HR Due Diligence

Dr. Elijah EzenduFIMC, 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 diligence2.Know the trend in Due Diligence3.Conduct standard HR Due Diligence4.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. Managementii. Personneliii. Contractsiv. Proprietary Rightsv. Marketingvi. Productionvii. Financial Areaviii.Reference Area - Vadim Kotelnikov

Primary Era Scope of Due Diligence

Finance Legal Human Resources

• Finance• Legal• Management• Business Opportunity • Intangibles• Cultural

Secondary Era Scope of Due Diligence

Current Scope of Due Diligence

-Elijah Ezendu, Due Diligence

Steps in Due Diligence

Conducting Diligence Intelligence Analysis

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 ProcessFinding 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&A´s, 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. Comprehensive study of the firm 2. Assessment of M&A risks3. Negotiation4. 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 Checklist1. National political, social and

cultural framework2. Strategy, workforce composition

and organisation3. HR administration and

measurement4. Legal framework5. Recruitment 6. Review of key contracts of

employment7. Training and development8. Remuneration and pay

administration9. Benefits10.Sick leave and sickness pay and

benefits

11. Employee financial participation12. Performance and quality management13. Working time14. Leave and time-off15. Equality16. Employee representation and

corporate communication17. Security and safety18. Internal rules, discipline and grievance

procedures19. Termination of contract20. 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