Top tips for successful carve out programmes

The recent news from RBS about the complexity of separating Williams & Glyn as a ‘complex process’ is an understatement; carve out programmes are complex beasts. Companies that have been built up over time, either through acquisition or organically, often end up with a plethora of legacy systems and processes that so intertwined it is a long and complex process to unpick.

What makes the RBS and Williams & Glyn carve out even more prevalent is that previous studies[1] have shown that 50% of all carve outs, particularly in the financial services sector, fail to achieve their planned timescales. The primary reason is often due to the complexity of carving out and creating a separate IT platform.

To ‘stand up’ a fully functioning separate business on Day 1 is incredibly challenging. Most companies opt to take the less complex route by allowing the carve entity to continue to use their IT platform throughout transitional service arrangements for a short period of time once the deal closes.

While each carve out programme has its own set of unique challenges, at Moorhouse we believe there are several important factors that will drive the success of any carve out.

1) Having clarity on the operating model at an early stage

A separation ‘blueprint’ for the ‘carve out’ business should be developed as soon as possible in the planning process. In it, there should be sufficient detail to cover five key areas of each functional area: people, processes, systems, contracts and physical assets (such as offices and factories). Our experience has shown that management often under-estimate the complexity of carving out a business from the parent organisation. We typically find over 100 ‘touch points’ between the two organisations, which is often more than management has estimated. A previous study[2] has found that 88% of respondents say that their companies leave value on the table as a result of not planning separations in sufficient detail.

Having this clarity at an early stage will help to underpin the development of detailed separation plans and experience has shown that deviations from the agreed model can have a major impact on meeting targeted timescales and the budget.

2) Focus on the most difficult areas up front

Different options such as full separation, replicating existing or transitional service arrangements for shared services / contracts, will need to be considered and assessed before a recommended way forward can be agreed. Generally avoiding a ‘big bang’ approach and taking a phased approach to systems migration activity will mitigate risks and provide an opportunity to resolve issues that arise prior to the next data migration. Understanding the impact of separation on these areas will be a key component to managing time and cost.

3) Creating the right 'tension' between the two new organisations

Having the right governance framework is another vital ingredient. Implementing an appropriate governance framework that creates the right balance between both organisations, has a much better chance of ensuring that the chosen solutions are most applicable for the carve out organisation as a standalone business. It is well known that relationships will change from a close-knit internal relationship to a third-party arm’s length relationship. And, therefore, getting into the mindset of an arms-length commercial relationship at an early stage is key to ensuring optimal solutions are achieved.

4) Making the separation programme the number one priority

It is also important to ensure that the separation programme is prioritised as the number one programme throughout both organisations. Other programmes will need to take a back seat and allow separation to take priority for transition and testing of data migrations. The majority of large corporate organisations have a portfolio of change programmes going on at any point of time and it’s critical that these do not disrupt or undermine a separation programme. Conflicting programmes and priorities can have a significant impact on a separation which, in itself, is a major disruption to business as usual. This can cause delay and impact the proposed operating model design.

Both management teams need to be fully aligned on this priority. Having the most talented people focussed on the separation programme will also help to set up the programme for success and deal with the challenges that arise.

5) Keeping your people on your side

Carving out a business will create uncertainty and ambiguity for employees and can become a major distraction to business as usual activities. Removing these distractions by communicating and implementing the organisational structure for the carve out entity as quickly as possible ahead of Day 1.

Identifying key talent for the carve out and putting retention plans in place will also be key, as well as clear communication to employees on the strategic rationale for the standalone organisation. This will help to motivate employees moving to the carve out and avoid them becoming distracted from their day to day roles.

6) Setting up transitional service arrangements (TSAs)

In most large and complex separations, there will be a need for transitional service arrangements to be put in place. Especially if the two organisations are sharing IT platforms past the transaction date. These tend to be around shared systems, services and property, along with IT infrastructure.

Putting in place appropriate service level agreements and/or key performance indicators will help to avoid disputes once the relationship changes to a commercial one. There will also need to be an appropriate governance structure and review process established to manage the performance of TSAs and any dispute resolution. To encourage the carve out entity to develop their own solutions as soon as possible, timescales for providing TSAs by the seller organisation should be kept to a minimum.

 [1] http://www2.deloitte.com/content/dam/Deloitte/fr/Documents/finance/Publications/Etude_cessions2012.pdf

[2] http://www.ey.com/GL/en/Services/Transactions/Divestiture-Advisory-Services/EY-global-corporate-divestment-study

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