Leadership Barometer 33 Downsizing Tips

January 13, 2020

Every organization deals with downsizing occasionally in a struggle to survive difficult economic conditions. These times are true tests of the quality of leadership.

In many cases, downsizing leads to numerous problems in its wake, especially lower trust.

The most crucial shortage threatening our world is not oil, money, or any other physical resource. It is the lack of enlightened leaders who know how to build trust and transparency, especially when draconian actions are contemplated.

We are in need of more leaders who can establish and maintain the right kind of environment. A serious problem is in the daily actions of the leaders who undermine trust, even though that is not their intention.

The current work climate for leaders exacerbates the problem. The ability to maintain trust and transparency during workforce reductions is a key skill few leaders have.

Downsizing is a unique opportunity to grow leaders who do have the ability to make difficult decisions in ways that maintain the essence of trust.

Thankfully, there are processes that allow leaders to accomplish incredibly complex restructurings and still keep the backbone of the organization strong and loyal. It takes exceptional skill and care to accomplish this, but it can be done.

The trick is to not fall victim to the conventional ways of surgery that have been ineffective numerous times in the past. Yes, if you need to, you can cut off a leg in the backwoods with a dirty bucksaw and a bottle of whisky, but there are far safer, effective, and less painful ways to accomplish such a traumatic pruning.

One helpful tool in a downsizing is to be as transparent as possible during the planning phase. In the past, HR managers have worried that disclosing a need for downsizing or reorganization might lead to sabotage or other forms of rebellion.

The irony is that, even with the best secrecy, everyone in the organization is well aware of an impending change long before it is announced, and the concealment only adds to the frustration.

Just as nature hates a vacuum, people find a void in communication intolerable. Not knowing what is going to happen is an incredibly potent poison.

Gossip and rumors generally make the problem bigger than it actually is, and leaders find themselves dealing with the fallout.

Human beings are far more resilient in the face of bad news than to uncertainty. Information freely given is a kind of anesthesia that allows managers to accomplish difficult operations with far less trauma. The transparency works for three reasons:

1. It allows time for people to assimilate and deal with the emotional upheaval and adjust their life plans accordingly.
2. It treats employees like adults who are respected enough to hear the bad news rather than children who can’t be trusted to deal with trauma and must be sheltered from reality until the last minute.
3. It allows time to cross-train those people who will be leaving with those who will inherit their work.

All three of these reasons, while not pleasant, do serve to enhance rather than destroy trust.

Don’t humiliate people

Another tip is how to break the news to someone who will be terminated. One way to handle the situation is to ask yourself how you would like to be treated if the situation were reversed. Would you like to be paraded down the hall to pack a box with your possessions and escorted outside the gate and forced to hand over your keys and badge?

Many enlightened leaders have handled the separation in a more humane way. They break the news to the individual and share that the employee needs to find alternative employment. They may even offer assistance with ideas on where to look and offer for a reference.

Then, the employee is not immediately escorted off the premises, but is allowed to pack things up over the next several days and say good bye to friends and work colleagues. Some employers have even experimented with letting the impacted worker use the facilities and equipment for a short while during the job search.

HR managers will quickly point out the risks of having formerly employed workers on the premises, and it is true that the person needs to understand that if he or she is disruptive in any way, then the leaving will be immediate.

The idea is that when you treat separated employees with respect and kindness, even when the news is not good, they respond with a better attitude, which generally improves the outcome.

The more powerful result is that the employees who are not leaving are also impressed by the way these former colleagues were treated. That factor tends to bolster morale a bit for workers who are now asked to take up the slack.

Full and timely disclosure of information and thoughtful exit processes are only two of the many tools leaders can use to help maintain or even grow trust while executing unpleasant necessities.

My study of leadership over the past several decades indicates that the situation is not hopeless. We simply need to teach leaders the benefits of building an environment of trust and transparency and how to obtain them.

Robert Whipple, MBA, CPLP, is a consultant, trainer, speaker, and author in the areas of leadership and trust.

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Merger Problems

January 23, 2015

M&A or Merger and Acquisition text on blockNumerous studies have found over 50% of mergers and acquisitions fall short of expected results, primarily due to the failure of the cultures to integrate well. Why, then are CEOs so cheerful when they head into one of these major restructuring activities?

 

In my book, Trust in Transition: Navigating Organizational Change, I discuss 30 different systemic problems with making mergers work and give antidotes to each of them. In this brief article I will describe what I believe are the five most serious problems and suggest ways to mitigate them.

1. Relying too much on the mechanical process

When MBA students learn about M&As, the content usually is focused on the financial and legal details of setting up a combined entity from two unique groups.

Topics covered include asset valuation, due diligence, negotiation, legal aspects, management structure, and numerous other organizational things that must be considered. Few programs give equal attention to the cultural part of the equation.

Students are left to assume that the culture simply “sorts out” by itself over time. That oversight is huge because cultural issues are usually the root cause of merger problems.

For example, the Daimler-Chrysler merger in 1998 was a classic debacle that cost Daimler nearly $36 billion over a decade. The magnitude of a loss that large, was almost $10 million per day for 10 years! The major reason for the breakup was the failure of the two cultures to integrate.

To improve the M&A process, it would be helpful to give the cultural integration equal footing with the legal and financial aspects of the activities from the start.

2. Loss of objectivity leads to inadequate planning

Top leaders can easily see the benefits, and they look seductively attractive. The costs and hassles seem to be manageable, so not much energy is spent on internal culture issues or potential external problems for customers.

The upside of the deal is championed, while challenges are pushed aside. Objectivity gives way to passion for the deal.

Anyone who questions the validity of an assumption or brings up a potential problem is labeled as “not a team player,” so reasonable dissent is extinguished.

Here are three antidotes for this situation:

1) have a trusted Devil’s Advocate on the senior team who will prevent myopic optimism,

2) explore potential problem areas and design solutions that mitigate risk, and

3) calculate the ROI based on the best guess of the benefits, but inflate estimated costs and problems, because real costs will surface later and often be larger than anticipated.

3. Lack of adequate training

Leadership training is crucial during any kind of reorganization. Many organizations back off on training for leaders because there is so much chaos during the integration that most leaders are “too busy to sit in the classroom.”

Antidote: Bring the classroom to the chaos. What better time is there to do leadership development than right there in the middle of the crucible? Skilled L&D professionals can leverage the urgent need for solutions into pragmatic problem solving and motivational skills.

Supervisors are also in urgent need of leadership training during a reorganization. Reason: they form the critical trust link between the management layers and the workers. Changes faced by each supervisor are stressful personally, yet this individual is vital in creating order for the other people.

Weak or bully supervisors often come unglued due to the pressures of a merger. They need training and assistance in order to perform their function when it matters most.

4. “We Versus They” Thinking

From day one, the leaders must not only preach the avoidance of “we versus they” thinking, they must model it and insist on it.

I often hear language that indicates lack of full integration years after a merger has been supposedly completed. It is essential to replace parochial thinking with “us” type language and actions.

One way to help speed the integration is to co-locate the groups. That is often impossible in the short term, so transplanting some key resources from one group to the other is another way to make it harder to tell who “we” are and who “they” are.

5. Loss of Trust

In the anticipation of a merger or acquisition, adrenaline drives expectations of what the merged entity can accomplish. It is easy to assume the individual needs will be resolved and team cohesion will somehow settle in quickly.

That is usually not the case, and often bitter feelings linger on, hurting the integrated organization for years.

Candid and frequent communication is needed to keep people informed and allow top managers to feel the angst of workers. It is in these interfaces that trust is either maintained or destroyed by the behaviors, words, and body language of senior leaders.

Ten Best Practices

Anticipate a bumpy ride, and expect that significant psychological calming is going to be needed at times. Here are some additional ideas that may be helpful:

1. Be clear and transparent throughout the process.

2. Create design teams early to help people connect with the future more quickly.

3. Include the customer in every decision, especially during the chaos phase.

4. Assume the risk of setbacks willingly, and do not let unexpected issues spoil the overall process.

5. Invest in some Emotional Intelligence training for people in the organization, especially management.

6. Celebrate positive movement in an integrated way to model the spirit of the merged culture.

7. Bring in a grief counselor to help people cope with the loss and the transition.

8. Train leaders to model the integrated behaviors, and do not tolerate silo thinking.

9. Consider cross-locating or co-locating people, where possible.

10. Prune redundant resources delicately with a sharp scalpel rather than a long line of guillotines.

There can be times of joy and accomplishment during any merger or acquisition. It is possible to maintain trust, even amidst the chaos. After all, the vision for the whole activity is a brighter future.

The wise leader will recognize that changes of this magnitude require extraordinary effort and patience to achieve the anticipated result.

By focusing the same level of effort on establishing the right kind of culture as they do on the financial and legal aspects of reorganization, leaders can ensure they meet or exceed their goals.

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Announcing a Downsizing

July 21, 2013

AnnounceThe need for excellent leaders grows more urgent every day. I believe the most crucial shortage threatening our world is not oil, money, or any other physical resource. It is the lack of enlightened leaders who know how to build trust and transparency. We are at an all-time low in terms of the number of leaders who can establish and maintain the right kind of environment. The outrageous scandals of the past few years are only a small part of the problem. The real cancer is in the daily actions of the many leaders who undermine trust with less visible mistakes every hour of every day.

The current work climate for leaders exacerbates the problem. Most organizations have been forced to take draconian measures in a desperate struggle to survive. In these environments, the ability to maintain trust and transparency often is eclipsed by the extreme actions required to keep from going bankrupt. This conundrum is a unique opportunity to grow leaders who do have the ability to make difficult decisions in a way that maintains the essence of trust. One of the most complex situations occurs when there is a need to trim the current workforce. While there is no one formula that fits every situation, here are some ideas that might prove helpful if you are in that situation.

When a downsizing is going to be required, many managers wrestle with when and how to break the news to the work force. On the surface, it feels like the safer thing to do is to procrastinate on announcing the difficult news, which may be directionally the wrong way to go for the long term health of the organization.

Thankfully, there are processes that allow leaders to accomplish incredibly disruptive restructurings and still keep the backbone of the organization strong and loyal. It takes exceptional skill and care to accomplish this, but it can be done. The trick is to not fall victim to the conventional ways of surgery that have been ineffective numerous times in the past. Yes, if you need to, you can cut off a leg in the back woods with a dirty bucksaw and a bottle of whisky, but there are far less painful, safe, and effective ways to accomplish such a traumatic pruning.

One tool is to be as transparent as possible during the planning phase. In the past, HR managers have insisted that the risk of projecting a need for downsizing or reorganization might lead to sabotage or other forms of rebellion. There are also legal considerations with premature divulging of information, so there is a balance that must be considered. The irony is that, even with the best secrecy, everyone in the organization is well aware of an impending change long before it is announced. Just as nature hates a vacuum, people find a void in communication intolerable.

Not knowing what is going to happen is an incredibly potent poison. Human beings are far more resilient to bad news than to uncertainty. Information freely given is a kind of anesthesia that allows managers to accomplish difficult operations with far less trauma. This can be helpful for three reasons: 1) it allows time for people to assimilate and deal with the emotional upheaval and adjust their life plans accordingly, 2) it treats employees like adults who are respected enough to hear the bad news rather than children who can’t be trusted to deal with trauma and must be sheltered from reality until the last minute, and 3) it allows time for the people who will be leaving to train those who will inherit their work. All three of these reasons, while not pleasant, work to enhance rather than destroy trust.

One caveat is that pre-announcing a downsizing may cause some of the best people to go job hunting elsewhere. The wise manager understands this and makes sure the critical resources know their situation is secure. It is better to have a forthright discussion about the situation and future than to have people making assumptions based on speculation.

Full and timely disclosure of information is only one of many tools leaders can use to help maintain or even grow trust while executing unpleasant necessities. The method is not universal for every situation and culture, but it will have merit in many situations and should at least be considered as an option. My study of leadership over the past several decades indicates the situation is not hopeless. We simply need to teach leaders the benefits of trust and transparency and how to obtain them.

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Stupid or Brilliant

May 13, 2012

I do a fun exercise in my leadership classes called “Stupid or Brilliant.” I go through a number of scenarios and specify an action that, on the surface, appears to be stupid. In each case, the loss of control would appear to be devastating from a risk point of view. I ask the participants to vote if the action was stupid or brilliant.

There are some examples where there is a documented correct answer, but most of the questions can lead to lively debate. Here is an example of a question with a real answer.

A doughnut street vendor at the base of a skyscraper in New York City noticed that the line was too long while people waited for him to make change. He was losing customers. He put out a box with change and small bills and a sign that read “In a hurry? Make your own change: I trust you!” At first glance, putting money out in trust in NYC would be stupid. People could just take the cash and go. Instead, the vendor found the strategy to be brilliant for three reasons:

1. The throughput of his vending operation increased by 50% because the line moved faster.

2. People started talking about his trust throughout the building, and they came out to buy from this honest vendor.

3. Many people would not even take the change. If their total came to $3.75, they would just put in a five dollar bill and walk away.

Other strategies for trusting people leave room for analysis. For example:

One consultant decided to charge only what the customer felt was appropriate after his work was done. He would leave the fee totally at the discretion of the people he was helping. This tactic defies negotiation logic because it ignores what is called the “call girl” principle of negotiation (the value of the service is greatly reduced after the service is rendered). Yet, this consultant generally did very well and often took away larger fees than he would have if he had negotiated a firm price before doing the work.

One organization was forced by market conditions to do some downsizing. They decided to allow the people being let go to continue to use their old office, computers, and cell phones for several months if they wanted while they looked for work elsewhere. Of course, there were a few stated rules about not being disruptive and honoring professional behaviors while on the premises, but other than that, the severed employees were treated the same as the ones retained. There was a risk, but the company found that in all but a few rare exceptions, the benefits far outweighed the risks.

You can carry blind trust to an extreme where a strategy is truly stupid. One example I give in my classes is this: The owner of a bar does not charge patrons per drink but asks each customer to keep track of what was consumed and pay at the end of the night. Obviously, most people vote for this as a “stupid” strategy. On the other hand, it would make an interesting experiment, because it may be possible that customers would pay more than required on average rather than pay less.

The point is that when we really do trust people to do the right thing, they often respond in ways that defy conventional wisdom. That logic is generally derived from a social norm based on a controlling philosophy. When given the chance, most people react with integrity and gratitude when we extend trust to them.

I have developed what I call the “First Law of Trust.” It is: “If you are unhappy with the level of trust others have toward you, the first corrective action is to find ways to extend trust more to them.” Trust is reciprocal in nature, so the best way to receive more trust is to give more. Try this technique with the people in your life, and you will see a dramatic increase in trust. Often what seems like an unwise risk to take will turn out to be rewarded by far greater loyalty than you can imagine.

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Downsizing Mistakes

August 14, 2011

Every organization deals with downsizing occasionally in a struggle to survive hard economic conditions. These times are true tests of the quality of leadership. In many cases, downsizing leads to numerous problems in its wake, especially lower trust.

The most crucial shortage threatening our world is not oil, money, or any other physical resource. It is the lack of enlightened leaders who know how to build trust and transparency, especially when draconian actions are contemplated. We are at an all-time low in terms of the number of leaders who can establish and maintain the right kind of environment. The outrageous scandals of the past few years are only a small part of the problem. The real cancer is in the daily actions of the leaders who undermine trust with less visible mistakes every hour of every day.

The current work climate for leaders exacerbates the problem. The ability to maintain trust and transparency during workforce reductions is a key skill most leaders lack. Downsizing is a unique opportunity to grow leaders who do have the ability to make difficult decisions in ways that maintain the essence of trust.

Thankfully, there are processes that allow leaders to accomplish incredibly complex restructurings and still keep the backbone of the organization strong and loyal. It takes exceptional skill and care to accomplish this, but it can be done. The trick is to not fall victim to the conventional ways of surgery that have been ineffective numerous times in the past. Yes, if you need to, you can cut off a leg in the backwoods with a dirty bucksaw and a bottle of whisky, but there are far safer, effective, and less painful ways to accomplish such a traumatic pruning.

One tool in a downsizing is to be as transparent as possible during the planning phase. In the past, HR managers have insisted that disclosing a need for downsizing or reorganization might lead to sabotage or other forms of rebellion. The irony is that, even with the best secrecy, everyone in the organization is well aware of an impending change long before it is announced, and the concealment only adds to the frustration.

Just as nature hates a vacuum, people find a void in communication intolerable. Not knowing what is going to happen is an incredibly potent poison. Human beings are far more resilient to bad news than to uncertainty. Information freely given is a kind of anesthesia that allows managers to accomplish difficult operations with far less trauma. The transparency works for three reasons:

1. It allows time for people to assimilate and deal with the emotional upheaval and adjust their life plans accordingly.
2. It treats employees like adults who are respected enough to hear the bad news rather than children who can’t be trusted to deal with trauma and must be sheltered from reality until the last minute.
3. It allows time to cross train those people who will be leaving with those who will inherit their work.

All three of these reasons, while not pleasant, do serve to enhance rather than destroy trust.

Full and timely disclosure of information is only one of many tools leaders can use to help maintain or even grow trust while executing unpleasant necessities. My study of leadership over the past several decades indicates that the situation is not hopeless. We simply need to teach leaders the benefits of building an environment of trust and transparency and how to obtain them. My latest book, Leading with Trust is like Sailing Downwind was written to help fill this urgent need. It is full of ideas for creating and maintaining trust within organizations in good times and bad.

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The role of HR in Mergers

June 19, 2011

In any merger or acquisition, one of the most taxed groups is the Human Resources Department. The success of the venture and the health of the resulting merged organization in the future are highly dependent on the skill and dedication of the combined HR unit. It would be tempting to downsize the HR function early in the merger process, since duplicate staff functions are generally trimmed as a result of any merger. That would be a big mistake.

HR has so many different and critical roles during the integration, having to perform them all flawlessly during an extended transition with reduced staff would result in high jeopardy for the business. Let’s look at a sampling of new roles to be played by HR during a merger. These are over and above the normal listing of roles that keep all HR staff hopping in steady state times.

Advocating for the people process during all negotiations

The process leading up to a merger can take many months or even years. During that time, both organizations are expected to run normally, with top performance, because each one is being scrutinized for valuation purposes. The HR staff must keep all elements of the planned merger under wraps for legal reasons while simultaneously analyzing the potential impact of the merger.

Creating uniform policies

HR policies and procedures need to be shaped to the new reality. This involves working with key stakeholders in both units to sort out a steady stream of issues, like flex work plans, vacation plans, salary rationalization, benefits alignment, movement of people, communication systems, and numerous other critical operational decisions. In these decisions, the HR role is that of a pivot player with management and the workforce.

Working to blend the cultures

Historically, when mergers fail to produce expected results, it is often due to the inability of the cultures to blend into a homogeneous hybrid culture. A classic case example of this was the Daimler Chrysler merger where the two cultures never did merge. The more formal style of the Daimler culture and the more free-flowing style of Chrysler made an integration impossible. HR must take the lead at bringing in the appropriate resources (such as teambuilding experts or leadership improvement consultants) early in the integration to keep the two old cultures from becoming calcified and rigid. It is during the integration process that all kinds of dysfunctional and even childish behaviors may become evident at all levels.

Sorting through downsizings

Inherent in most mergers is the ability to trim back on redundant functions in the staff areas and even in production groups. This is a critical issue for any merger process. HR must ensure that any downsizing activity is done fairly and with the appropriate sensitivity to the welfare of impacted individuals. When reductions do occur, it is often the people staying who feel like the true losers, because they need to survive in a working world that sometimes seems untenable. Usually HR is involved in trying to prop up sagging morale before, during, and after downsizing efforts.

Advocating for transparency

Information dissemination during a merger process is a critical element, and HR is usually at least partly involved in the roll out of information. The ultimate level of trust in the merged group will be closely linked to the level of transparency people witness during the various phases. The conundrum between what must be kept under wraps and what can be shared at any point in time is like a giant jigsaw puzzle. Eventually all the pieces fit into place and the big picture can be viewed, but along the way it really does matter which piece is played at any point in time. HR takes on many roles from advisor to top management, to conduit for information, to designing communication processes and being a sounding board for feedback.

Training Integration

The Learning Management Systems (LMS) of the two entities are likely to be different. Each group will want to hang onto their familiar way of scheduling and tracking the training activities of their people. Major battles can erupt over the work required to convert from one LMS to a different one. The “victor” is perceived to have “won” over the group that needs to retool. Hard feelings over this issue can last for years. Sometimes a blending of the two systems works well where both groups are called upon to modify their past patterns.

Minimizing distractions

What is the name of the merged unit? If both names of the separate units are in the new name, which one comes first? Which CEO is perceived to be the top dog and which one has to get used to being second in command or needs to leave? What will the logo look like? Who gets to reside in the prime real estate? What outside training group is selected? On and on, the issues seem endless, and what appear to be rather straight forward decisions quickly become emotionally charged.

It is common in a merger to have both parties feel beleaguered and put out by the other party. It is hard to maintain objectivity and the perception of fairness when groups feel they are under attack. What might seem like a fair split of the pain to top managers may feel incredibly lopsided to both groups on the shop floor.
The workload of HR during the entire process from first inkling to full integration is many times what will occur in a steady state operation. That is why it is important to not downsize any seemingly redundant HR resources until full integration and stability have been achieved.

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Merger Right Sizing

May 8, 2011

Where have all the people gone – long time passing?

When organizations merge or are acquired, there follows an unsettled time where the integration needs to happen. Ultimately the combined workforce will be sized to reflect the joined operation, but how does a wise organization get to that ideal state with the least amount of pain?
Sizing an organization following a merger is really no different from determining the correct size of any organization at any time. It is a matching of the work to be done to the resources available, all things considered. How we wrestle with the concept of “all things considered” is the tricky part. Let us look at some potential ways to determine the size of a work force and the advantages and disadvantages of each one.

Historical Precedence

If we look at the historical staffing levels of two separate entities and do some extrapolation, we can make an estimate of how large a workforce to have in each department following a merger. The danger here is that the newly formed entity is not really just the sum of the two previous separate groups. It is a completely different organization. For a time, it may be necessary to run heavier than desired as the old processes must exist in tandem with new ones being invented.

Listen to the Squawking

Some leaders like to gauge the level of staffing such that there is a reasonable level of complaints about not enough staff, but not an extreme level where people are starting to burn out, have health problems, or just leave for greener pastures. If there is no noise coming from the existing workforce, it means that people are “happy,” which some leaders interpret as also being “fat” and “dumb.” Some level of tension to scramble after tough goals despite running thin seems like a reasonable place to be. The caveat here is that regardless of how an organization is staffed, some percentage of the population is going to complain there are not enough people to do the work. Often these individuals are the same people who wander around about half of the time complaining to their co-workers that there is not enough time to get the work done.

Analytical Approach

As an example, say your combined organization has 517 people on the payroll. One way to look at the right size challenge is whether the organization would be worse off in the long term if there was either 518 people or 516 people onboard. If the answer is “yes” to both questions, then you have found the right staffing number. That sounds too simple, and it really is because it forces a kind of precision about what people are capable of in various venues that is just not available. Exactly who these people are and what capabilities they have is of critical importance. The calculation of a specific number would be impossible, but the logic behind the thinking process is sound. If you were able to approximate the thought process in each smaller unit, then it might be more practical to think this way.

Consider the level of cross training

The use of training time and activity as a buffer for workforce size issues has many benefits. In an article titled, “Cross Training The Miracle Cure,” I have documented some of the benefits of cross training as follows:

• Increased motivation among employees, that make them less likely to be absentees.
• Flexibility to operate efficiently in any other position. Handy for future restructuring or employee shifting, when needed.
• Personal bonds made between peers who cross train together and share ideas.
• Acquiring new skills leads to higher job security.
• Increased self-esteem and fun occur with learning different tasks.
• Trust between employee-manager increases.
• ROI (return of investment) compared to other training options is outstanding because timing of training can occur during slack times.
• A cross-training program teaches employees to maintain job processes well documented and easy to communicate.
• While cross-training occurs, new ideas for improved processes often surface.

By taking the opportunity to do more cross training, it may reduce the immediate cash benefits of running with the lowest possible number of people, but it may be a much better financial choice for the organization long term. As leaders seek to develop the workforce, people become capable of doing more and are able to pick up slack when there is an upswing in business.

Change the rules and the functions

It might be possible to improve the top line by putting more feet on the street. Employees who previously worked in Accounts Receivable, for example, might have the connections to be deployed as additional sales resources. When there appears to be an excess of resources, it is a great time for a leader to get creative with what is possible in terms of changing the game rather than just getting out the axe.

Percentage Reduction

Probably the least creative and interesting way to configure the size of an organization is the one most often used by corporations. Somebody takes a look at the Income statement and decides we need to cut 15% across the board. The level is arbitrary, but it takes on a kind of legitimacy as managers throughout the organization strive to meet the bogey. It can be counterproductive because it penalizes groups that have historically run lean since the percentage cuts are normally spread evenly.

Experiments with Contract Labor

Many organizations have gone to a different model where the control mechanism is not how many employees are on the payroll but what percentage of temporary or contract workers are onboard. Having the ability to throttle up or down on the number of contract workers allows much more flexibility than the hire and layoff model of earlier times. Because acquisition costs are lower for contract workers, and with the ability to let them go without penalty, organizations can experiment with several different staffing strategies in reaction to differing market or competitive conditions. Unfortunately, the downsides of running with a hybrid workforce are so numerous this topic deserves a separate article. Whenever contract workers work side by side with full time employees on similar tasks, the atmosphere is ripe for conflict and lower trust. It is best to separate functions so that contract people are doing different work from full time employees and to have policies in place that ensure contract workers can feel fairly treated.

Anticipate

Wayne Gretzky made the following observation about his success in ice hockey, “I always skate to where the puck is going to be.” Doing good research about factors governing the size of needed workforce can allow time to right size the organization in a way that has little disruption. It is when we are caught off guard by a major recession like 2009, or experience a huge windfall of business due to the demise of a competitor that we become frantic about being way out of line relative to current conditions. Colin Powell said, “Great leaders have the ability to see around corners.” Good organizations are constantly asking “what if” type questions.

Having the right size of workforce is very much an art. Doing it well involves a consistent approach, a strategy, some training, and lots of practice. Sometimes it involves high risk, and other times it is a routine activity. Getting and keeping control of this HR process is particularly important during a merger or acquisition when all economic and human factors are up for negotiation. Making good decisions during these times is essential for the survival of the organization.

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Who is “On The Bus” After a Merger?

December 11, 2010

Whenever two groups merge, there is a change in personnel and positions. Typically, there are fewer slots after a merger, so some staff are let go. Often, this winnowing process goes all the way to the top of the organization. A huge conundrum for the health of the business is how to keep the right people on the bus and get the wrong people off the bus.

During the assimilation process after the merger is announced, there is normally an evaluation period where top brass figure out how many positions there are going to be and then seek to fill those slots with the best qualified individuals from the talent pool of the combined groups. After the selection process, the remaining people will receive some painful but expected news.

This process is what appears to be the ballgame with personnel after a merger. Actually, I believe the real ballgame happens long before the official selection process, and top management had better do the right things then or some of the most talented individuals will not be in the crowd when the selection process begins. Long before the announcement of a merger is made, people in both camps are at least vaguely aware that something is afoot. In most situations, the rumor that there is going to be some kind of a major discontinuity has been circulating for months.

People in both organizations are justifiably nervous when facing some unknown hazard that is bound to create casualties. In my own experience, I have noticed that even the highest performing individuals are unnerved enough to start questioning their longevity, at least to themselves. The very best and most marketable individuals have a good chance to land comparable or superior positions in other, more stable, organizations. So, the most valuable people start looking for alternatives long before any forced ranking of staff members takes place.

On the flip side, the least talented people or the ones who are lazy or have interpersonal issues recognize that they are vulnerable. They also realize they are not going to find many opportunities on the outside, so they hunker down and prepare to defend themselves through legitimate or fraudulent tactics. Their objective is to stay in the game if at all possible, and they will do whatever is necessary to ensure that when the music stops they are near an empty chair. This may involve some unfair pushing and shoving.

One of the very first actions top management should take is to identify the critical few people they need to be around for the afterlife in the merged configuration. These people need to be informed that their place in the new order is assured, and it will mean a better existence for them. Of course, that is a tall order because the truth is that there are far too many unknowns in the months running up to a merger to legitimately assure anyone of anything.

In this situation, some kind of contingent bonus may be helpful. Stock options are often used as a tool here because payment can be substantial, but it only occurs when the organization itself thrives. People will think twice about leaving a $100K job to go to a new organization if they can see a potential $1M payout in stock options if the merger is a success.

The downside of any bonus incentive is that of fairness. Basically, top management is singling out a few of the best people (in their opinion) to incent to stay. That will unnerve the mass of people in the middle who believe they are contributing just as much to the prior organization as the fair-haired individuals, but are not receiving an incentive to stay. That sends a chilling signal that impacts motivation and productivity for the majority of people at the very time when the due diligence process is examining the numbers for valuation purposes. This problem can be mitigated if the performance evaluation system in place is sensitive enough to already single out the top 5% of individuals, so any retention incentive can be thought of as an adjunct to the normal performance management process.

Monetary incentives are not the only tool managers can use to allow key individuals to know they are valued during a merger. Simply having a candid discussion about the situation with individuals can go a long way toward having them want to stay on the team. Of course, it is always a good strategy to let the best people know they are valued, but the benefit of doing it is amplified significantly during the months running up to a merger announcement.

Another idea is to have people serve on planning groups that are charged with assembling data for the due diligence process or in developing the communication roll out. When individuals are included in active work to accomplish the merger, they instinctively know there will be a place for them once the dust settles.

Having the right people on the bus following a merger is the most critical consideration governing the success of the effort. I believe it is essential for top management to take steps to ensure the best people stay. These actions need to be accomplished during the conceptual phase of a merger and not while the formal integration process is unfolding.

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Merger Miseries 5 – Mini Mergers

October 4, 2010

This is the fifth in a series of articles on the trials and tribulations of mergers and acquisitions. The topic for this episode is “mini mergers.” Every day in the news we hear about the mega mergers between giant organizations like airlines and automobile companies. These consolidations typically involve billions of dollars and take many months or even years to accomplish. The moves are the subject of constant Wall Street and popular business press analysis. In reality, there are literally thousands of smaller mergers, acquisitions, or restructurings that go on every day. These smaller but more numerous actions, when taken in aggregate, dwarf the mega mergers in terms of total impact, even though they do not get as much attention.

Any activity to change the way a unit goes about accomplishing its mission is a form of change that involves restructuring the roles of people. The activity goes under a wide spectrum of names, like: reorganization, merger, restructuring, downsizing, acquisition, reengineering, work-out, process improvements, Lean Six Sigma, and layoffs. Regardless of the name, each of these efforts is designed to make the resulting organization more effective than the prior pieces. The problem is that in roughly 80% of the cases, the activity consumes more resources than planned and is far more troublesome than anticipated.

Unfortunately, the tendency is to focus on the mechanical nature of the action with little planning on the consequences on people. For example, if a merger of two groups within a corporation is contemplated, far more energy typically will be spent on the timing of the move and the layout of the new office than on what changes will need to be made to the way people work together during and after the merge. The procedural issues and training needed are usually given short shrift until the mechanical merger is consummated, which misses an excellent opportunity for people to become invested in both the process and the outcome. The typical sequence almost guarantees a lapse in customer service and great consternation among the workers while managers try to sort out the mess.

There is a solution to the problem. It is to begin by addressing why we need to do something in the first place. If we need to be more competitive in order to compete with a new worldwide market, then start by discussing this problem with the people in the organization. Take the time to solicit creative ways to solve the problem that may or may not involve a restructuring of units. Let the individuals affected come to the conclusion that if the organization is to survive at all, something significant needs to be done.

Then, when the topic of combining units comes up, it is born out of involvement with the impacted groups. They can help configure the mechanical set up of the merged entity, and also begin to plan for the impact on people long before the actual event. They can set up groups whose job it will be to take care of customer issues with “one voice” while the organizational turmoil is going on. They can establish training programs for individuals who need to learn different functions. They can help people who are impacted find a path to a viable future inside or outside the old organization. In other words, the impacted people can and should help figure out what to do before the mechanical merger begins.

Involving people is often avoided out of fear that impacted people might get angry and start some forms of sabotage. It is true that there is some risk of that kind of problem, but it is far better to take this risk with eyes open and manage it intelligently. Reason: The vast majority of individuals will act responsibly when they are treated like adults and given some ability to shape their own destiny. Even though considerable pain is involved, a company can get through a transition phase quickly and with grace if top management allows people at all levels to be part of the design process.

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Merger Miseries One

September 6, 2010

This is the first in a series of articles related to building trust and transparency in merger situations of organizations. This particular article focuses on how the complexity of doing a merger is often downplayed in organizations and gives one possible antidote that CEOs should heed before jumping head first into a merger.

Why are the hassles underestimated?

Mergers are usually considered in an attempt to pool strengths and eventually drive costs down to improve competitive positioning. It is normally envisioned as a way to survive, but frequently turns into a way to commit suicide.

Top managers who study the impact of a merger can readily see the tangible rewards, and the benefits look seductively attractive. The costs and hassles seem to be manageable, so not a lot of energy is spent on an organized campaign to mitigate potential negative aspects. The upfront cultural work is often neglected as managers just announce the merger and tell everyone to “work together and get along as new processes are invented.” This typically gets the venture off on the wrong foot, and it gets a lot worse before emotional bankruptcy, if not physical bankruptcy is reached.

Consultants hired to smooth the process focus on the benefits and the quick shot of cash from doing the merger. Their remuneration is tied to an efficient and speedy process, so they spend little energy on the blending of two cultures until the fan becomes very soiled. This pattern is so stubbornly consistent that one wonders why more caution is not exercised. Some groups have found ways to do mergers right, and I hope to add some value with tools and ideas that can contribute to the art.

One bit of advice is to be more conservative during the initial planning phase. First, assume your calculations of the benefits are order-of-magnitude correct, but quadruple the estimated time it will take to accomplish them. Next, take the projected investments required to achieve the benefits, as best you can estimate them in advance, and multiply that number by 10. Finally, take the best intelligence on how this merger is going to negatively impact customers and suppliers, and bump that up by a factor of 5X. That might be a reasonable approximation of a business case for the venture. If the merger still looks viable under those circumstances, then going on to the next steps is probably worthwhile. If the figures based on this more realistic scenario cause you to gulp, better read up on some of the horror stories of merger disasters in other organizations and check your medicine cabinet for antacids and tranquilizers.

Acquisitions gone bad are not hard to find. For example the Daimler-Chrysler merger in 1998 was a classic debacle that cost Daimler nearly $36 Billion over a decade. Just as a reality check, my calculation reveals this to be about $10 Million a day for 10 years. Large scale disasters like this are plastered on the front pages of business periodicals. Unfortunately, the more pervasive problem is the thousands of unsung smaller-scale disasters that go on continually within organizations of all sizes and types.

I am not saying all mergers are failures compared to intentions. I am sure there are some positive surprises as well. My thesis is that the track record does not indicate a positive result is most likely. In the coming weeks, I will be sharing many different aspects of the merger and acquisition business. We will look at the issue in both large scale mergers and in the tiny restructuring efforts that go on daily in most organizations. I would appreciate any comments, suggestions, or ideas you have along the way.

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