HR Due Diligence

Dr. Elijah Ezendu

FIMC, FCIM, FIIAN, FBDI, FAAFM, FAAPM, FCCM, MIMIS, MITD, ACIArb, ACIPM, PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC

Learning Objectives
At the end of the course, participants should be able to do the following: 1. Know the importance of due diligence 2. Know the trend in Due Diligence 3. Conduct standard HR Due Diligence 4. Identify peculiarities of HR Due Diligence in Merger and Acquisition

Nine-tenths of tactics are certain and taught in the books; but, the irrational tenth is like the kingfisher flashing across the pool. This is the test of generals. Success can only be ensured by instinct sharpened by thought. At the crisis, it is as natural as a reflex.
-T. E. Lawrence, The Science of Guerilla Warfare

What is Due Diligence?

Due diligence is a systematic intelligence performed for ascertaining the condition of a transaction, process, scheme or firm, so as to determine worth or verify fulfillment of definite requirements.
- Elijah Ezendu, Due Diligence

Due diligence is an investigative process of collecting and analyzing appropriate, relevant data before reaching a decision with a goal of understanding the advantages, disadvantages and risks associated with the decision.
Source: International Business Standards Association

Focus of Due Diligence

Identification of real state of issue Reduction of uncertainty Identification of unknown risk Identification of undisclosed concern Ascertainment of true value Validation of initial findings Confirmation of compliance

Due Diligence Study Areas

i. Management ii. Personnel iii. Contracts iv. Proprietary Rights v. Marketing vi. Production vii. Financial Area viii.Reference Area
- Vadim Kotelnikov

Primary Era Scope of Due Diligence

Finance Legal Human Resources

Secondary Era Scope of Due Diligence

Finance Legal Management Business Opportunity Intangibles Cultural

Current Scope of Due Diligence

Human Resource Legal Intellectual Property

Business Risk

Regulatory Framework

Business Model

Market

Finance

Technology

-Elijah Ezendu, Due Diligence

Steps in Due Diligence

Review Proposal Identify intelligence objectives

Presentation of Report

Conduct Diligence Intelligence Analysis

Conducting Diligence Intelligence Analysis

Establish Structure, Scheme and Project Plan of Analysis

Collect & Review Secondary Data

Collect & Review Primary Data

Analyse & Synthesize Data

Identify key information

Ascertain Implications of Findings

Recommendation of Action Points

Expertise Requirement in Due Diligence

The Prevailing trend in expertise requirement highlights the use of Lawyers for Legal Due Diligence, Chartered Accountants and Chartered Financial Analysts for Finance Due Diligence, Chartered Human Resource Management Practitioners for Human Resource Due Diligence, Risk Analysts for Business Risk Due Diligence. While the Competitive Intelligence Analyst can perform Regulatory Framework Due Diligence, Business Model Due Diligence, Market Due Diligence, Intellectual Property Due Diligence, and Technology Due Diligence.

Uses of Business Due Diligence

Alliance Deals Acquisition Deals Merger Deals Suitability to receive Grant as Non-Profit Organisation Large-Volume Market Exchange with some Government Agencies Large-Volume Market Exchange with some International Organizations.

Common Reasons Why Some Venture Capital Deals Are Rejected

Problems in Management Problems in Market and Competitive Risks Problems in Business Model Problems in Financial Projections

Source: David Eyler

Standard Deal Process

Finding Deal Flow Initial Screening Due Diligence

Valuation, Negotiation, Legal Monitoring

Exit

Source: Nelson Gray, Due Diligence

While due diligence in other areas is already standard for M&As, many leading companies are only now recognizing the significance of a well-founded HR due diligence. Because: Approximately 60% of all mergers fail due to the fact that the human capital was not correctly evaluated in the previous contemplations!
Source: Hill International

Influence of HR Due Diligence Result

Snapshot of the internal and external corporate identity and business circumstances Recognition and status of the formal and informal leaders within your organization Personal characterizations to support individual career planning process Recognition and motivation of the key employees as well as the strategy to keep loyalty Action plans and scenarios to support change management any time SWOT analysis of both individuals and close-working-groups Position and relationship analysis Strengths to highlight, weaknesses to improve, opportunities to take and threats to avoid.
Source: Human Value International

As a result of continuous morphing, the demand for due diligence has increased astronomically, and the need for competent HR Due Diligence Practitioners has become the spotlight in most restructuring deals.

Key Focus of HR Due Diligence in Merger and Acquisition

Identify human resource management risks Ascertain availability of fitting interventions for mitigating identified human resource management risks Determine employment costs of the prospective business Assess organisational leadership models Assess the human resource management process of the deal

Steps of HR Due Diligence in Merger & Acquisition

1. 2. 3. 4. Comprehensive study of the firm Assessment of M&A risks Negotiation Integration and Implementation

Comprehensive Study of the Firm

Focus of study should be identification of probable problem in the following key areas. Human Resource Planning and Development Organisational Behaviour Organisational Infrastructure Human Resource Management Processes Talent Employee Relations Work and Employment Human Resource Services Performance Management & Rewards Health, Safety and Environment

Assessment of M&A Risks

Identify challenges to management in each key area Determine probability of each challenge Determine impact of each challenge Determine manageability of each challenge Develop action plan for handling each challenge

Negotiation
At this stage the parties involved shall seek common grounds of understanding and document key points of agreement, knowing that endorsed agreements shall be binding on all.

Integration and Implementation

Integration of human resource management policies and processes, organisational culture and employee information systems Consolidation of employee benefits Consolidation of organisational structure Consolidation of career path and succession plan Consolidation of talent profile Establishment and deployment of communication plan for effective change management

Standard HR Due Diligence Checklist

1. National political, social and cultural framework 2. Strategy, workforce composition and organisation 3. HR administration and measurement 4. Legal framework 5. Recruitment 6. Review of key contracts of employment 7. Training and development 8. Remuneration and pay administration 9. Benefits 10.Sick leave and sickness pay and benefits 11. Employee financial participation 12. Performance and quality management 13. Working time 14. Leave and time-off 15. Equality 16. Employee representation and corporate communication 17. Security and safety 18. Internal rules, discipline and grievance procedures 19. Termination of contract 20. Retirement and pensions

Source: Burgess and Goodman, IDS International HR Due Diligence Checklist

Case Analysis
Lobita Nig Limited and Santomax Limited are on the verge of a merger deal. Lobita Nig Limited is manufacturer of confectioneries and has two plants in Lagos in addition to one in Portharcourt, with a staff strength of 320. Santomax Limited is a market leader in Food and Beverages sector, and has 4 plants in Nigeria in addition to 3 in South Africa, with a staff strength of 1260 workers. How would you handle the HR Due Diligence in order to ensure post merger talent retention?

Thank You

For additional information: Dr. Elijah Ezendu

elezendu@yahoo.com, 08033024596