The Impact of Corporate Splits on R&D

Almost two years ago an article appeared in the Wall Street Journal decrying the rise of corporate splits and the seeming increase in organizations seeking ways to innovate at faster speeds. Today this trend appears to be holding. Xerox, Timken, Armstrong, Hewlett-Packard, to name a few recent splits. There are also big mergers that break up large companies and form new ones, such as the merger of Dow Chemical and DuPont. And, lest we not forget, there are also those organizations whose purpose seems to be to create spinoffs–companies like Danaher and Royal DSM.

Bystanders witness these splits, mergers, and spinoffs and think little of how much work goes into performing them. As the only cross-industry association to address how large R&D firms handle the management of innovation, the Industrial Research Institute (IRI) wanted to hear how these splits impact the R&D function of firms undergoing a split. IRI also wanted to create an outline for other organizations to reference if/when they decide to break up their firms.

A roundtable, “The Impact of Corporate Splits on R&D,” was hosted by IRI at their Annual Meeting earlier this year. The conversation held by the IRI member participants told volumes about the challenges involved in splitting up large R&D organizations.

The 80-20 Rule

The roundtable began with a brief overview of the experiences had by those in attendance who had experienced a corporate split. The first thing each made clear was that splitting an organization of any size is challenging.  Depending on how intertwined the entities being separated are, however, most of the activities usually follow the 80-20 rule: 80 percent of the organization is relatively straightforward to split, 20 percent is typically very challenging. Several attendees also noted that this assessment is not universal across the organization. Some business units are indeed easy to break apart; these fall into the 80 portion of the 80-20 rule. However, the other 20 percent create many pain points that should be addressed before an organization delves into a split.

Pain Point #1: Uncertainty

No-one likes uncertainty.  Therefore, think carefully about the communication plan that announces to associates that the organization is splitting. It is easy to create panic, not because it is necessarily warranted, but because the normal stability was just removed. Destroying familiarity and creating two unknowns is littered with uncertainty in the eyes of almost everyone working for a firm undertaking a split.

The biggest concern is retention. Telling your R&D staff that the organization is splitting and that it’s not clear where they’ll be in a year is not much different than telling them you’re about to undergo a series of deep and drastic personnel cuts, even though that isn’t the case and many of them will still have a job afterwards. The advice those in attendance gave was straightforward: “For those whose futures are certain, tell them.  For those that are perhaps in a gray zone as to in which entity they will land, tell them too. They will appreciate it and take some comfort in knowing they have a job, even if it’s not clear exactly what that will be.”

No matter what is happening, in terms of personnel, people will fear what they don’t know and you need to prevent a sudden rush of talent out the door.  Remember, the most valuable are also typically the most mobile.

Pain Point #2: Time

Time management is critical.  It is difficult to envision every issue that will arise during the course of a separation, but it is very important to set an aggressive, but realistic timeline at the outset. So many pieces are moving and so many people are transitioning into and out of the old and new organization(s) that challenges arise daily that have the capability to delay the whole process. Time is not typically on the side of an organization undergoing a split. Once announced, everyone wants it to be completed.  The longer it takes, the more uncertainty it generates potentially creating more problems that could threaten the new entities. Likewise, if done too quickly, the more probable it is that oversights are made that could threaten their longevity once it’s finished, or create ongoing turmoil that effectively drags out the separation and impacts all parties involved.

Pain Point #3: Knowledge Management

The people that comprise an organization pose additional challenges above and beyond whether they stay or leave. A critical component of a split when the new companies target different, but potentially overlapping, market segments is how to create fence posts around trade secrets. Some personnel work in business areas that give them access to knowledge from both new companies. It must be decided which of the new organizations gets to keep such a valued employee? And how does one of the organizations ensure that such an employee not expose their trade secrets if he or she ends up working for the other entity?

Touching on the value of these cross-fertilized employees, attendees also noted that they represented another challenge besides the risk of managing their knowledge of trade secrets; they were also extremely talented associates that both organizations wanted to retain. How does an organization split its highly skilled personnel evenly and fairly?

Pain Point #4: Hidden Costs

Creating a budget that allows for the emergence of new business entities that result from a corporate split is no easy process to begin with, but it also carries the baggage of less obvious impacts. The manpower drain touched on above is one such example; the loss of key skills for both organizations that lose access to physical resources and talented individuals is another potentially negative impact. But one of the biggest impacts, relevant to the roundtable discussion, was the decrease in the R&D budget for both organizations. One large firm becoming two smaller ones also means one large R&D budget becoming two smaller ones. So both organizations come out of the split weaker in terms of physical assets, manpower, and R&D budgets unless the decision is made to add additional headcount into the new organizations.

Recommendations for Overcoming Challenges

No matter how difficult and painful a split may seem from a managerial perspective, there are benefits to completing one, as some of the attending organizations had already determined. The new business entities can move faster, innovate with more focus on their core business, and can pour more effort into a consolidated consumer base instead of a diverse one. The attendees of the roundtable, leaders at firms that have either undertaken a split or who are about to, as well as leaders from firms like FM Global, whose job is to manage the insurance and risks for companies seeking to merge or split, and Danaher, which has spun off more than 400 businesses, discussed at length how to mitigate some of the above listed pain points.

1) Tackle Critical Challenges First

Remember, time is not on the side of firms merging or splitting. Any problem that arises that can slow down the process will inevitably produce a ripple effect that delays it even more than expected. The recommendations made by attendees who have undergone splits or spinoffs was not to shy away from the big challenges until the  end, but rather to tackle them first, before anything else.

The 80-20 rule comes into play. Knowing that 20 percent of the split is going to create the largest challenges means it is better to resolve those issues up front instead of waiting for them to hit with full force. The personnel challenges that make up one of the major problems companies face when splitting or merging can create the biggest headaches. Let the skilled workers know which company they will be moving to as early as possible and help them make that transition, physically and mentally.

2) Ensure Both Companies Thrive

It is human nature to try and grab as much power as possible when given the opportunity. Executives creating new organizations out of a corporate split no doubt try to negotiate in such a way that their organization gets more than their counterpart’s do. According to the roundtable attendees, however, it is very important to drive a balanced approach. Splits should never be done with any malice or sandbagging towards one of the new entities.

Imagine telling employees they’ll be transferred to a new organization and then have them find out that new organization received nothing but a sliver of the budget, none of the resources they needed, and all the personnel who are considered average or below average performers. How quickly will those staffers resign and all but guarantee the death of that new entity? Was that the purpose of splitting, so half of the company could quickly die? No, not at all.

The first step is to establish an arbitration process. An impartial mechanism should be in place to judge claims made about resources, manpower, access, and so forth. The second step is ensuring single ownership over the negotiation of the new entities. Executives cannot be competing for resources between two new entities and within those new entities at the start. This will only slow the process down and ensure a rise in uncertainty and possibly ill-will or malice in the negotiations. Single ownership is important for ensuring that both new entities are made in such a way that they can each thrive after the process is complete. This also means identifying the core business and purpose of the new entities at the start. Which leads to executives needing to…

3) Manage Staff Expectations

Uncertainty is a killer when it comes to a corporate split or merger. The advice made by the roundtable attendees was unanimous when it came to personnel. They recommended that personnel be communicated with early and often. Regular training sessions should be held to allow technical staff the opportunity to learn about the split/merger, about what it means for them, and about how they can best transition to their new roles. Core and non-core business units should be identified and personnel should be made aware of which business units are going to which of the new businesses and how that translates to workforce needs at each organization. Giving personnel a say in where they go also goes a long way to ensuring smooth transitions and higher retention.

Conclusion

Whether a firm is undertaking a split, a merger, or spinning out smaller companies en masse, the challenges for R&D are similar, according to the IRI roundtable participants. Tackle big problems upfront, don’t wait for them to arise at the worst possible time (which they undoubtedly will). Be decisive and minimize the number of agents in the negotiations to ensure a speedy transition. And, most importantly, talk to your people early and often about everything that’s going on. Transparency is key.

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