The Human Capital Balance Sheet in M&A: Bringing expectations to life

Posted by Michael Fuchs, Ami Louise Rich, and Alisa Locricchio on March 25, 2019.

The typical M&A transaction can be thought of containing two main phases: Phase 1 is the run-up to Day 1—an intense period of targeting, deal strategy, due diligence, and Day 1 planning focused on maximizing potential value while just getting the deal done. Phase 2 addresses the longer term vision of the transaction from Day 2 and beyond—focusing on the most effective and efficient way to achieve all the strategic, financial, operational and functional objectives laid out during Phase 1. A focus on the Human Capital Balance Sheet is a critical way in which an organization can bring Day 1 expectations in sync with Day 2+ realities.

The Human Capital Balance Sheet can best be described as a single, transparent view of the workforce from the lens of cost, value, and risk. It analyzes these factors to understand how investment in your workforce drives organizational performance. By taking this view of your workforce, leaders can better align on priorities for the workforce, enabling well-informed decisions about where to maintain, increase, cut back, or eliminate workforce spend, in order to optimize the organization’s human capital investments.

Incorporating the Human Capital Balance Sheet into M&A deal planning enables business leaders to understand the baseline human capital (all-in labor) cost of their current organization and gain insights into the implications of the transaction on this overall workforce spend, whether the transaction is an acquisition, merger, or divestiture. Getting increased clarity on the workforce spend implications on Day 1 helps the organization to better prepare for Day 2+ and hit the ground running to execute against the strategic goals of the transaction.

For example, during a divestiture:
Organizations will be able to obtain a view of the all-in labor cost for Day 1 planning to determine:

  • If the go-forward view is aligned with the business objectives and financial goals of the divestiture
  • What workforce spend components need to be adjusted, such as org design, job architecture, rewards programs, pay practices, leave management, and overall HR functional spend
  • What workforce spend initiatives need to be prioritized in order to achieve and sustain the strategic goals of the transaction

Completing this work prior to deal close gives organizations a running start to accelerate work on org design, total rewards optimization, and other identified opportunities as of Day 2.

During an integration:
In addition to obtaining the go-forward view and insights into workforce spend and strategy implementation discussed above, organizations will be able to more deeply evaluate the acquired company prior to deal close to better understand:

  • Its human capital spend/cost model
  • Areas of alignment and misalignment between the two companies
  • Opportunities for efficiency gains and optimization at both the acquirer and company being acquired

For example, rather than adopting all policies and practices of the acquirer, the right business decision may be to implement a hybrid model based on the combined findings of the Human Capital Balance Sheet.

The Human Capital Balance Sheet in action: Rewards optimization
The opportunity to harmonize and optimize rewards programs during an M&A transaction is considerable.

Too often, the types and variety of rewards offered at an organization beyond the typical pay/insurance/retirement offerings have been based on industry benchmarks or whatever perk might be in fashion. But this approach doesn’t consider that what one segment of the workforce values may not be the same as another, and some rewards programs may not be particularly valued by any segment, making them a poor investment.

Rewards optimization provides clarity and actionable insights into the relationship between the value employees place on a particular offering and the program’s overall effectiveness. By utilizing a conjoint survey prior to determining the future-state rewards program, employees indicate which program features are most important or most valuable to them and which are least important or least valuable to them. Rewards for the combined or divested organization can be adjusted accordingly to maximize their value.

Based on our experience, rewards optimization data analysis can yield reward packages that the vast majority of employees (frequently 70–80 percent) prefer over their current packages.

Given the considerable to-do list and high stakes involved, M&A transactions can be taxing and disruptive, but the potential opportunities make it an exhilarating time, too. Considering the Human Capital Balance Sheet as part of the deal evaluation and execution process can shine a light on the often murky areas of workforce investments and enable well-informed decision-making through the lens of cost, value, and risk. Armed with this insight, leaders are better able to align on people priorities and optimize the organization’s human capital investments, not only on Day 1 but for Day 2 and beyond.

Moreover, bringing this expanded workforce view to the table enhances HR’s contribution to the deal as well as its reputation as a valued partner to the business. It demonstrates HR leaders’ ability to think outside the HR silo to bring operational and financial solutions to leaders at times when they matter most.

Michael Fuchs is a Principal in the Human Capital Practice of Deloitte Consulting LLP. Over his almost 30 year career, he has focused on the impact Human Capital has on the success of Mergers & Acquisitions, as well as other business transformations. Michael is currently leading Deloitte’s Human Capital Balance Sheet initiative.

Ami Louise Rich is a principal in the Human Capital practice of Deloitte Consulting LLP with experience in strategic change, workforce transition, organization design, and training development and delivery.

Alisa Locricchio is a senior manager in the Human Capital practice of Deloitte Consulting LLP with experience in M&A strategy development and execution and pre-/post-Day 1 planning related to employee and HR functional integration activities.

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