HCM | 7 MIN READ

Global Employment Outsourcing: A Compelling Human Capital Management Option

By Chris Klein, SVP, Global HR & Payroll Solutions

We pride ourselves on sharing informative and engaging content each month that revolves in some way around the variety of practice lines and consulting services we offer here at Spencer Thomas Group.  Usually that content comes from inside our own walls through our consultants, project managers and practice leaders.  That doesn’t mean we don’t spend a lot of time reading up on what folks outside of STG are writing and when we come across content that we would have liked to write, but found someone else that beat us to it and did a great job we want to share!  Here you have an example of that from Eric Snethkamp who is a Global Channels and Strategic Alliances Manager with Safeguard World International.  Thank you Eric for sharing your insights on this very interesting topic.  We may have made a tweak here and there, but the article you are about to read is his and one worth sharing.

Love them or hate them, Transition Services Agreements (TSA’s) are often an integral part of asset based M&A transactions / spin-offs / divestitures / carve-outs depending on your preferred terminology.  And, while they’re designed to solve problems with the transfer of ownership post-close, they often become a sticking point in a negotiation and can even lead to deals being lost.  These problems can be magnified in a cross-border deal.

With a carve-out or asset based divestiture as opposed to a stock purchase, the seller transfers a defined set of assets to the buyer.  Those assets can include machinery, real estate, inventory, intellectual property and employee headcount.  However, the buyer does not always acquire the sellers’ business identity, business entities, or the infrastructure including things like employee benefits plans, payroll processing and contracts.

This becomes a particular problem for buyers when they don’t already have formal business entities set up in the countries where they will potentially be acquiring assets including employees.  This is part of what’s now a larger integration issue.  As a buyer what do you do?  Set up entities ahead of time in those countries where the assets will be acquired and keep your fingers crossed the deal is going to close?  Do you wait until the ink is drying to set up entities and again keep your fingers crossed you’ll have the entities set up in time to insure the employees have an employer when the transfer is made?  Or, the commonly used Transition Services Agreement – TSA in which the employees remain part of the sellers’ books for a period of time?

Setting up entities ahead of time is rarely, if ever, a viable solution without the certainty of the deal closing.  Waiting until the ink is drying becomes a scramble no one ones to navigate with all kinds of associated time related pitfalls. That’s where TSA’s come in.

TSA’s are shared services or outsourcing agreements which can be arranged to define who and how certain specifics are operated over a period time during the transition of ownership.  Things like IT, support services, facilities, operations and supply chain can be part of TSA’s. In this case we are specifically focused on employees and HR (payroll and benefits).  More specifically, a scenario where the buyer needs to run the target business immediately after closing but does not have entities yet established to host new employees.

A TSA is often used to keep employees on the sellers’ benefits and payroll plans until the buyer establishes their in-country entities.  Downsides can exist with TSA’s though.  The seller is not always happy to keep employees on their books after divesting those assets.  Will they receive the funds from the buyer to make payroll?  Will the buyer have everything in place at the end of the TSA to make the transition?  What performance standards will have to be met?  What are the financial impacts? What is the cost basis and payment terms of the TSA.  What representations and warranties are made?  What are the limits of liability?  What are the exclusions?  How are disputes resolved?  And so on and so on.

Can you see where were going here.  Problems closing the deal.  More items to negotiate which may ultimately be the demise of the transaction.  What everyone wants is a clean, quick and smooth transaction.  Employment based TSA’s while an important and valuable tool can be troublesome. .

One  alternative that is not always commonly known can be engaging a Global Employment Outsourcing (GEO) model.  When engaging a GEO provider early in the due diligence process the entire conversation of human capital based TSA’s can be greatly reduced or even eliminated entirely in some circumstances.

A GEO provider has the ability to quickly onboard impacted employees onto their own contracts while the client (the buyer) maintains operational control and management of the employees.  The employees make a clean and quick transition from the seller which helps the seller make a clean break of the employees from their books.  It also frees the buyer to focus on negotiating the deal as well as implementing their future plans for growing or modifying the business.  Finally, it keeps disruption to a minimum when it comes to paying those employees which is critical to keep their enthusiasm and focus in tact through what could otherwise be disruptive change.

Payroll processing is often a source of strain on deal negotiations as employees will need to be transferred to a new payroll provider(s) contract or conglomerated onto a single global payroll if multiple country locations were previously being serviced by separate in-country providers.  In addition to the technical challenges this presents it may be that the newly formed company finds itself with no resources to manage the payroll process even if systems and processes are good ones and in place!  Considering a payroll provider with the ability to service client needs in multiple locations should be included in the due diligence stage to help simplify negotiations and post close migration of employees.  There are a variety of options for global payroll of course, but fewer for GEO and taking a good look at the pros, cons and options available is well worth the time.

The result can be a cleaner deal, simplified negotiations and reduced time to close.  The buyer now has the time it takes to make long term decisions in regards to their new employees and other assets without worrying about TSA stipulations or HR compliance tasks, duties and issues associated with acquiring new employees in a new country. Good for both sides.

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