The people factor in business sunsetting

Based upon our recently introduced “sunsetting” approach, here we focus on proactive management of a workforce throughout a carve-out and sunsetting process - a critical success factor.

Transparency and clear resource requirements

Based on the sunset business plan with a potential carve-out, the workforce should be re-examined, to align declining business output with future headcount requirements.

The first step during the carve-out preparation is to ensure a reliable and valid as-is full time employee/headcount (FTE/HC) and personnel cost baseline. Error-free and reliable HR data is rare; cleansing HR data should be conducted early on to draw the right conclusions for FTE reductions and transfer planning. The FTE reduction target should be driven from the top down and aligned with revenue decline as well as with overall cost targets. 

As a second step, the FTE target needs to be spread across the sunset business, requiring several iterations to understand and detail the impact at a functional and departmental level, as well as the relevant interdependencies. Closing production lines or sites is likely to result in issues that need to be factored into plans. Further, the workforce’s age distribution and expected retirement times should be mapped to the plan (‘natural attrition’) and options for partial and/or early retirement used to soften some of the discrepancies. A certain degree of bottom-up-validation will also aid implementation. This is a key step to avoid typical fallout of repeated restructuring efforts and stick to the essential transparent and collaborative approach, which sets sunsetting apart.

Of course, reality might differ, so in addition to this rather linear plan, tailored scenarios should be developed and critically reviewed with key players who understand the sunset business in detail. These can account for likely and surprising adverse effects, from delays in implementing measures to changes in demand. Ideally, countermeasures will have been discussed at an early stage. This will insulate the plan once it comes into contact with an inevitably more complex reality.

Retention and risk mitigation

Identifying key employees for their skills and knowledge is another crucial success factor. Retaining and motivating these people often has an additional benefit beyond their direct contribution. These key players are often well connected across the organization and their retention can help to boost morale across the workforce.

The most obvious incentive available is direct financial compensation, usually tied to certain milestones. Additionally, soft factors such as recognition or increased responsibilities should be considered, as they often have a similar and more sustainable impact on individuals. In case of retention agreements that have direct financial impacts, review and assessment of the legal components needs to be conducted.

Implementation of required adaptations

As soon as transparency, planning and retention measures are in place, negotiations with works’ council(s) (if applicable) and potentially unions need to be prepared to achieve targeted workforce levels over time. With these bodies, communication should be up-front and transparent to avoid the risk of process blocks and numerous negotiation rounds. Preparing and packaging the relevant information in a transparent and understandable format is key to success. 

Further, a clear negotiation strategy should be defined among the negotiation team to avoid unnecessary back and forth arguments. Together this will lead to greater confidence among the employee side representatives and an effective negotiation process. In the spirit of sunsetting, a socially responsible approach should guide discussions, while the legally separate nature of the business usually contributes to a heightened sense of urgency on both sides of the table.

Transparent communication and a strong rationale will help to soften the perception of sunsetting. Scenario modelling within the possible budget, e.g. having a 0,5 factor or 0,7 factor calculation for severance payments at hand, is important for the negotiation team as it gives them room to manoeuvre. Works councils want to be heard and taken seriously and have a certain say in the measures that are impacting the workforce they are representing.

In a carve-out, RemainCo works council has an interim mandate to represent NewCo employees, until NewCo has its own works council elected (~6 months). Therefore, works council members should be incorporated early on in proposed measures for FTE reductions. This is even more important when considering that either a carve-out or the remaining business should be built around the right employees owning the relevant know-how. This needs to be conceptually incorporated to safeguard quality and processes and to avoid employees leaving with a severance payment or either going with the carve-out or staying within the remaining business without the ability to add value to operations.

When running an FTE reduction program and a carve-out simultaneously, country legislation deviates across EMEA. When the sunset business operates across EMEA, country specific legislation and required negotiation time differ, so this needs to be considered and planned carefully.

Another possibility that is often brought to the table is to bring employees of the sunset business into a transfer company or to provide the services of a transfer agency. Critical to both models is to actively support employees in finding new jobs. Transfer companies in particular do have advantages for employees as well as for the employer. This can provide lots of flexibility, such as using notice periods for financing. It can also help define more flexible exit or transfer dates, especially in sunset situations where a business needs to exit in a sequential process.