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Creating clarity from chaos – the art of successful IT separation in portfolio disposals

By Hubert Wentzel, Principal Consultant for iOCO

Johannesburg, 27 Nov 2023
Hubert Wentzel, Principal Consultant, iOCO.
Hubert Wentzel, Principal Consultant, iOCO.

Mergers and acquisitions have become a common strategy for growth and transformation. As a result, companies often find themselves in situations where they need to divest or carve out a part of their organisation, and managing the IT and OT estate during this process can be a complex and daunting task. This makes it critical to understand the critical success factors involved in unscrambling the IT omelette when disposing of companies in the portfolio. What are these critical success factors, and how can a consultative-driven service approach pave the way for a smooth and successful transition? Let’s explore.

Charting complex carve-outs: Unscrambling the corporate omelette

Over the past few years, we have been engaged in numerous mergers and acquisitions, acting on behalf of the buyer or seller to divest and carve out the IT infrastructure of various organisations. These divestments have ranged from mining companies to manufacturing entities and logistics firms. Managing the carve-out process for an IT organisation that was traditionally centralised within a larger corporate structure is no small feat. Unlike merging two entities, breaking them apart involves disengaging systems, handling data egress and navigating new vendor engagements. It often entails renegotiating licences with vendors and agreements, which can be a complex and time-consuming process. The challenges of separating IT and OT assets in a carve-out are akin to unscrambling an omelette – a task that requires precision and a well thought-out strategy.

Strategic transition and rationalisation: A two-fold approach

Our approach to most transitions has been to initially transition the IT state as it is without introducing additional complications by transforming it. Transformation here refers to re-engineering processes to make them more efficient, simpler and faster. Introducing significant changes during a carve-out can increase the risk factor and the impact on the business. Therefore, we prefer a two-step process: provision the IT estate as is with some rationalisation, and after the proverbial dust has settled, we then consider transforming some applications and the information life cycle. The carve-out process is typically initiated through a services agreement between the seller and the buyer to ensure service continuity during the transition. This agreement also dictates the responsibilities of both parties during the transition, which can last anywhere from three to 12 months, depending on the complexity and size of the IT estate.

Addressing documentation challenges and mitigating technical debt

One challenge we encounter frequently is the poor definition and incompleteness of documentation and artefacts provided by the seller. The scope of work often differs from what the seller initially believes, leading to costly surprises. To address this, we conduct thorough due diligence upfront to understand the true scope of the IT estate, which influences the duration of the transition process. While the technical aspects of the transition are critical, it's also essential to consider the transitional services agreement, which governs the commercial engagement between the divestee and the buyer. This agreement specifies which services will be paid for and when the service transitions to a new provider or the buyer's infrastructure.

Overcoming technical debt and geographical challenges in IT divestitures

In many cases, the IT infrastructure is centralised, and the procuring entity lacks IT capabilities. One issue we frequently encounter is technical debt – outdated systems and infrastructure that the seller often neglects in the years leading up to the sale. The buyer can be left with the burden of making substantial investments to refresh and modernise the IT environment post-transition, which can significantly impact the purchase price. Additionally, the location of the divested entity plays a significant role in determining the post-transition IT environment. Entities in remote areas may require different solutions, such as on-premises infrastructure for critical services such as MRM. Cloud adoption is considered carefully once factors like internet bandwidth and reliability thereof is established.

Appreciating IT estate carve-outs with strategies for seamless transition

CIOs and IT leaders need to understand the intricacies of carving out IT estates during mergers and acquisitions. While there are various complexities involved in this process, companies should consider seeking experienced advisory partners to navigate these challenges successfully. From an IT consulting perspective, building trust and rapport with buyers is essential. When dealing with organisations going through these transitions, focusing on service continuity and cost-effectiveness is key. These experiences can be valuable for companies that have been through similar situations, making them more attractive partners for potential buyers. Carve-out transactions, whether divestments, mergers, acquisitions or the creation of new entities, demand a tailored and nuanced approach for successful separation. A consultative-driven service is fundamental in addressing the complexities and challenges of separating IT and OT assets during divestment.

Taking a systematic approach to carve-out considerations

Deliberations begin with compliance, emphasising adherence to industry regulations and standards. Deciding whether the entity continues as a going concern or forms a new one shapes the transition strategy. Mutual success is crucial for both seller and buyer, making a consultative approach instrumental in aligning interests. Balancing the cost of transition with services rendered is vital, and a consultative approach defines a fair cost-to-serve model benefiting all stakeholders. Managing third-party support, dependencies and comprehensive risk analysis are integral to this approach. Assessing the business state and volatility guides the transition, setting realistic timelines for production continuity. The consultative approach ensures labor harmony and prevents disruptions while aligning service procurement with transition goals once the post-transition operating model is defined.

Transition and operation: Working through the complexities

After the consultative-driven service sets the stage, transitioning from the old IT and OT estate to the new and subsequent operation involves precision and expertise. This intricate process encompasses several key steps.

Crafting order amid complexity

First, moving from existing IT and OT infrastructure to a new entity or integration with another organisation, the M/ICT Services Transition and Brown-Fields phase demands meticulous planning to ensure a seamless transition. Then, the transitional services agreement (TSA) plays a crucial role in outlining the terms and conditions for transition and operation. It undergoes a comprehensive review, definition and alignment to meet the specific needs of both the seller and the buyer. This requires comprehensive due diligence to be executed rigorously to understand the scope and complexity of IT and OT assets. This step is vital in informing subsequent decisions and actions. In a recent case, the buyer was about to sign a TSA valuing IT services at R1.8 million monthly. By questioning the seller's statements and claims about the IT estate's size and users, we successfully reduced it to R1.3 million per month.

Blueprinting the future

Developing design principles is the next critical step, establishing the framework for the new IT and OT environment. This ensures alignment with organisational goals and sets the stage for a smooth transition. Clear assumptions must be defined and aggregated to facilitate comprehensive understanding, following which the architecture and technology roadmap is outlined, taking into account organisational goals and industry standards. This step ensures a strategic approach to the transition. Thereafter, identifying change management requirements is integral during a carve-out. This involves recognising and prioritising transformational activities to ensure a smooth transition and the consultative service must play a key role in negotiating and establishing contracts with vendors and third parties with the aim to achieve cost-effectiveness during and after the transition, along with the development of a comprehensive budget for the transition.

Holistic management with a consultative touch

Additionally, recognising and addressing constraints that may impact the carve-out is a key contribution of the consultative service, which is instrumental in effective planning and execution. Lastly, a consultative-driven service ensures clear definition and effective management of both transition and transformation aspects to ensure a holistic and strategic approach to the entire process.

Handling the complexities of IT separation with expertise and precision

Unscrambling the IT omelette when disposing of companies within a portfolio is a demanding endeavour, but with the right approach and a consultative-driven service, organisations can achieve their goals while minimising risks and ensuring a smooth transition. The key to success lies in recognising the challenges and being realistic about the size of the task at hand. As the business landscape continues to evolve, CIOs and IT leaders must stay informed about the complexities of carving out IT estates during mergers and acquisitions, but in such cases, finding experienced partners can make all the difference in a successful transition that ensures service continuity and cost-effectiveness. By fostering trust, building rapport and considering potential challenges and opportunities for the future in addressing the critical success factors, organisations will be better equipped to overcome the challenges in separating their IT infrastructures when disposing of companies in their portfolio.

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