A company’s ability to build and thrive in the future rests on many factors. One key factor is the ability to have the right leadership in place, at all levels, to be the guiding hands of success. The corollary to this is the ability to anticipate the need for new leadership roles and have a source of future leaders, i.e. companies either have to develop and promote leaders  internally (build) or hire leaders externally (buy).

Companies often favor one strategy (“build” or “buy”) over the other. Each has its advantages and disadvantages. There are also reasons why one strategy may be a better choice at any given time, depending upon the business circumstances. To fill leadership roles the most forward-thinking companies employ both strategies in the unique balance that their business necessitates. This permits them to capitalize on the most positive aspects each strategy affords. Understanding the reasons and situations where each strategy provides its advantages can help companies deploy them successfully.

“Build” – “Building” internal leadership for the future requires the development of a detailed plan for identifying future leaders, building and providing training programs, and tracking open positions for placement of rising leaders. It’s a longer term proposition that will not yield immediate results. However, I don’t believe you can ever go wrong developing employee  capabilities, and the benefits accrue not only to the employee but to the company as well. Developing employees to eventually be placed in future leader roles is most effective when companies:

• - Take a long-term view of corporate planning
• - Are in an industry where external leadership resources are limited (e.g. aerospace)
• - Are in an industry that is growing rapidly and available resources with industry experience have been outstripped by demand (think health care)
• - Promote the development programs available to their employees and encourage participation. 

Developing leadership internally benefits companies by reducing recruitment costs to fill leadership roles and providing continuity of corporate knowledge enabling the new leadership placement  to become productive sooner. Building internal leadership, however, takes time and it may require two or more years to develop employees to the point where they can be promoted to a leadership role. A long-term resource planning view needs to be taken with external hiring until internal capability exists. A company’s commitment to training and promoting internal candidates through leadership development programs can enhance its ability to attract potential employees as these candidates see the possibilities of career advancement. This is a great reputation for any company to cultivate. 

“Buy” – “Buying” leadership, through external recruiting of people to fill leadership roles, is an effective method of adding leadership quickly or bringing on leadership with specialty skills not found within your company.  Companies tend to utilize the “buy” method of leadership acquisition if they:

• - Are growing fast (again, think health care)
• - Have not yet established leadership development programs
• - Recognize that the need for new leaders outstrips available internal candidates
• - Are moving in a new strategic direction and are seeking a new top executive to drive the change
• - Have made a strategic decision to not provide leadership development programs or promote leadership from within. 

Recruiting external leadership can be an expensive proposition with costs increasing appreciably as the level of leadership sought rises (Director and Executive levels). Externally recruited leadership will also require some period of indoctrination to the company, perhaps up to six months, before they reach full productivity even if they have industry experience. Not having an internal leadership development program may also harm the company’s ability to attract candidates, both leaders and non-leaders. Companies that become known for not providing advancement opportunities or developing employees for leadership roles may find their pool of candidates for open job postings becomes shallow – word gets out. 

Companies should not expect that their leadership requirements will be satisfied by a single leadership acquisition strategy. Each strategy – build and buy – has a role to play in filling leadership needs at all levels. The real skill is in defining the balance between the two and determining which roles and under what circumstances each strategy will be utilized as the method of filling the leadership ranks.

About Metricsboard: We are an online benchmark company that provides free business performance benchmark assessments. The benchmarks are automated and take less than 10 minutes online to complete.  In return, you receive a full results report with comparison data on best practices, a maturity rating against your competitors (peer group) and strategic recommendations. There is a complimentary benchmark you can take for Web 2.0 Marketing, B2B Sales, IT Infrastructure, Human Resources, Procurement and Corporate Communications. Your privacy is protected and you will not receive any sales follow-up calls.

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The rays of economic recovery sunshine are on the horizon, and many corporations are gearing up for merger and acquisition (M&A) activity – some as acquirers and some to be acquired. If you’re on the acquirer side, you’re getting your M&A team in place. Don’t forget one of the key and often overlooked or omitted members of the team – HR. This omission can cost a company to pay more than it should for an acquisition (sometimes a lot more) or result in an acquisition that should never have occurred in the first place.

I’m not going to talk about the methodology that HR should employ during M&A due diligence or post acquisition integration – I could write several articles about various aspects of the methodology (and may at a later date). Instead I want to focus on some critical areas where HR’s due diligence can uncover hidden costs or other issues that will affect the price buyers should be willing to pay, affect the way the acquisition is integrated, or scuttle the deal completely. Although there are many areas that HR will review as part of the due diligence process, my focus is on three areas where I believe HR can provide insights into the acquisition target’s operations that can greatly affect the final price offered and ultimately protect the company and shareholders’ interests. Those areas are benefits, retirement plans, and corporate culture. I will provide some real examples from my own experience to highlight the points.

Benefits – The primary cost driver is health care benefits (I’m not going to touch upon what recent health care legislation may add to the due diligence process, but it will need to be a new part of the analysis). A starting point must be an understanding of the breakdown of costs of benefits for the acquiring company. A side-by-side comparison of benefits with the target company provides a differential of benefits offered and their associated costs. Cost differentials do not generally translate into the price paid for the acquisition, but do factor into how the acquisition costs upon integration. In one acquisition our HR team uncovered a cost differential of $1,500 less per employee/year for essentially identical benefits to those that we, the acquiring company, had for our own employees. The reason for the difference in costs was that the target company had a younger average employee age and a better claims history. Our usual practice would have been to integrate the employees into our own benefit plan, but that would have brought them under our claims history and only slightly lowered our average employee age. With approximately 1,000 employees to integrate at $1,500/employee we saved $1.5 million in the first year post acquisition by allowing the acquired company to retain their benefit plans.

Retirement Plans  – Pension plans include defined benefit plans (pension plans) and defined contribution plans, most often 401(k) plans in the United States. Companies with pension plans are few in number and generally limited to larger and older established companies (think GM). The due diligence of a pension plan usually revolves around whether the plan has unfunded liabilities and requires lawyers and actuaries to complete the analysis. Newer retirement vehicles such as 401(k) plans require that due diligence look not only at unfunded liabilities (failure to deposit a corporate match) but also at plan administration and history (fees paid to the administrator, mergers with other plans, employee loans from their plan, etc.). Options are to have a shareholders’ resolution passed by the target company to close the plan prior to the acquisition date, or to merge the target company’s plan with the acquiring company’s plan. During the due diligence of one target company, we discovered that the 401(k) plan had been merged with the plan of one of their acquisitions. While this is not in itself inherently bad, there were some issues that our ERISA attorney estimated would cost about $500,000 or more to fix post-acquisition if we did not have the planned closed. In the end, we opted to not to close the plan but did adjust the offer price accordingly to reflect the costs of cleaning-up the acquired plan.

Corporate Culture – Corporate culture is the norms of operation, the attitudes of management and people, and socially acceptable behaviors within the work environment of a company. A key part of the HR due diligence must be a cultural assessment of an acquisition target. Lack of cultural fit of an acquisition can keep you from ever seeing the ROI of the acquisition. In other words – money wasted. Though hard to do, the HR team must be ready to recommend to the M&A team that acquisition of the target should not go forward because of an incompatible difference in corporate cultures, i.e., a clash of corporate cultures should be seen as a “showstopper” to acquisition. Sadly, M&A teams may not see “culture clash” as a reason to abort the acquisition even if a cultural assessment is completed as part of due diligence. During the acquisition of one small technology company, we did not perform a cultural assessment. We were interested in the genius of the employees who were on the “leading edge of bleeding edge” – the intellectual property that they would bring to the company. However, the acquired company’s employees thought more like artists, a culture that was definitely not part of our own. While our clients were eager to talk to these mavens, our culture alienated them, and every last one of them left the company after a couple of years. Value lost; lesson learned.

During due diligence HR has a responsibility to uncover costs and issues that impact the acquisition decision and the cost of purchase. In addition, HR is tasked with providing options to the M&A team to mitigate or eliminate these costs and issues. Ultimately, the M&A team is responsible for selecting from HR’s recommended options and incorporating them into the final deal structure, pricing, and terms and conditions.

About Metricsboard: We are an online benchmark company that provides free business performance benchmark assessments. The benchmarks are automated and take less than 10 minutes online to complete.  In return, you receive a full results report with comparison data on best practices, a maturity rating against your competitors (peer group) and strategic recommendations. There is a complimentary benchmark you can take for Web 2.0 Marketing, B2B Sales, IT Infrastructure, Human Resources, Procurement and Corporate Communications. Your privacy is protected and you will not receive any sales follow-up calls.

Find out how you compare against your competitors? Learn the latest best practices and performance tips.  Visit our benchmark services page  Sign up for our RSS feed or newsletter to get regular updates on trend data covering Marketing, Sales, HR, IT and other operational areas.

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