hard-won talent. "During a merger or acquisition, employees have a heightened response to change," says Denise A. Tarka, president of Cleveland-based consulting firm The Employment Edge. "Factors such as the employees' inability to access HR information can significantly impact employees' perceptions and morale, sometimes leading to a sense of distrust" and, ultimately, to defections.

Adds David Sroelov: "The biggest problem may be that people from one company or the other might not want to participate in the [systems] effort, due to a perception that their previous work is inferior." To prevent an us?vs.?them attitude from developing, managers should ensure that the transition team for HR systems includes representatives from both companies' HR departments, he advises.

The Impact of Culture

When assessing how to approach systems during a merger, HR professionals from both participating firms should start by considering their respective corporate cultures. This is not just some feel?good exercise. Executives at different companies often choose software tools that reflect very different decision-making processes.

Tarka cites two merging companies in the health care industry that took a hard look at their different cultures and created their mutual HR system based on what they learned. "The first company had a very centralized decision-making process," says Tarka, who advised the firms. "Most HR?related functions required managers to work through a complex chain of approval in order to access the necessary information and take action."

The company with the centralized decision-making process had a custom?built system in which the HR and payroll components were integrated with their business system. The HR department was the only group with access to the HR and payroll modules. Managers and employees with any questions had to go to HR for answers.

The second company's decision?making process was decentralized. Managers could access certain areas of the HRIS, such as reports on employee performance appraisals, salary grades and compensation information, and training and development information. Employee attendance data was available to both managers and employees. Employees could enter the system to update personal data such as changes in address.

"It became apparent that the newly formed organization, in part because of its new size, would need to rely on a more decentralized decision-making process," Tarka says. Making HR information directly available to managers through the HRIS, as the second company already did, became an important goal, but data security also was important. The merged organization chose the centralized company's custom-built software as its standard but added manager access to help push decision?making information down the line.

Developing contingency plans also was important, Tarka adds. HR made hard copies of essential records before the data conversion, so that if problems occurred, HR could continue to function manually.

When You're Acquired

Culture may take a back seat to sheer size when one company buys another—or in a merger where one firm clearly is the dominant partner. The HR practices of the acquiring or dominant firm are likely to trump those of the acquired or smaller firm. "The reality is, it's easier and faster for the acquiring company to compel the target HR department to embrace their policies and practices," says Mikio Manuel, a regional HR business consultant for Rockville, Md. based ADP Inc., an HR management systems and payroll processing company.

For the dominant player's HR systems, the advantages are clear. Its HR system continues to function as is while simply adding the new employees, Tarka notes. HR and IT employees in the dominant firm do not have to spend time training on a new system. And while the system will experience an increase in workload, the only employees who will need training will be those hired to help handle the increased load, she adds.

The downside, of course, is that employees with the company forced to phase out its HR system may feel as though they have been vanquished in some way, that the acquiring company has "won" something, Bickley says.

Another possible disadvantage is that forcing the smaller company to abandon its HR system may also affect that company's other, associated systems, Bickley says. Many companies integrate HR systems tightly with other business systems through processes such as using HR-maintained employee directory information in other systems, he notes. Also, when a company uses enterprise resource planning systems—which offer integrated modules for HR, accounting, procurement, sales and other business functions—dropping the HR module could affect other parts of the system.

To communicate these kinds of issues to the acquiring firm, HR and IT executives in the smaller firm should put together a list of their technology needs and ensure that top management in both firms sees it, Gale Sroelov says.

Bickley adds: "The list should contain whatever HR business practices the smaller company needs to continue, based on whatever unique needs their particular business, culture or employee base have, which the larger organization is unlikely to have," he says. Such a list can prove sensitive, he says. The acquiring firm may perceive it as evidence of resistance to change.

"There need to be compelling business reasons, clearly explained, why the smaller entity needs to continue with any unique practice," Bickley notes. "The larger entity will often approach the discussion with skepticism, since there can be so much embedded resistance to change or assimilation during mergers."

Building on Existing Systems

The choice of one firm's system over the other's may be less a matter of dominance and more a matter of convenience and speed. That was the case when TransCanada merged with another Canadian pipeline firm, NOVA Corp., to form a new Trans?Canada in July 1998. Coming into the merger, NOVA was running several modules, including an HR module, from enterprise resource planning vendor SAP of Walldorf, Germany. NOVA outsourced its payroll.

In contrast, TransCanada had developed its own in?house, client?server systems that had been in use for at least six years. The systems administered employee records, benefits plans, pension plans and certain payroll functions. Before the merger, the TransCanada systems were nearing the end of their life cycles.

"Our decision was to retain and re?configure the SAP HR system to the needs of the new, merged company," Bickley says. The systems team figured that maintenance costs of the SAP HR system and the older TransCanada in-house system would be about the same, he says. What made the difference was the push for HR to complete its part of the merger and get data up and running quickly so that HR could help other parts of the new organization through the merger.

"Management's advice was, pick one of the [systems] alternatives that you know, that you have skill sets in," Bickley recalls. "HR was under tremendous pressure to execute their parts of the merger." By using NOVA's existing system as a starting point, TransCanada was able to create a revamped system in a short time, he says. The SAP HR module could handle a new compensation system that the merged organization needed immediately.

And the price was right. The budget for the integration was slated at $4 million (Canadian), and thanks to the head start provided by using NOVA's system, HR had its new system on schedule and under budget, at just $3.3 million (Canadian), Bickley says.

Starting Fresh

In some cases, neither participant's existing HR system can handle the new organization's needs. Scrapping both systems and starting anew might sound like a dramatic change for both companies. But Tarka says that in about a third of the mergers her clients undertake, the choice is a new HRIS. The decision to buy or build a new HRIS is most appropriate when the two participants' legacy systems are not capable of supporting the increased workforce.

Two nonprofit organizations that merged with Tarka's help chose to put a new system into place. "Prior to the merger, each individual organization had very different systems, yet neither one of the systems had the necessary infrastructure to support the increase in employees," she says. "One agency had all manual [recordkeeping] and the other had a DOS version of an HRIS." In both organizations, a designated person, who had responsibilities other than HR, answered employees' HR questions. The newly merged organization quickly realized that neither system had the capacity to support the data needs and questions of the expanded workforce.

Geography further complicated the merger. The two locations remained physically, although not operationally, separate after the merger, but HR was consolidated at one location, requiring a single system to serve two locations.

If merging organizations question whether they need to find a new, mutual system, Tarka says, HR for both firms needs to ask what upgrades they need, whether the existing HR systems can handle the increased numbers of employees and whether existing systems can be expanded.

When to Stay Separate In rare cases, it may make sense for a merged organization to keep two separate systems, such as during international mergers or acquisitions.

"If the acquisition is an international endeavor where languages or differences in employment laws can be issues, keeping the two departments separate can be advantageous," Tarka says. Also, if one business is acquiring another only for the short term, with plans to sell the acquired firm soon, keeping the acquired business's systems intact makes sense because it saves the effort of trying to change something that will be gone soon anyway, she adds.

Overall, consultants and merger veterans alike see little benefit in retaining separate HR systems. "There's a distinct danger that two separate sets of HR practices will continue, allowing the continuance of two, separate employee populations in the new organization," Bickley says.

Maintaining two systems creates more work for IT and HR, David Sroelov says. "It's a pretty good bet that management will want one report, not two. This means somewhere along the line, more programs will have to be written to combine two sets of data." Adds Tarka: "With two systems, consistency in the enforcement of employment practices becomes a challenge."

J.W. Dysart is a software analyst and Internet business consultant based in Thousand Oaks, Calif.

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SHRM articles:
A Mergers and Acquisitions Checklist
(HR Magazine)


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