Getting serious about divestment
Conversations about business and industry are so dominated with talk of investment and ‘investment opportunities’, that, despite its potentially enormous implications, divestment becomes something of an afterthought. As the private sector becomes ever more fragmented, divestment and the opportunities and risks it presents must occupy an equal place in commercial dialogue.
Divestments are complex procedures and require careful consideration of all associated risks and implications. If these are not considered with sufficient scrutiny, they can have significant commercial, legal, and operational impacts. Often, Procurement professionals are not consulted early, or adequately enough in a Divestment process. However, they are a vital stakeholder in managing and mitigating key risks.
Procurement should always have a seat at the table to help advise on approach, and set strategy.
Key Impacts of Poor or Mismanaged Divestment Activities:
- Non-compliance – Which can result in breaches of contract and unauthorised uses by the divested entity. Both of which can have harmful financial consequences.
- A recovery of fees during the period of breach.
- No Contractual Coverage – If Divestors licenses don’t apply, then technically there is no contract in place. Entities would therefore be ‘working at risk’ insomuch as there would be no data protection and/or security, liabilities, or IP rights.
- There could be considerable impact to a business if they were suddenly instructed to cease use of applications. This would be especially so if there are no contingency plans in place.
- The ripple effect of this impact could reach customers putting company reputation at risk.
- There would exist considerable costs to a business if unable to use software.
- There are additional costs to enforced penalties for many forms of non-compliance.
- Transfer fees will apply.
- The need for duplicate licensing and the associated costs.
In this paper, we document some of the key best practices Procurement should take in any divestment exercise.
Need for a Coordinated Approach
A major pitfall for divesting entities is the propensity to begin proceedings without first taking the opportunity to step back, and prepare a fully thought-through divestment strategy, approach, and plan. Taking this step back and preparation of planning can save an organisation a multitude of complications in the future.
Key considerations before commencing a divestment:
Divestment is not a Part-time exercise
Divesting entities often treat the separation as an exercise which can be undertaken as part of existing tasks and capacities. A Deloitte report found that 75% of executives questioned, cited insufficient resourcing as a major hurdle during divestment activities. (Perspectives on driving divestiture and carve out value, Deloitte, 2013)
Divestment is not a part-time exercise which can be done by someone as part of a wider remit. It needs a dedicated, structured capability to coordinate and drive towards achieving end outcomes. It is key to have a dedicated ‘Divestment Office’, focused on:
- Coordinating strategy and standardising approach
- Establishing and managing governance
- Managing communications and stakeholders
- Gathering data and reviewing contracts
- Negotiating with Suppliers
Taking a step back
It is common during a divestment for there to be multiple competing interests, stakeholders, and priorities. Before proceeding with the detail of a divestment, it is imperative to agree the Terms of Reference. This means agreeing the roles of relevant parties, how and what documents/information should be and can be shared, what business communications to utilise, and identifying key dependencies and considerations.
Setting the terms of engagement on these key factors helps to ensure an efficient and coordinated process.
Gaining a clear understanding of assets which are moving to the divested business can save both the divested and retained entities millions in capital. Most suppliers see a company separation as an opportunity to acquire additional revenue. Suppliers often take advantage of entities and their lack of accurate inventory. It is important then to work with your asset management teams to ensure assets are captured accurately thus allowing an accurate transfer to the divested entity, and renegotiation of any contracts.
Don’t take for granted that everything will be ok!
If you are the entity being divested, it in incumbent upon you to make sure your interests are heard and represented. Often what happens, is that the selling party sets the timelines, priorities, and strategy. This may not always be in the interests of the entity being divested.
The consequence of this is that the divesting entity is then left to pick up the pieces of a divestment which does not align with their own business strategy. This leaves them exposed commercially, legally, and operationally.
TSAs are not always the best answer!
Transitional Service Agreements (TSAs) may not always be the cheapest, most effective option. In the majority of divestments, the parties hastily agree Transitional Service Agreements with ill-defined and/or inadequate costs, service levels, scope, and exit plans. In many cases, the transitional services which are provided back into the divested entity are not in line with the entities own business strategy and requirements. The result is a poor service.
While TSAs may provide interim benefits, it is important to assess which business functions can be performed in-housed as much as possible into the divested entity.
Opportunity for a Fresh Start
A divestment can create an opportunity for the divested entity to make a fresh start. To create an operating model which aligns with their own business strategy. This should also apply to the Divested Entities Procurement & Commercial function too.
The newly created procurement organisation needs to ensure that they are not just ‘cutting and pasting’ the procedures and approaches of the selling organisation. They must use the separation as an opportunity to drive business value, review the separating entities business requirements, identify current procurement organisations capability, put in a plan to rectify any gaps, and meet the business requirements.
Conclusion: Be ready for the initial storm
In most cases, company separations will mean a period of instability, especially for the entity being divested. Divestments are not ‘business as usual’ (BAU), so review your BAU operating model, and devise a plan to address any gaps during this period of instability.
In some cases, this may mean making some additional investments to bring in additional expertise, or provide additional capacity. This will allow a much quicker move back to a BAU state, and in many instances provide longer term savings and risk mitigation.