Study: Worker Retention Key in Divestitures

Many, unfortunately, don’t follow best practices

By Dinah Wisenberg Brin May 9, 2013
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Most executives of companies that have divested a business consider employee retention key to a succ​essful transaction, but they often aren’t using the most effective techniques to keep workers on board, a recent Ernst & Young LLP survey found.

“The thing that people were doing most often was the least successful”—that is, offering a bonus to stay through deal completion, said Ernst & Young Executive Director Ellen Copland, who recently discussed strategies of successful sellers that the consulting firm highlighted in its Human Capital Carve-out Study: Strategies of Successful Sellers, released in February 2013.

Ernst & Young, which surveyed 100 CEOs, CFOs, corporate development officers and HR professionals who have worked on divestitures on the seller’s side, recommended four over-riding practices for divestiture success, all of which touch on HR issues. Successful employee retention is but one vital piece of the formula and one of the areas where companies have room to improve by adopting winning practices:

Boost negotiating power by learning in advance the carve-out business’s HR needs and by giving the buyer financial information based on the costs of transferring employees. Be prepared to offer 12 months of transitional services to reach a quicker close, including rapid-recruiting support and other HR services in the agreement.

Keep business operations stable throughout the process by addressing labor and vital employee concerns. “The companies that were happy with the process of selling the business were more proactive and worked closely with labor,” said Copland.

Use targeted communications and retention planning to keep workers focused on business operations and customers, holding managers accountable for employee engagement.

Organize the HR team to help execute a timely and cost-effective transfer, and establish a dedicated and diverse divestment team that includes HR representatives who best understand labor relations and financial matters.

Retaining Employees

Survey results offered insights into specific steps that companies (with the help of their HR department) should consider to enable a smooth transition, with employee retention being a key goal. Ernst & Young found that 85 percent of respondents consider employee retention the biggest driver of carve-out success.

Companies most often tried to retain employees by offering them a cash bonus for staying with the divested business through the sale, but that method was the least effective, according to Copland. Holding managers accountable for employee retention and providing enhanced severance protection to employees through the post-divestiture period are the most successful strategies, she said.

“Retention bonus only gets people to stay long enough to get the payment,” she noted. “It’s not building a value proposition for them or building a level of trust.” By contrast, enhanced severance protection shows workers they’ll have some income security if the new owner has to let them go later, and it affords more time to convince employees that the business will be a good place to work, she added.

It’s the company’s way of saying, “‘We just want you to not be worried,’” Copland said.

Holding managers accountable for employee retention works because they know what the people who report to them are interested in, and it can help boost support for the divestiture, she said. “The end goal is to ensure that key employees’ performance and productivity are not disrupted.”

Communication and Engagement

“Providing support to employees of the business unit being divested and to those remaining with the seller can help defuse negative feelings and keep the divestment process on track,” the report stated. “Communications may work best for different companies at different times, but one thing is certain: communications must be timely, honest and culturally appropriate.”

Sellers need to develop plans for communicating with employees during the divestiture process, briefing key employees in advance to generate support and excitement at senior levels, and keeping unions informed, the report added.

In terms of information to supply to buyers, Ernst & Young said successful sellers “provide comprehensive employee details that have been reviewed from a buyer’s perspective. These details include benefits, employment agreements, employment demographics, legally required indemnities and others.”

Among other best practices, the survey also found that the best performers use transitional services agreements of more than a year, although many sellers believe that short agreements will minimize their costs.

“The cost of providing TSAs is outweighed by the benefit of using TSAs to provide critical HR functions to the divested entity quickly,” the report stated.

Overall, the report noted, “Both sellers and buyers will benefit by considering the sensitive needs of impacted employees, contractors and customers.”

Former Associated Press editor and Dow Jones reporter Dinah Wisenberg Brin is a frequent contributor to CNBC.com and a freelance journalist based in Philadelphia.

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