The world wide economic downturn is prompting companies to sell non-core business units, consolidate operations and generally downsize. Lately, everyone seems to have at least one article devoted to some aspect of restructuring a business—see, for example, the cover story [1] in the June 2009 edition of LEXPERT magazine.
Despite the fact that restructuring initiatives often have a profound impact on employees, few articles are talking about the human resources implications of restructuring a business. Employees have valuable know-how, technical knowledge, and relationships with customers, so their departure or disaffection can have significant and unintended financial consequences for a company.
CNET recently reported [2] the results of a survey of 950 people who had lost or left their jobs during the past 12 months. Nearly 60% of admitted to taking confidential company information with them, and of those, 60% reported having an unfavourable view of their former employer. Similar losses also occur in businesses that have undergone restructuring or which have been purchased by new owners. In an article in the April 2007 Harvard Business Review [3], David Harding and Ted Rouse argued that unless purchasers of businesses make efforts to understand employee needs and the culture of the purchased business, they will lose valuable employees, employee productivity, customers, and market share after closing. Though it predates the current economic downturn, the piece (locked behind a paywall but available for purchase here [4]) is even more relevant today.
Planning for a business restructuring often takes months; yet in my experience, insufficient resources are typically devoted to managing the human resources consequences, leading to significant additional or ‘hidden’ costs. The following are some examples of strategies that can mitigate costs and losses associated with terminated or disaffected employees:
- Rumours of a pending sale of a business or layoffs are worrisome and distracting to employees, resulting in lost productivity, higher benefit costs, poorer client relations and service, and attrition of key employees. Emphasize the importance of taking steps to maintain confidentiality throughout the planning or negotiating stages.
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How fairly employees believe they and laid off co-workers were treated during the restructuring will affect retained employees’ commitment and productivity. Consider what if any steps you can take to minimize the chances that employees will become disaffected and/or leave as a result of the restructuring.
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If you are considering providing ‘working notice’ of termination for employees, consider the hidden costs of such a plan including increased benefit claims and costs, the potential negative impact on service to clients and customers during the working notice period, and the risk that those employees will not complete critical tasks or facilitate a transition prior to their termination. Offering a closing bonus or increased severance offer payable at the end of the working notice period dependent upon maintaining service levels or completion of the key tasks, is one way to manage those risks.
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If the sale or closure of a business or business unit is delayed, do not expect that an extension of employees’ working notice will be welcomed by those employees. One consequence of that event is that any negotiations for the final severance packages, if not yet settled, will be negatively affected. If it is reasonably foreseeable that the sale or closure date may be delayed, consider the benefits of agreeing to more generous severance package terms in exchange for an early settlement coupled with a right for the employer to later apportion what part of the severance will consist of working notice and pay in lieu of notice.
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Business owners who have agreed to sell their business but stay on as an employee after the closing are usually not prepared for and/or underestimate the difficulties associated with the change in control and culture that inevitably occurs. Ensure that any new employment agreements have good severance provisions that can be triggered by the former owner/now employee, and minimize any linkages to payment of the sale proceeds with the length of employment, post-closing.
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If retention of key employees is a condition of sale, determine what is necessary to secure their employment, or continued employment. Key employees’ leverage increases as costs to negotiate and implement the sale have been incurred, and as closing nears. Consider the relative risks of early communication of a sale that may not close in order to secure key employees, versus the costs of not securing key employees early.
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Consider the culture of an acquired business when imposing new employment contracts. Even when a purchaser agrees to offer employment to current employees on substantially the same terms, if the form of employment contract (i.e. formality, tone, or one-sided language) is at odds with what the employees are used to, the employee-purchaser relationship will get off to a bad start. That in turn may affect the employees’ willingness to buy into or adapt to operational changes implemented by the purchaser, or result in loss of productivity or other costs associated with attrition.
By taking care in the early planning stages, one can minimize the unintended financial consequences associated with restructuring a business. It is inevitable that these events will be stressful to employees, however by considering the impact on employees in advance, it is possible to have a successful—if not happy—ending.