HR Due Diligence

An estimated 70% – 90% of all Mergers & Acquisitions (M&A) fail to achieve their anticipated strategic and financial objectives. This rate of failure is often attributed to various HR-related factors, such as incompatible cultures, management styles, poor motivation, loss of key talent, lack of communication, diminished trust and uncertainty of long-term goals.

What is HR Due Diligence?

During a business merger or an acquisition, the acquirer also takes on the human capital of the company. The process of understanding this human side of the target company is known as human resource or HR due diligence.

Human due diligence lays the groundwork for smooth integration. Done early enough, it also helps acquirers decide whether to embrace or terminate a deal and determine the price they are willing to pay. In hostile situations, it’s obviously more difficult to conduct due diligence. But there is still a certain amount of human due diligence that companies can and must do to reduce the inevitable fallout from the acquisition process and smooth the integration.

Key Areas of Investigation & Analysis

Organization Structure

Assessment of the organizational structure and the HR function. This includes:

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Functional reporting relationships

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Administrative reporting relationships

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Position responsibilities

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Vertical and horizontal levels and departments

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Department responsibilities and inter-department co-ordination

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Physical office arrangement, etc.

Compensation & Benefits

Employee compensation is a major cost to the company which the acquirer will be taking over after the merger or acquisition. Compensation and benefits include the following points:

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Basic Compensation

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Bonus Plans

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Pension plans and insurance

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Leave and vacation policies

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Employee stock options

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Other benefits

Key Areas of Investigation & Analysis

People & Culture

Focus is on employment structure, people demographics, transfers and independent contractor agreements.

Labour Relations

Mapping of regulatory issues and risks associated with the Target’s former and current management practices as well as compliances with established agreements.

The key focus of HR Due Diligence in Merger & Acquisition is:

Mapping of regulatory issues and risks associated with the Target’s former and current management practices as well as compliances with established agreements.

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Identifying human resource management risks

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Ascertaining availability of fitting interventions for mitigating identified human resource management risks

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Determining employment costs of the target company

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Assessing the organizational leadership models

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Assessing the human resource management process of the deal

Influence of HR Due Diligence Result

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Snapshot of the internal and external corporate identity and business circumstances

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Recognition and status of the formal and informal leaders within the organization

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Personal characterizations to support individual career planning process

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Recognition and motivation of the key employees as well as the strategy to keep loyalty

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Action plans and scenarios to support change management any time

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SWOT analysis of both individuals and close-working-groups

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Position and relationship analysis

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Strengths to highlight, weaknesses to improve, opportunities to take and threats to avoid

Comprehensive Study of the Target Company

The focus of study is the identification of current state and potential problems in the following key areas:

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Human Resource Planning and Development

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Organizational Behaviour

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Organizational Infrastructure

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Human Resource Management Processes

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Talent

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Employee Relations

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Human Resource Services

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Performance Management & Rewards

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Health, Safety, and Environment

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Human Resource Information System

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HR Value Proposition

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Social HR & Traditional HR Integration

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Employer Brand Competitiveness

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Cultural Alignment/Paralysis

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Strategic Retention Management

Common HR related Risks:

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Poor retention strategy or key employees at high risk

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Potential employment transfer complications

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Failure to reconcile information from systems, resulting in losses of historical records and regulatory issues

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Failure to renegotiate contracts with vendors

HR Due Diligence – Integration & Implementation

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Integration of human resource management policies and processes, organizational culture and employee information systems

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Consolidation of employee benefits

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Consolidation of organizational structure

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Consolidation of career path and succession plan

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Consolidation of talent profile

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Establishment and deployment of communication plan for effective change management

Benefits of HR Due Diligence

Below is a non-exhaustive outline of the benefits of conducting HR Due Diligence:

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Understand the Target’s competitiveness to attract and retain talent;

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Map the potential salary equalization and benefits harmonization;

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Obtain a concise overview of the Target’s workforce and issues that may impact in the daily operation;

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Capture any requirements to comply with the applicable labour laws;

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Understand the Target’s organizational design, its HR structure and total costs;

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Summarize the current state and risks of any union relations.