Duncan Smithson, a partner in Mercer’s Mergers & Acquisitions consulting business, recently coauthored an article for The Deal that shares Mercer’s latest research and thinking on how workforce analytics can support deal success. He spoke with Mercer/View to elaborate on this topic.
Q: WHY IS HUMAN CAPITAL SUCH AN IMPORTANT FACTOR IN M&A SUCCESS?
DUNCAN SMITHSON: If you think about how businesses work, pretty much every company — whether a mom-and-pop shop, a multibillion-dollar global enterprise, or a not-for-profit organization — needs profitable revenue growth in order to further its strategic mission. Consider how companies go about achieving that growth beyond their core operations. They might look to gain efficiencies in their supply chain so that expenses trend downward, or seek to sell their product in new markets to drive numbers up. Whatever the strategy, companies increasingly are eyeing mergers and acquisitions as an important tool in their toolbox to boost revenue and profits as part of a global growth objective.
People and people practices play a critical role in those strategies. Every organization needs people — they are the engines that allow companies to succeed. While some companies or industries are much more peopleintensive than others, the associated opportunities and risks matter to the financial strategies of any organization, regardless of size, industry, or type. Particularly in the context of M&A, it’s essential that companies have the right talent and skills, and that the people and HR strategies of the companies align.
Q: IN GENERAL, WHAT IS THE ROLE OF WORKFORCE ANALYTICS IN AN M&A ENVIRONMENT, AND WHY IS IT IMPORTANT?
D.S.: During the transaction process, the acquiring company is continually assessing whether anything it is doing is facilitating greater advantage or leverage and bringing to fruition the underlying strategic rationale of the deal. Certainly this is true of the people and HR practices that it’s acquiring. That’s where the use of workforce analytics comes in.
Workforce analytics uses data-driven tools to look at and measure current and future workforce issues, trends, and needs, and helps acquiring companies answer a number of key questions: How are our people going to drive business success? What type of people do we need in terms of roles, job functions, and necessary qualifications?
How many people do we need? Are we employing the right mix of roles to support future demand? Where has this talent come from in the past? Are current practices sustainable, and if not, why? Will we be able to get the additional talent we need, and if so, from where? What are the HR programs and policies that we need to evaluate, change, or implement to address the gaps?
This analysis of strategy, structure, sourcing, and practices is important regardless of the context. But M&A acts as a catalyst that forces companies to revisit these issues, particularly if the transaction yields a combined organization that is substantially larger or more diversified than it was prior to the acquisition.
So, understanding and optimizing the workforce — uncovering how HR programs and human capital practices and policies impact ROI, and having the right people with the right skills in the right place at the right time at the right cost — is key to maximizing deal success and meeting the overall objectives of the company.
Q: WHAT ARE THE KEY ELEMENTS OF WORKFORCE ANALYTICS IN UNDERSTANDING HUMAN CAPITAL RISKS AND OPPORTUNITIES IN THE CONTEXT OF AN ACQUISITION?
D.S.: At the highest level, it’s about understanding which groups of individuals or roles are fundamental to driving future strategic value for the business and segmenting the workforce accordingly. Then it’s a return to basic economic demand and supply — identifying how many people you will need, how many you have, where the gaps exist, and how you are going to close them.
For M&A, the most important source of critical talent is within the acquiring company’s own internal labor market (ILM). Using the employee database, you can glean great insights about labor market flows: where talent came from; how people moved in, up, through, and out of the organization; the talent the company has presently; the number that were acquired over a certain period of time; and how they were acquired.
Ideally you want to see something similar for the target organization so you can overlay the two in a comprehensive map, identifying where there are similarities or differences and determining which policies and practices are driving the different ILMs and why. For example, why does the target company do a better job of attracting, promoting, and retaining talent? The answer might be a superior sales-incentive plan design, or perhaps the junior engineer training program is really top-notch, or the target company simply pays more.
Workforce analytics also allows acquiring companies to look at external labor markets to determine the availability and location of needed talent. For example, it’s possible that for a particular critical role, even if an acquiring company nabbed every graduate from every university and stole all of the talent from its competitors, there simply would not be enough people to make the numbers work. This is critical information that directly impacts the purported financial rationale of the deal.
Basically, anything and everything in the HR sphere can either be the culprit or the facilitator of driving behaviors that translate into financial success. But practically speaking, you want to identify the two or three interventions that will really make a difference. In an M&A situation, you hope to get close to the answer as part of due diligence. At the very least, such revelations represent value changers in the deal, which acquiring companies need to budget for up front.
Q: WHAT ARE THE UNIQUE CHALLENGES TO MAKING WORKFORCE ANALYTICS EFFECTIVE IN M&A, AND HOW CAN THEY BE OVERCOME?
D.S.: Availability of data is always the biggest challenge, but it changes over the course of the transaction. In the early stages, access is limited with analysis at a high level to generate interest among potential buyers and test whether a target is a good fit. Only after the deal closes does the buyer have full access to the target company’s data. But in between, there is the potential to do something scalable and carry out workforce analytics to increasing degrees of complexity as the deal proceeds and more information becomes available.
Beyond the data, the greatest challenge for buyers is to “know thyself.” Transactions put a spotlight on current strategies and force a fresh look at existing practices, requiring companies to sharpen their focus and answer questions they may have avoided in the past.
Many companies have never analyzed who drives strategic value for the business, nor segmented their workforce. It would behoove those on the acquisition trail to address these issues — not only to better know themselves and what or who is critical, but also to more accurately identify target companies, create a more efficient due diligence process, and successfully drive behaviors that will optimize M&A opportunities to meet financial and strategic objectives.
Mercer’s Duncan Smithson and Brian Levine published an article on this topic, “Avoiding Labor Pains in Mergers,” in the 27 September 2013 issue of The Deal. Learn more about Mercer’s M&A transaction consulting services.
|Duncan Smithson (Chicago)
Partner, M&A Consulting
+1 312 917 9284
Brian Levine, PhD (New York)