Business Executive Series #5

Business Imperative, Access to New Capabilities, Avoidance of IT CapEx

Representative goal statement -   “I need IT to enable short-term independence from (previous Parent company); put in place a flexible mechanism to address future requirements and avoid competing for capital with critical business investments.”

Business Merger, Acquisition, Divestiture and Integration activities are huge programs of work for both the business and IT. Different MADI scenarios will vary on where they are along the scale of work continuum, but I’ve never been a part of one that wasn’t complex and intense.

In this post, I’m going to focus on the Business Imperative (New Company “Newco” as a result of a divestiture), with a few synergistic opportunities to gain access to New Capabilities and Avoid IT CapEx (similar topics as covered in BES-3) during the process. Also, this post will only deal with a scenario where the “spin-off” is either an IPO or a sale to a financial buyer (there would be more integration with a strategic buyer or a joint venture partner, and a much longer post).

Divestitures are inherently detailed and time-consuming activities for both the Parent and divested entity. The Parent has plenty of work to do to unravel the new enterprise from existing systems and operations and help it stand up on Day 1 with services. As the new CIO of the divested entity, you however, have the mirror situation, plus the added bonus of your loving ex-Parent company now making decisions based on what is in their best interests, not those of Newco.

To frame the discussion, I’ll offer a few themes:

•    Be ahead of the curve
•    Keep it simple
•    Directly manage the change

Be Ahead of the Curve
Whatever consultants have been hired to assist with the activity probably have IT playing a limited role in setting up a data room and assisting in satisfying due diligence requests. That is insufficient.

IT needs to be an early and important player in the due diligence process. Because of its unique view of the way in which the business functions of the company operate, IT brings the ability to identify potential issues and opportunities that could significantly change the value proposition of the deal (cost, timing, risk).

If IT hasn’t been involved in the due diligence or if it was not conducted sufficiently, you are now behind the curve in having to figure out what needs to happen, how it needs to happen (but unfortunately, probably not when it needs to happen).

The connection to the program team is vital to understanding the strategy behind the creation of Newco, and how the business and business functions are thinking about operating. Obviously, they will be counting on IT services being in place to support their plans. They may, however, not understand how tightly the integration is with the old company from an IT perspective.

For example, if the Parent has a single, integrated ERP environment (application, database, infrastructure), the split will be more complex than if Newco is currently on its own instance. Data and access also become interesting intellectual property and security problems, particularly if Newco is planning on leveraging existing Parent company systems for an extended period of time.

This example illustrates what IT can see that will in some way impact the cost, time or risk involved with the divestiture. Being a full partner in the diligence efforts will pay dividends in speed of execution, more realistic costs and operations impact to the business.

Keep it Simple
As much as I’d like to recommend implementing a fully services-based IT strategy, unless the Parent is currently operating with one, there are practical limitations as to how much can be done in the time frame for the divestiture of Newco. There is already enough change on the plate for the organization.

Nonetheless, because of the realities of your IT services situation, there are some parts of the model that will need to be implemented. The options for provisioning Newco shared services are driven by how they are currently sourced by the Parent, the existing level of integration, and the time constraints of the divestiture. In the short run, tightly integrated functions have little choice other than to be supplied via the Parent process (internal or third party). Less tightly integrated functions may have some other options, however, focusing on pursuit of these may not be the optimal use of resources right now. Day 1 the business will expect to have IT capabilities capable of supporting not just business-as-usual activities, but also critical projects in-flight for new solutions delivery. To simplify and solidify these basic services, I’d opt for provisioning via Temporary Services Agreements with the Parent or 3rd party provider.

This will, of course, require that the Parent, 3rd party providers, and Newco have some sort of Managed Services infrastructure standing up and functional. If the Parent is currently using 3rd party providers, then there is already some of this capability in place and that will need to be extended to the directly provided Parent services, with a mirror capability for these services to be managed by Newco IT.

If the Parent provides services through 3rd parties, those contracts must be extended to Newco across geographies and corporate entities (this can be a big deal on a global basis, with companion agreements, etc.). New scale and volumes may become issues for both companies. The Parent strategic sourcing group will need to take point to work this through with you and the 3rd party providers. Note that continuity of services is necessary and not sufficient for normal business and IT operations. Additional governance mechanisms will need to exist between service providers to ensure that both basic operational processes and existing project deliverables and timelines are supported.

Under this scenario, on Day 1 of Newco operation, IT services will likely be provisioned as follows:

•    Commodity services (data center, end user, network) provided by the Parent directly or via 3rd party.
•    Business process services (ERP and shared systems/services) provided by the Parent directly or via 3rd party.
•    Business analyst and business-unit specific systems hired as Newco IT.
•    Service delivery managers and service management hired as Newco IT.

Be aware that this scenario will place extra burdens on the information/network security teams to allow appropriate access to data and shared capabilities. Depending on the sophistication of the current environment and the ability of the Parent and Newco to come to logical and practical solutions, this activity could easily be more time-consuming than planned.

There will be the need to develop a “Day X” agreement and attendant program of work for the weaning of Newco from Parent services. While this is an important program of work for both companies, it needs to be considered in the context of the complexities driving the initial provisioning, with realistic expectations set for the completion of the work.

As a reality check for Newco IT services, ensure that you have a macro level benchmark of your costs versus that of your industry and/or Parent (IT as a % of revenue for example). If your projected IT costs are over the benchmark, you might successfully argue to the Parent that this situation is putting Newco at a structural disadvantage and the deal economics or cost of IT services need to be revisited. If that is not successful (higher costs could be driven by loss of scale or new functions), programs will need to be developed with the business to drive to the benchmark (as balanced against other business needs).

Directly Manage the Change
For your staff, Newco has been an open secret for some period of time. You probably have already had to address rumors about the path forward for IT staff working directly or indirectly for the Newco business unit. Your people want to know as soon as possible what career choices they will have, what decisions they will need to make (if any) and when they will need to make them. The decisions that you make now about provisioning services will determine the answers to those questions.

Your commitment to implementing a managed services model has already been balanced with business risk. Unless the Newco business unit was run independently, there are some shared business functions and some shared IT services. The resources that will be first hired into Newco IT (usually business-facing and development skill sets) are easily identified and can be protected early in the Day 1 planning process*. Resources providing shared ERP-type functional, analytical and infrastructure services are the ones with the most ambiguity and uncertainty to deal with during the process and need to be a special focus of the organizational change management activities by the Parent, Newco and any 3rd party vendors who may have a role (consistency of message, focus on the groups).

During all of this change, you and the rest of your leadership team will have the critical job of hands-on change management. The job of creating and communicating a vision that will be somewhat of a work-in-process is difficult at best and will be extremely time-consuming. Now is the time you need to engage most directly with your organization to be effective in addressing their issues and concerns. Keeping in touch and getting first-hand feedback in a timely fashion will help accomplish that.

I’m not going any further in addressing OCM activities, as that was the subject of an earlier post (ref. Organizational Change Management).

As you are now going to be part of a new business (defined earlier as either an IPO or investment by a financial buyer), it stands to reason that your primary goal will be to increase the value of the business to the shareholder(s). To directly support that goal, your job is to create an IT capability that optimizes the IT value proposition to the business (ref. FAQ: IT Value Proposition). Based on your background with the Newco line of business, you probably have a good idea of how to segment services between the value proposition categories. Post-Day 1 is the time to build the full services-based IT strategy to align with your map of services. This can then be worked into a more complete vision for your organization.

Finally, during this transition period, every business function will now be thinking along service lines and looking for some thought leadership – and an enabling partner. IT will be in a position to make that offer due to the existence of the initial Newco IT managed services framework and take advantage of the opportunity for thought leadership and potential synergies down the road. This will position IT well as a business partner in the future.

*”protected” in the sense that these people may have a more directly visible path to Newco and mechanisms to retain key folks may be put into place quickly, along with restrictions to prevent them from being poached by the Parent.