Separations have become a widely adopted strategy for creating value, but their popularity does not mean these complex transactions are always effective. For instance, spin-offs—one of the main types of corporate separations, alongside divestitures and carveouts—have hit record numbers in recent years, but these deals are not guaranteed to create value for both the remaining and new businesses.
Through our decades of research and experience supporting organizations in a range of separations, McKinsey has identified the practices that matter most for improving the odds of creating value for both the remaining and separated companies (see sidebar, “Separation best practices”). One of the most important practices is focused leadership. Executives across both organizations in a separation must be aligned on the objectives for the deal so they can help their teams identify priorities and trade-offs. They should think carefully about how they will talk about the separation with employees, customers, partners, and other stakeholders to address any hesitation, confusion, or fear of change.
Three other best practices—focusing on the operating model, people, and culture—are just as critical and, in the rush to complete a deal, frequently overlooked.
In spin-offs and other separations, organizations should follow a parallel process of executing the mechanics of the transaction while creating a transformation plan for the remaining and new businesses. Too often they treat these as distinct efforts—to their detriment. They may miss opportunities to not only create more financial value through deal synergies but also to sharpen leaders’ focus on what the separate entities need to achieve their strategic objectives—for instance, what operating model best serves the value agenda of the new company, what new skills may be required, and how leaders can communicate about the deal most effectively with employees, investors, and other key stakeholders.
In this article, we explain how companies can integrate discussions about talent into their separation plans and use these conversations to reset expectations about operating models, culture, and value creation.
Establish a world-class operating model
As a first step to executing a separation, companies should develop an operating model that serves the dual purpose of strengthening the remaining and new businesses. This requires leaders to think strategically about the people at the center of their operating model, as well as their culture. C-suite executives can work with their business unit leaders and HR teams to address the following questions related to their operating model:
- Boxes and lines. What sort of operating structure does the new business need? For instance, what changes would be needed to accommodate a potential new, leaner regional setup or a focus on services instead of products?
- Core processes. Which day-to-day operating processes are critical for accelerating the development of the new organization? For instance, are decision-making roles and responsibilities clear, so that the right people are empowered to make critical choices quickly?
- Workforce size. How many people are needed to deliver on the objectives of the remaining and new entities?
- Talent and skills. What skills and capabilities are needed in the new operating model? Do we have the people to fill these roles, or do we need to recruit from outside the organization? For example, does either the CFO or CEO have the experience to serve in the role for a publicly traded company in a spin-off, which is a requirement in most jurisdictions? Do we have the right digital or R&D talent?
- Performance management. How will we set performance goals for our teams and individual employees in the new company? What are the KPIs and best performance review structures? How will we support talent development and offer meaningful financial and nonfinancial incentives?
Companies that don’t address these operating model factors and instead opt for creating a “mini me” may find that both the remaining and new businesses are less competitive after the separation.
In one example, when a diversified oil and gas conglomerate spun off one of its upstream businesses, its leaders decided to decrease complexity by setting up a leaner regional structure for the new entity. It also established a leaner back-office support structure to streamline financial reporting, which had been a heavy burden when the business was part of the bigger parent organization. Finally, the executive team also chose to increase investments in digital and sustainability capabilities for the new business, which aligned with its vision for creating more value for the future.
Set the foundation with talent and culture
Our research shows that talent allocation is the second-most-important sticking point for organizations in a separation, behind only transitional service agreements. Indeed, separations can falter when leaders are slow to make decisions about talent, which, in turn, can prevent them from making critical decisions about how to organize the remaining and new businesses for maximum impact.
Talent
In our experience, leaders of the new entities in successful separations routinely do several things well: they identify key roles in the organization, increase the visibility of those positions, and fill them with change agents who support the transition. Leaders should carefully consider the following questions to ensure that they are developing an effective talent strategy:
- Identify a list of key talent and roles. What are the unique roles or highly specialized skills that are critical to creating value for the business, and how do we identify them? Which new skills are needed to achieve the strategic goals of the separated organization? How can we match the best-fit employees with our most important roles to achieve the highest levels of productivity? (Previous McKinsey research shows that top performers in highly critical roles deliver 800 percent more productivity than average performers in those positions.)
- Define and apply talent selection criteria. Have we established our process for selecting talent? Are we communicating consistently with our team to explain the process and provide updates?
- Define talent retention strategies. Which employees in critical functions are at risk of leaving during or shortly after the separation? What is our budget to offer incentives to retain these people? What nonfinancial incentives can we use to retain talent?
- Define allocation principles and fill key roles. How do our talent allocation principles align with the new business strategy and goals? What are the critical business areas that require focused talent investment?
- Oversee talent allocations and transfers. How do we ensure that we seamlessly disentangle employees who are performing work for both businesses? Can we provide training to support employees who are transferring into new roles?
- Reassess and close gaps. Have we fully matched our talent allocation with our new operating model? Do we need to accelerate hiring or find temporary solutions to fill any important gaps?
Culture
High-performing organizations are fueled by a strong culture—that is, the common set of behaviors, mindsets, and beliefs that shape how people work and interact. The jolt of a separation, while challenging, provides a great opportunity to reset the culture of the separated entity in service of what matters the most in the new company.
Leaders in high-performing organizations do several things routinely: they clearly communicate the organization’s values and mission, they model positive behaviors and mindsets, and they identify influencers within the organization who can inspire and help employees find purpose in their work. Through these actions, they can unlock their performance and productivity. An important task for leaders in separations, then, is to determine which parts, if any, of the existing culture should be ported over to the new business.
Another crucial factor is establishing a clear and consistent performance management framework during the transition and beyond. During the separation planning process, leaders will need to determine how to adjust the existing performance management system to achieve new business goals. This will mean defining or redefining the KPIs and financial and nonfinancial incentives to ensure they are aligned with overarching corporate priorities. Leaders may need to focus more on capability building—providing upskilling opportunities or professional development programs, for instance—to encourage employees’ growth. And they will need to conduct regular performance conversations with employees to update metrics and objectives as roles and organizational priorities change.
In one example from a healthcare divestiture, the newly separated consumer health organization defined its culture to be more agile and consumer-focused than that of the larger pharmaceutical organization from which it was created. Leaders of the new organization started by explaining to employees the company’s new values and ways of working, including implementing faster approval timelines. In rolling out this new approach across the company, executives worked with their respective teams to detail what the changes would mean for their specific functions. Leaders also touted aspects of the new culture to attract new kinds of talent for critical roles. This cultural shift helped the new company establish its own identity and get off to a strong start as an independent organization.
Inspire employees with a vision for change
Throughout the separation process, leaders will need to consistently communicate why the planned change will benefit all stakeholders, including investors and employees. Leaders should be clear about the strategic rationale for the separation and how it will serve the purpose of the new company. Companies should deliver a “true north” vision that will inspire employees to get behind the change and feel connected to the work required to meet the new objectives. A separation can succeed only when the strategy and vision are aligned with employees and their day-to-day operations. Leaders should not make promises they will not be able to keep as the separation takes shape.
In another example, an energy company underwent a large transformation and divested several noncore businesses. To motivate the leadership group of one of the newly separated businesses, the energy company CEO articulated a strong change story. He emphasized that the business was a better fit with the core focus of its new owner. While acknowledging the transition would not be easy, he stressed the opportunities to learn and take new approaches to expanding the business—likening it to being entrepreneurs with a big corporate backing. The CEO’s change narrative inspired his direct reports to be more supportive of the separation and to feel more personally connected to the opportunities ahead under new ownership.
Creating value for both the remaining and new businesses in a separation is a daunting challenge. To meet it, leaders tend to put their entire focus on executing the transaction, eyeing the successful day one launch of the new entity. Instead, they should take the time to craft a transformation plan that prioritizes operating models, people, and culture alongside the full value-creation opportunities. They should design an effective strategy for matching the right people with the right roles and inspire employees to embrace change. In doing so, leaders can meet the separation challenge head-on and increase their odds of success.
