One of the most significant business trends of the last few years has been the unwelcome insertion of “Activist Investors” into organizations that are deemed to be “undervalued” because of overly complicated systems, lack of coordination across business units, and the “disproportionate” sharing of infrastructure costs which “inhibit” the ability of high growth potential businesses to flourish. As a result, large conglomerate organizations are being forced to break apart and spin off business units in attempts to “unlock” the value of the business.
Sometimes this works, sometimes it doesn’t, and sometimes there is no noticeable change. When a business unit spins-off and creates a new organization, the change and the impacts of the change are significant. The new company is going to be immediately looking for ways to drive growth, scale operations, reduce costs, and invest in functions that were once taken for granted. For example, a spin-off company may have relied on shared corporate services such as customer support, human resources, marketing, and finance. All of a sudden the new company has to create these functions for themselves with limited resources and capabilities.
As the business world becomes more complex, the more pressure large organizations will have to perform which will cause more activist investors to demand changes in the way of spin-offs. I strongly believe that trend will continue over the next 12-18 months and potentially even increase as more uncertainly rises in global markets.
So what are the implications of this potential on your business? If your company is about to spin-off or has plans to spin-off, what will be the effect on the execution of your business strategy and the talent needed to run your organization? How are you preparing teams prior to and after the spin-off?
Based on our years of experience in working with Fortune 500 companies, we have compiled this list of business implications and ideas to better manage the impacts to the business from the short- and long-term effects of a spin-off:
Lack of a Cohesive and Aligned New Strategy
Up until the spin-off, the strategy of the business was set; it was given to the business unit President by the CEO and Board of Directors. And the leadership team of the business unit was expected to execute it and achieve results.
In the spin-off, that is all changed. The business unit President is perhaps the new CEO of a new company. Or perhaps not; and a new CEO has been brought in to develop and execute a new strategy to unlock the value. Regardless of whom the CEO is and what the expectations are, the questions are still the same…
- “What is the new strategy and how do we make this work?”
- “Who is responsible for what?”
- “How do we position our products and services?”
- “What does the new structure look like?”
- “How are we supposed to work together?”
- “How do we create new systems?”
The list goes on and on, and the meetings can last forever. There is so much to do and very little time to do it.
Unclear Value Proposition to Your Customers
While the Finance team can make the numbers of a spin-off look good on a spreadsheet and in press releases to investors, a spin-off often fails to translate successfully to customers. Too many times we have seen spin-offs fail because the customers weren’t considered, and more importantly the “new and improved” value proposition and brand identity to the customers becomes fuzzy or even lost.
Becoming an Independent Business is Really Hard for People and Culture
Often lost in a spin-off process is the internal people side of things. How do you lead the integration process to make it all work successfully? Again, the deal may look great on paper, but can it be executed through people? Is there a strategy in place to lead the change and onboard a new team into a new culture or are leaders planning on keeping the same culture? How do you entice your people to come with the spin-off and not stay at the “old” company? How do you integrate new people – who you need to replace the centralized services that you need to replace– and make them part of the new team?
There Will Be a Lot of Financial Scrutiny and Pressure to Perform
Once the deal is done, the new team is in place, and the new value proposition to the customers is hopefully being delivered, the financial scrutiny and pressure to perform begins. The expectation will be great and there will be a drive for top line performance, cost management, bottom line performance, effective utilization of the assets and resources, and increased shareholder value. This is where the business acumen of the employees, managers, and leaders is critical. When a company spins-off, their value is not 50% of an old company, it is 200% of a new company. All of a sudden, everyone will be under even more pressure to perform to meet higher metrics of business performance and the organization needs to know what that is and their effect on it.
Operations will Lag Behind
There are systems to be re-invented (Supply Chain Management, Accounting, HR, CRM, etc.) and nothing ever goes as planned. I can think of one client that had a spin-off and they couldn’t pay their vendors because their payment system wasn’t ready yet. It was both embarrassing hurt their key relationships.
In addition to the systems, manufacturing, distribution, and customer service all typically are impacted and inevitably fall behind, increasing frustration internally and for customers.
Talent Management Impacts
No matter if you are an Executive, Business Unit Leader, Line Manager or an HR professional you need to consider what skills and tools are needed to help support and execute a successful spin-off. For example, do people in your company understand the financial metrics of performance they are being measured on post spin-off? Do they clearly understand the new strategy of the company and the role they now play and what they will potentially be playing in the future? Do they know how to create alignment, collaboration, lead for innovation and how to lead change?
Over the years, we have identified a list of competencies that are critical to successfully executing a spin-off. There are three general categories with skills in each including:
Business Acumen/Strategic Thinking
- Industry knowledge
- P&L focus
- Balance sheet focus
- Data analysis
- Strategic mindset
- Business judgment
- Establishing strategic direction
- Strategic execution
- Operational decision-making
- Customer focus
- Selling the new vision
- Gaining commitment
- Managing conflict
- Managing change
- Coaching, hiring and firing
What Should You Do?
If your organization is going through a spin-off process or about to, then you should also know and understand some of the tools that are available to help better prepare for this change. Here is our checklist of tools to consider:
Do you know your “ready state” for a potential spin-off? What are your strengths? Where are your critical leaders weak in terms of skills and tools? A series of tailored assessments can easily help you understand any gaps and needs. Develop a talent gap map to provide detailed information about divisions, business units, and levels of leadership so that you can build your Talent Development strategy accordingly.
Develop the Skills of Current Business Leaders
Assessments and general understanding of your organizational structure and culture will help you determine that the leadership team, the general managers, and the business unit heads need new skills and tools to successfully build the spin-off and execute a successful integration. Look to develop a skill building initiative that quickly and efficiently develop the business acumen and business leadership skills needed to be an effective business leader during this time of change.
Develop the High Potentials
There has been a movement recently to better prepare the future leaders of our organizations by focusing on the “high potentials”. These future leaders will need to step in and make decisions and support change, and they must be prepared. If you start right before a spin-off, they will be ready in a few years when the expectations are even greater…and there may be more changes on the horizon.
Develop the Managers of Managers, and Managers of People
In order a spin-off to be successful, leadership needs to ensure that manager also have the right tools and skills. Too often they are neglected, and an investment in skills can have a significant return on investment. Spin-off companies need to invest in the right learning technology to support on-going learning journeys for Managers of Managers and Managers of people when they need it and how they need it.
Business unit spin-offs are a critical growth and/or divestiture strategy of many companies. True success from a spin-off is accomplished by skilled people executing the plan and doing the business at a tactical level. Prior to, during, and after a spin-off, organizations need to make sure they have the right people in the right roles, with the right skills, processes, and tools to ensure an aligned and integrated transition.Business & Finance Articles on Business 2 Community