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Kate Phelon

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Be prepared for when your HR service provider is acquired


Be prepared - Swiss Army knifeWhen your service provider is acquired it may throw your business into flux. But Bill Thomas suggests if you’re already prepared you could turn the situation to your advantage.

Your service provider is delivering the required service levels and more, the contract is robust and all is well with world. Then suddenly, your service provider is acquired and everything is in flux. What happens next?

Outsourcing contracts typically span many years and it’s vital to ensure that arrangements are structured to anticipate and respond to change – as mergers and acquisitions are fairly common in the service provider market, this is not an issue to be ignored. Even the best prepared HR service buyers are going to need to roll up their sleeves and proactively manage the transition.

“It’s vital to ensure that arrangements are structured to anticipate and respond to change – as mergers and acquisitions are fairly common in the service provider market.”

You will need to review your contract, service levels and why you originally committed to the service provider and then arrange high level stakeholder meetings with the new owners to establish who in the new hierarchy ‘owns’ your business, and is rewarded on its success.

It’s a natural reaction to assume that the acquisition of your service provider is bad news. But when you step back and realise that the acquiring company is really buying client contracts, service delivery assets, revenue and people, the reality is that acquisitions generate unique opportunities for both parties to re-evaluate the current agreement. This can result in a more productive relationship with the added potential of access to the new organisation’s capabilities.

Once you become aware that your service provider is to be acquired, concerns are likely to include the new organisation being less capable than your chosen provider, having your account team reduced or replaced, new and costly governance being introduced, or in the most extreme scenario, being issued with a termination notice.

If an answer to ‘how to ensure it’s business as usual when your HR service provider is acquired’ had to be given in one word, it would be ‘preparation’. Don’t wait to receive official notification from your service provider – the best defence is proactive preparation; the following five steps show you how:

Step one: Review your contract

Good service contracts have specific clauses that deal with change of control, change of beneficial owner, assignment and/or novation (substitution of new legal obligations) and obligation to serve – either through notice flexibility, transition assistance or the removal of the service provider’s option to break the contract.

These clauses enhance your options and underline the security of service provision. Most modern service contracts contain change of control provisions. Far more rare is the ‘obligation to serve’ as it is seldom anticipated; but it can be brought into sharp focus when a new parent company has a rationalisation and cost cutting agenda for its new acquisition – the impact of which may well be a termination for convenience by your service provider. If your contract does not include these clauses, you may want to revisit the contractual terms sooner rather than later.

Step two: Clarify why you chose your original supplier

It is important to be very clear what the key reasons for choosing your supplier were. This will allow you to ensure that the arrangement that is agreed with the new owner sees the required levels of service being maintained. Also, this process may reveal areas in which your existing contract needs to be updated. Being armed with this information will allow you to ensure that your contract is configured to meet your evolving HR needs – more radically, you may find that your current outsourcing model is no longer compatible with overall business strategy.

Step three: Evaluate performance

You may feel at the mercy of events when your service provider is acquired, but do not overlook the fact that the new owner is likely to be keen to retain existing clients and will work hard to ensure that clients remain satisfied. This puts you in a strong negotiating position. If current service performance is not satisfactory, now is the time to address such issues – and remember that performance issues can relate to a wide range of factors such as price, user satisfaction, cultural alignment, technical performance and innovation.

Step four: Evaluate your options

Having followed steps one, two and three, you will have made the necessary preparations to allow informed decisions to be taken – and from a position of strength. Put simply, it is time to decide whether to negotiate or terminate your contract.

Both the negotiation and termination options need to be assessed for risks, opportunities and potential costs. You must also consider the need to seek an alternative supplier or suppliers if negotiations fail or the new owner has a strategic direction that excludes supplying you and your business.

When evaluating options, ensure that you know simple things like the implications of the Acquired Rights Directive in Europe, who owns assets and intellectual property rights, what investments have been made that are amortised, and which service elements are shared or leveraged, as these will all have a bearing on the practicality and commercial viability of any option.

Step five: HR is not alone in decision making

Major change events are reason to mobilise every talent and asset from within your organisation. As the services that will be affected are critical to your business, contract changes will likely be significant and thus may well require board approval. Given the nature of the change, the board should be re-engaged, and whatever support it can offer should be accepted. The support, assistance and thought leadership of external specialist lawyers and consultants can also help ensure a safe and economically advantageous outcome.

Mergers and acquisitions in outsourcing are increasing in the overall market – and can be a major unexpected distraction from other HR priorities, but they remain a rare occurrence for individual client organisations. However, the best way to turn such a situation to your advantage is to be prepared and to make sure that your contract is fully prepared for this scenario.

Bill Thomas is managing director of the human resource practice at sourcing advisory firm, EquaTerra.

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Kate Phelon

Content manager

Read more from Kate Phelon

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