A carve-out sets out to unlock greater value as an independent entity than it had as part of the broader business. An often overlooked factor in achieving that outcome, however, is the detailed consideration of what infrastructure the new entity will require to “successfully” exit off the boarder businesses shared infrastructure. In our world we call that the development of a transition services agreement (TSA) exit strategy.
How can a poorly planned TSA Exit impact value? Delays and gaps in the TSA exit strategy affect confidence, erode shareholder value, and call into question the benefit of a carve-out. Many organizations spend the initial lifecycle of a carve-out focused on legal separation, establishing the transition services agreement required to provide business continuity and shifting assets into the new entity. The resource constraints to accomplish this can be substantial which leads organizations to subsequently underinvest in planning how to establish a replacement infrastructure. This commonly results in sub-optimized infrastructure setup that can plague an organization for years to come, but that doesn’t have to be the case. In truth the initial steps taken to achieve success come early in the process but aren’t connected with the broader exit efforts, such as discussions to develop the initial estimates of the stand-up costs and the replacement headcount that would have been needed to operate as a standalone. We believe this investment in planning significantly improves alignment on the support duration and critical investment priorities that can inform the transaction thesis if properly timed.
MorganFranklin works side by side with our clients to develop flexible and scalable solutions that help organizations plan and execute initial legal separation and successful exit off a TSA schedule of services. Every company is different and what each carve-out requires to thrive is unique. Our team focuses on understanding the intricate business and culture of each client and brings a diverse network of industry experts to execute and deploy tailored strategic exit plans.
Effective carve-out planning transforms wide-reaching goals into achievable value-driven milestones across every layer of the business
Establish your TSA exit guiding principles. Creating guiding principles or core decision criteria is crucial and can help reduce inefficiencies in decision making. This may seem obvious, but decisions made in a void of guiding principles or core decision criteria tend to be revisited time and time again, creating inefficiencies, and causing rework. Creating a set of unifying criteria will support decision making inform priority, and execution when things get rolling. From our experience, guiding principles can include exit timeline, technology preferences (such as on-premises versus cloud configurations), outsourcing models, scalability needs, public company readiness, and benchmarking cost ratios for certain functional areas of the business such as IT, finance and HR.
- Establish leadership structure, project governance, and engage with stakeholders
- Agree on guiding principles and assumptions to drive benefits to the organization over the course of the TSA exit.
- Define which universal key constraints will guide the development of the plan. These often come directly from the transaction thesis.
- Track the timeline needed to develop and execute against the plan.
Definition of success: Clear assumptions and key constraints that guide decisions and that are agreed-upon and understandable to all stakeholders and decision makers.
Define your future IT infrastructure. IT infrastructure is the foundation of how your organization will operate in the future and is therefore a critical factor in a timely TSA Exit. Many carve-out organizations believe their existing IT infrastructure creates suboptimization and impinges on performance—investing the appropriate efforts up front to prioritize those challenges and address in the TSA exit can spur increased engagement from stakeholders and create positive organizational inertia.
- Define and document the domain, infrastructure, hardware, security, application, data, and network design footprint. Determine which applications you can clone, which can be retired, and which new applications will enable growth.
- Gain a critical understanding of the parent company’s IT resource capabilities and availability to determine what you can rely on and which professional services you must seek out.
- Develop additional application specific critical factors that can be used in conjunction with your guiding principles to evaluate potential replacement technologies early. The goal here is to pare down the list to a manageable population so new management can execute timely vendor selections.
- Define high-level roadmaps across domain, infrastructure, network, security, applications, data analytics, end user services, and architecture integrations.
- Identify key milestones and exit dates. These allow for more accurate TSA exit points across IT.
- Socialize IT Infrastructure plans with functional stakeholders to ensure understanding of the recommended IT standup sequence to build their operating models around.
- Make the decision to purchase hardware needed to deploy new applications.
- Assess and deploy updated cyber protections and policies for the new enterprise.
Definition of success: The post-TSA IT landscape is clearly defined with supporting roadmaps across procurement, domain, network, infrastructure, security, applications, analytics, end user services, security, and integrations.
Create functional blueprints. MorganFranklin utilizes blueprints to define the corners of consideration and execution for each functional area. Each functional area needs to understand what they are building toward for each area, as well as what dependencies exist. Successful blueprinting exercises result in TSA exit criteria and provide a foundation for milestones required to meet the criteria.
- Define business process considerations, confirm technology deployment order needs, identify dependencies, define the recommended hiring order.
- Document and evaluate the critical open questions that exist coming out of the blueprinting process and work to resolve the ones that will affect the immediate three- to five-month needs of the organization. Evaluate decisions against your guiding principles and typical business considerations, such as impact on business processes, degree of system automation, complexity of implementation, and adoption or implementation timeline.
- Create and socialize both the completed decisions and the TSA exit criteria that result from the blueprints. Exit criteria should provide a starting point for creating milestones as an integrated plan with the IT roll-out.
Definition of success: Clearly defined TSA exit criteria for each of the functional areas reflecting the process, technology, people, and data requirements for each. Key drivers linked and communicated with the exit criteria increase awareness and show the importance of everyone’s role in the program and drives community.
Agree on the roadmap, build the milestone workplan, and finalize budget. Defining a roadmap across key workstreams drives unity and creates accountability within the organization. Translating that roadmap into a clear set of milestones provides the detail needed to estimate costs for the exit activities as well as for the TSA. The IT infrastructure and functional operating model blueprints are leveraged to create roadmaps and estimate costs for management approval. Milestone build ups are defined and drive the development of a detailed workplan.
- Get approval on the detailed hiring plans required to support each functional area, paying special attention to the order of hires so the right skillsets will be in place at the right time.
- Develop detailed top-down and bottom-up cost projections related to the TSA exit and incorporate them into the budget process. Gain approval from senior leadership and management.
Definition of success: A clear and actionable TSA roadmap developed with key milestones, responsibilities, resourcing, and dependencies. Approved cost implications of TSA exit details incorporated into the new company’s budget estimates.
Establish the transition service management office (TSMO), hire external resources, and plan kick-off. The final step is to evolve the Separation Management Office into the TSMO organization that will hold all stakeholders accountable and drive success through the exit activities. The TSMO will setup the infrastructure, communicate governance requirements, staff the project, and gather stakeholders for the kick-off. We find that a strong start to the TSMO is essential to maintain the energy and enthusiasm of the separation. The more communication points between the TSMO and team members early on, the better. Clarity is crucial in this stage. Without this an organization could see engagement and enthusiasm wither on the vine.
- Challenge the current operating model and what is expected from the future state organization, not what is provided today.
- Establish a governance model to include tools, tracking and reporting support, SME/leadership support, functional workstream leads, roles and responsibility definitions, meeting cadence, and budgets.
- Onboard team resources and professional services companies, as needed.
- Kick off with stakeholders aligning against key dates and the governance model. Revisit assumptions and decisions made during planning as a course of practice. Repetition is helpful to draw alignment and challenge where appropriate to create a more effective organization as part of the process.
Definition of success: A fully dedicated execution team established with leadership and organization clearly defined by the TSMO leadership. A governing body made up of the new company’s steering committee is established to make timely decisions and sign off on official exit notifications for each functional area.
Don’t get caught short sighted, unnecessarily risking the potential value created by a carve-out. Get proactive and create a well thought out TSA exit plan that protects the value the transaction seeks to create and prevent unnecessary long-term reliance on another entity, save capital and free up team members to focus on strategic activities that support the growth thesis.