Keep finance in focus when demerging IT

When breaking down IT systems in a demerger, IT directors need to focus on the financial implications as well as ensuring a...

When breaking down IT systems in a demerger, IT directors need to focus on the financial implications as well as ensuring a smooth handover of the technology

Breaking down IT systems during the divestiture part of a demerger can be every bit as challenging as integrating IT during a merger or acquisition - and just as critical to success or failure.

With 85% of demergers failing to meet business expectations, according to research by Meta Group, that puts IT squarely in the hot seat.

"Business has not taken sufficient account of the impact of IT," said Rakesh Kumar, vice-president of technology at Meta Group. The key focus in a demerger for IT should be financial, because that is the reason for divesting subsidiaries, he said.

"You have to get a handle on IT finances - it is far more important than technology," said Kumar. "Know the cost of your IT operational structure, from the assets to contracts to people."

That knowledge will show you where IT's costs and the benefits of demerging will lie - from being left with unnecessary commitments to contractors, to making money by selling boxes to your buyer. But separating out the technology to be demerged will take time and money. As with a merger or acquisition, early knowledge of the decision to divest is essential. "The earlier you know, the better," said Simon Mingay, vice-president and research director at Gartner.

Ironically, the recent consolidation of IT makes slicing it out again technically tricky. "Ripping IT out can be damn near impossible," said Mingay. "It could be easier simply to duplicate what has to go and hand over a copy. Moving your data to their system is the cleanest and cheapest option, but you must check if there is intellectual copyright you may not want to surrender."

You will also need to work out your legal obligations in respect of the regulatory requirements to hold data, said Kumar.

"It can be very problematical. Who keeps it, who owns it and who is accountable for it is often not clearly thought out, and it can rise up and bite you later," he said.

Delivering the requisite IT to your buyer as a service during the transition is another option, but this could cause licensing problems. "You could be left to take the budget hit of paying for them and also have the liability of paying for new licences at the acquiring company," said Mingay.

Although the capital costs of divesting should not hit the IT budget, do not expect to be compensated for the time it will inevitably take, said Mingay. "IT directors also need to foresee the effect it will have on future budgets. Chief executives may expect that as 30% of the company has gone, so should 30% of the IT budget," he said.

Consolidation and integration achieve economies of scale that can be lost by divestiture. Budgets may not be the only thing to disappear if staff transfer too. "You could risk losing skills and intellectual capital," said Mingay.

Even though demerging can allow you to get rid of IT that is "an unwanted appendage", said Mingay, it will also absorb your time and resources. Often there is a corollary of mergers and acquisitions, so IT can be faced with demerging on from one company while merging with another.

"Although I do not think we are heading back to the heady merger, acquisition and divestiture days of the late 1990s, we will see more activity in the second half of this year and next year," said Kumar.

Case study: Abbey     

Bill Gibbons, director of technology and services at high street bank Abbey, has a lot of mergers and demergers under his belt. For him, process is the key. 

"There are a lot of pitfalls to avoid," he said. "The most pressing need in a demerger is to stabilise your systems and support the expected benefits of the demerger. You need to know what your existing IT is, what your future [post-demerger] IT will be and then execute the transition." 

There are a clutch of immediate priorities. "Map your estate and understand your contractual position with your suppliers - get copies of all your contracts. A lot of financial implications will emerge, whether simple novation of licences, closure or renegotiation."  

These issues will inevitably run on beyond the sale, he said, so the earlier you get going, the better. Beware of stiffing, and that some smaller suppliers can be absolutely business-critical and therefore have disproportionate power. 

Demerging is resource-intensive and you will need a broad variety of people involved. Go for capability, not quantity, said Gibbons. "Ringfence key resources as soon as possible and let staff know they will be needed. But remember that divestiture can be market-sensitive, so you need small, focused teams. Formally sign them up to be party to information under Stock Exchange rules." 

You will also need non-IT specialists from other parts of the company, such as procurement, human resources, operational risk, finance and legal, who will have other calls on their time. 

"Outline your migration path as a formal plan," said Gibbons. "Engage with your buyer and swing in fast. You need to get together to work out your timelines - what you can deliver and when.  

"Identify any common third-party supply chains, such as transferring locations, facilities and people and decide if you can uncouple business systems from complex infrastructure. Lift and shift boxes, especially if those are front-end client boxes, or temporarily supply IT as a service to the buyer through the transition period." 

If you opt for the latter, said Gibbons, that service will need to be defined in the divestiture contract and the cost to the acquirer agreed.  For the actual migration - shutting down and switching across systems - you will need to transfer across a small window. However, Gibbons warned, "A demerger contract will have a finite date, but demerging IT will extend well beyond that date and that must be allowed for." 

Like it or not, in the real world there will be unforeseen challenges and common assumptions about unrealistic benefits, said Gibbons. "Always prepare for any delay. It may sound bizarre, but always have a contingency plan. I have not done a demerger yet that has gone according to the original plan," he said. 

Planning for the post-demerger situation is also necessary. If boxes and people have not transferred, you will be left with surplus resources and capacity. "You need to know whether you can absorb that excess capacity and what to use it for - for example, as a test platform, or as part of a consolidation strategy," said Gibbons.   

Key things to do in a demerger   

Know the financial structure of your IT organisation 

Assets - what is your inventory, who owns it, how is it accounted for and what is the residual value? 

Outstanding contracts - check software licences, including third-party services such as disaster recovery 

People - know which staff will be available, both permanent and contract.   

Check what IT you have, and what your liabilities may be 

Discover the exact scope of the demerger, what is going, to whom, and by when 

Check if you risk losing valuable intellectual property to your buyer 

Discover who will be liable for keeping data that is subject to regulatory control and who must pay for keeping it 

Check all contracts for software and services to discover whether they can be transferred/novated or will need renegotiation.   

Work out what has to go, by when and how 

Communicate with your counterpart IT director in the acquiring company to work out what is the best and cheapest method of demerging IT 

Brief any affected staff who will be transferred as soon as possible to minimise disruption.   

Prepare for post-demerger IT 

Can you make money out of selling hardware and licences to the buyer and can IT keep that money? 

Who will pay the costs of IT, capital and employee hours? 

Will you lose budget and headcount, free-up capacity or lose economies of scale? 

Is further merger, acquisition and divestiture activity on the cards?

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