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Hewitt Quarterly
Asia Pacific
is made possible through the combined skills and experience
of Hewitt consultants from across the Asia-Pacific region.
For further information please
contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com
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| It pays to focus on the positive aspects of human capital creation rather than just dwelling on the negative aspects of asset stripping and cost savings. |
| PE firms typically look for strong linkages between the financial performance of a company and the executives' remunerations and rewards |
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On the day before the Federal Reserve cut its discount lending rate to banks in the United States, sparking a reversal in plunging global markets sentiment, a news report by CNBC Asia noted that there was at least US$50 billion in private equity funds in Europe alone seeking opportunities for corporate buyouts or mergers and acquisitions (M&A).
In fact, the report went on to say that private equity firms were hoping to acquire companies at a discount given the liquidity crunch brought on by the aftermath of the besieged U.S. sub-prime housing loans market. While the debt crisis may
have put a temporary dampener on the private equity (PE) market, expectations are that in the long-term, values will continue to grow.
According to Boston Consulting Group, PE deals accounted for $650 billion, or 24 percent of all deals by value in 2006, up from a relatively modest share of six percent of all deals in 1996. Between 2002 and 2006, overall values grew an average of 20.4 percent each year in India and China, a clear sign that PE firms have been increasing their activities in Asia over the last few years.
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Which explains why Piotr Bednarczuk, the group leader and principal for Corporate Transactions and Transformations (CTT) at Hewitt Associates, advises the human resource managers of companies which are potential targets of PE funds to take a pro-active stance at all times.
"You don't want to be caught like a deer in the headlights and immobilized as private equity funds are always on the lookout for opportunities regardless of the conditions in the market. So it always pays to have a hip-pocket plan when opportunity knocks at your door," he adds. |
Hip-pocket plan
By a hip-pocket plan, he means that the HR department should have a ready-made strategy to unearth hidden human capital in the company that can convey value to prospective new owners. Such an exercise can also be carried out by a company's management to better determine its hidden value, regardless of whether a PE buyout is in the offing.
Bednarczuk notes that while human capital and workforce issues account for a significant part of the value creation and change management, they are often overlooked and many companies' management devote less than 10 per cent to their time on human capital issues.
Adds Christian Doeringer, Hewitt Associates senior consultant for CTT in Asia, "Asian
companies, both privately held and state-owned entities, usually either downplay the importance of human capital when it comes to a potential acquisition by a PE firm or overestimate the capabilities of their team.
Phase 1: Human Capital (HC)
Audit & Prioritization
Potential areas of HC value creation
Cost efficient, effective, fit-for purpose HC programs and infrastructure |
| Potential Value Drivers |
Transition and Setup Operations |
| HC Value Processes |
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Talent supply |
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Assessment of HC spend |
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Capability building |
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High performance workforce |
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Employment relationship |
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| Leadership |
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Leadership assessment/onboarding |
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Retention/severance plan design |
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Transition compensation/benefits |
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Incentive plans/equity replacement |
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| Organization |
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Workforce planning aligned with strategic objectives |
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HC organization restructuring for cost/agility |
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Define new HC business model and align leaders/employees |
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| HRIS/HR Operations |
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HC infrastructure assessment |
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Determine go forward HRIS/HR operations approach |
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Facilitate vendor RFP process and assist in vendor negotiations |
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Day 1 migration plans (HRIS/payroll) |
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Measure and modify |
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| Compensation & Benefits |
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Assess current compensation programs |
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Address transitional incentive issues |
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Rewards and recognition alignment |
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Assess current benefits for value, cost, volatility |
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Determine go-forward benefits approach |
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Manage benefit vendor RFP process and negotiate with vendors |
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Implement new program/define mix |
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| Culture/Engagement |
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Identify cultural pillars required to deliver results |
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Transition of cultural characteristics from current to future state to achieve business results |
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Identify culture gaps |
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"In the first case, many company leaders tend to believe that tangible assets, such as physical plants, property, equipment, customer lists, sales contracts and cash reserves, are more critical for the investor than their employees - which may or may not be true. In the latter case, the local companies may vastly overestimate the strengths and depths of their management teams and functional experts in areas such as R&D or sales, for instance, relative to the expectations of global PE firms.
"Firms in Asia need to take their human capital more seriously and also better understand the expectations of global PE firms with regards to human capital before they put their companies up for sale," he adds.
Elizabeth Fealy, senior consultant for CTT, says that it usually takes no more than two to three months to carry out a value-mapping exercise and identify areas of human capital that can then be used by HR to build a business case for value creation opportunities. Such attention is important in order to realise eventual synergy capture, not unlike those that involve expertise on the legal, technology or financial fronts during a company takeover or M&A situation.
Continuity & change
Fealy says that a well-thought-out plan can help to minimize disruption and help to smooth the transition during a change in ownership.
Take, for instance, compensation and benefits in the case of a public-listed company going private. Plans should be put into place to ensure that there will be a long-term incentive program to replace stock options. Top executives, for example, may be persuaded to 're-invest' a significant portion of their previous long-term incentives into equity in the new company.
Says Doeringer, "Many privately owned companies in Asia have compensation systems that are not well documented or are primarily driven by the owner's discretion. Actual performances may not play a significant role. For example, annual bonuses may be paid out to some executives close to the owner's family, while others may not benefit."
He notes that PE firms typically look for strong linkages between the financial performance of a company and the executives' remunerations and rewards. Hence, the need for private companies to show documentary proof on how the linkages are measured, as well as highlight them in order to become attractive investment targets.
Bednarczuk notes that private equity managers do not often have the staff or resources to handle or manage the nitty-gritty details of a transition, and frequently outsource the process to external parties. "It certainly helps if HR can play a more proactive role and hence have a bigger say in the changes and new alignment of the company's structure."
| Hewitt's Value Proposition for Private Equity Deals |
| Cost savings through HC Expertise |
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Generally reduce organization costs by 10 per cent through alignment workforce mix (insourced/outsourced/onshore/offshore), and skills change |
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Hewitt's Benefits practice can generally reduce benefits costs by five to 20 per cent through re-design and negotiation of benefits |
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Hewitt has saved companies from 20 to 30 per cent on HR operations/infrastructure annual cost by establishing highly functional, size appropriate HR platforms |
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| Execution Capabilities in Short Timeframes |
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Change management methodology enables sustainable implementation of strategy through metrics and consequence management at the individual employee level |
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Streamlined processes and significant experience enable Hewitt to establish benefits and HR operations infrastructure in consolidated timeframes (45 to 90 days) required by PE timelines |
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Hewitt streamlined HR delivery models while transforming the HR function in shorter timeframes than industry standard (1-1.5 years instead of two to three years) |
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| Risk Protection/ Mitigation Globally |
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Hewitt's HC expertise globally enables us to best identify HC liabilities and advise on purchase agreement projections that avoid millions in liabilities (e.g., in the area of pensions, benefits, executive compensation, employee transfer/relations) |
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Hewitt's experience in cross-cultural deals is leveraged through methodology that maps and manages cultural barriers to strategy implementation |
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| Support Growth Initiatives |
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Company growth can increase the possibility of achieving 20 per cent return on the buyout |
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Managing talent
Another area where human resources can help to facilitate the potential new owners is to have an existing talent bench or succession plan within the company.
"If HR is able to show to them that the company has the managerial talent, the new owners could be persuaded to hire from within rather than carry out an external recruitment exercise," says Bednarczuk.
In other words, it pays to focus on the positive aspects of human capital creation rather than just dwelling on the negative aspects of asset stripping and cost savings.
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Bednarczuk also points out that since a buyout company tends to hold on to its investment typically for at least five years, there is a lot of potential for the human resource division to fine-tune and grow the human capital of the company and raise returns on investment for both the owners and other stakeholders.
Based on his experience, he says that, in some cases, the change of ownership can sometimes make it easier for the human resource division to implement its value-enhancing programs due to the less hierarchal nature of private equity firms.
He adds that Hewitt's experience has shown that, in some cases, companies were able to reduce organizational costs by 10 per cent, and lower HR annual operational costs by some 20 to 30 per cent. When handled well, a company that has been the subject of a buyout can achieve at least a return of 20 per cent from the buyout companies sought by PE funds, says Bednarczuk.
Anupam Prakash, the APAC leader for CTT at Hewitt Associates, cautions PE firms to move beyond intuition and historical track records to assess the management and leadership qualities in potential target companies. In the context of most Asian countries, which until recently were bound by regulations and licensing, the criteria for success and hence leadership skills were vastly different from what it is required today. Formal management team assessments through expert assistance enhances the probability of success, especially in the backdrop of deals getting bigger and involving higher stakes.
The authors can be reached at: piotr.bednarczuk@hewitt.com,christian.doeringer@hewitt.com, elizabeth.fealy@hewitt.com,anupam.prakash@hewitt.com
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