Why 55% of spin-offs stumble on HR - and what CHROs can do about it

And yet, the data tells a more uncomfortable story.

According to McKinsey’s analysis of large-scale spin-offs completed between 2000 and 2022, 55 percent generated a negative weighted-average total shareholder return for both the parent and the new entity in the three years following separation. The median excess TSR across both entities was – 1.1 percent. And the trend is worsening: post-spin performance averaged +5.1 percent between 2000 and 2009, but has been – 4.4 percent since 2010.

Separations, it turns out, do not create value on their own. Value must be builtdeliberately, operationally, and from the very first day the new entity exists.

For CHROs, that is both a warning and an opportunity.

The four HR failure modes in spin-offs

When a spin-off underperforms, the post-mortem typically focuses on strategy, capital allocation, or market positioning. What is less often examined — but consistently present in the organisations that struggle most — is a failure of HR readiness. Based on the research and our experience working with organisations through complex separations, there are four HR failure modes that account for the majority of people-related value destruction in spin-offs.

1. The Day One infrastructure gap

In most corporate structures, HR functions are delivered through shared services: centralised payroll, group-wide benefits, common HR systems, pooled HR business partner support. When a business unit is spun off, all of that disappears at the stroke of a pen. The new entity becomes a legal employer — responsible for its own payroll, its own contracts, its own compliance — without having built any of the infrastructure to support those obligations.

The consequences of getting this wrong are immediate and severe. A payroll run that fails on Day One does not just create an administrative problem. It signals to every employee in the organisation that their new employer is not ready — and in a separation environment already charged with uncertainty, that signal is difficult to walk back.

Specialist HR sources note that Day One readiness requires every employee to have a valid employment contract, payroll data transferred and tested, employer registrations completed across all relevant jurisdictions, and HR self-service accessible from the moment the business opens its doors. In practice, organisations that treat this as a checklist to complete in the final weeks before separation consistently find themselves behind.

2. The talent attrition spiral

McKinsey’s research on buy-side carve-outs identifies two emotions that dominate the employee experience in any separation: feeling abandoned, and feeling uncertain. In a spin-off, both are present simultaneously — and both are most acutely felt by the employees the new organisation can least afford to lose.

High performers, by definition, have options. The uncertainty created by a separation — about compensation, career progression, culture, and the long-term viability of the new entity — is precisely the kind of ambiguity that causes talented people to accelerate conversations with competitors. Research consistently shows that key talent attrition in the early months of a separation is among the most significant and persistent value destroyers in carve-out transactions.

The CHRO’s challenge is that the window for meaningful intervention is narrow. Before close, communication with carved-out employees is typically restricted by deal confidentiality requirements. After close, the sense of dislocation is already established. The organisations that retain their best people are those that have a clear, credible talent communication plan ready to execute from Day One — one that answers the questions employees are actually asking, not the ones leadership would prefer them to be asking.

3. The compliance blind spot

A newly independent entity inherits the complexity of employment law without the legal infrastructure that the parent company had built over decades to manage it. Across different countries, industries, and workforce types, compliance obligations are specific, non-negotiable, and frequently underestimated.

Works council consultation requirements must be met within defined timelines — missing them can jeopardise the transaction itself. Pension obligations must be correctly transferred or replaced. Social security registrations, payroll tax filings, and statutory reporting must be established for a new employer entity that may never have existed before. In a multi-jurisdictional spin-off, this complexity multiplies across every country in scope.

The cost of non-compliance is not merely financial, though the financial penalties can be significant. The reputational impact of regulatory failures in the early months of a new entity’s existence — with employees, works councils, and regulators - sets the tone for the organisation’s relationship with those stakeholders for years.

4. The “mini-me” operating model trap

McKinsey identifies a pattern they call the “copy-paste” or “mini-me” approach to separation: the new entity replicates the parent company’s HR operating model at a smaller scale, without questioning whether that model is right for an independent business of its size and competitive position. The result, consistently, is an oversized HR function with a cost structure that the new entity cannot sustain.

The spin-off moment is, in fact, a rare opportunity to build an HR function from scratch — one designed for the organisation the new entity intends to become, not the one it has been. CHROs who seize that opportunity, benchmarking the new entity’s HR function against peers rather than against the parent, typically build leaner, more agile operations that serve the business better and cost less to run. Those who default to replication typically find themselves restructuring within eighteen months.

What the best-performing CHROs do differently

The organisations that navigate separations most effectively share a common characteristic: their CHROs are involved in the transaction process from the earliest stages, not brought in to execute decisions that have already been made.

This means the CHRO is present in the deal room when the scope of the TSA is negotiated, because the TSA defines how long the parent will continue to provide HR services — and therefore how much time the new entity has to build its own capability. It means the HR workstream runs in parallel with the legal and financial workstreams, not as a downstream task that begins once the deal structure is finalised. And it means the CHRO has a clear view of the talent map — knowing which employees are critical to the new entity’s strategy, what it will take to retain them, and what the flight risk looks like across the organisation.

The most effective CHROs in separations also make early decisions about what to build, what to buy, and what to outsource. An organisation standing up an independent HR function for the first time does not need to own every capability from day one. What it needs is for every capability to be operational from day one — and those are very different requirements.

How Zalaris supports CHROs through separation

Through our HR as a Service model, we provide newly independent organisations with fully operational HR and payroll services from day one – without the lead time required to build an in-house function and without the cost structure that comes with replicating a corporate HR model at scale.

The model is modular. CHROs can engage Zalaris for the specific capabilities the new entity needs, scoped to what the organisation requires rather than a fixed package.

The four service pillars:

• HR Operations. The full transactional layer – HR administration, payroll processing, accounting and reconciliation, statutory filings, and time management – ensuring every employee is paid correctly from the first cycle.
• HR Partner Plus. On-demand access to experienced HR Business Partners with local and regional expertise, without the cost or lead time of a permanent hire. Available per country, covering employee relations, works council engagement, and strategic advisory.
• HR Technology. A virtual team of subject matter experts who build the compliance frameworks, employment policies, and governance structures the new entity needs but has never had to create before.
• HR Transformation. IT and process consultants who design the operating model, implement the HR platform, and manage the transition from TSA dependency to standalone operations – accountable through go-live and beyond.

For CHROs navigating a spin-off, the question is rarely whether these capabilities are needed. It is whether there is time to build them – and whether it makes sense to manage them across a fragmented set of separate providers, none accountable for the whole.

One partner. One contract. Operational from day one.