Whether in the form of an outsourcing, corporate acquisition, divestiture or spin-off, the success of transformational undertakings must begin and end with a focus on the intended business and operating models of the succeeding enterprise(s). The commercial viability of a post-spin enterprise (and indeed its market valuation) will, in part, turn on whether there is a clear path for day-one and sustainable business continuity. Separation of technology infrastructures, systems and related contracts are often the most complex considerations facing the enterprise.
Central to accomplishing this objective is adopting an end-to-end process for transitioning third-party IT service arrangements and enterprise software licenses and related contracts from the existing company to the spin-off entities. Since most large companies have multiple IT contracts and software licenses that must be addressed, a uniform approach, driven by tested methodologies, flexible document templates and businesscentric tools, is of paramount importance.
While no single model can (or should) apply to all IT-related transactions, corporate decisionmakers achieve success when they engage a team that employs a disciplined and pragmatic approach for navigating the many challenges in these transactions.
The overview offered in this guide provides insight into the key elements for achieving a successful transition of third-party technology, IT services and shared services arrangements to the post-spin enterprises.
Define (and Align on) a Process
When preparing for a spin-off, early and thoughtful planning can dramatically improve the efficiency of the transition process. An informed front-end definition of the process offers opportunities for reduced transaction costs, shorter timeframes and lower risk (including diminished legal exposure for non-compliance and infringement claims from third parties). Buy-in across the stakeholders within an organization is crucial for successful implementation.
An effective approach is best implemented in four complementary phases. While the specific activities, tools, documentation and strategic and tactical elements necessarily will differ for each transaction, the core components of each phase include:
1. Mobilization. Organization of transaction infrastructure:
- Identification, assembly and organization of all third-party technology-related contracts
- Identification and documentation of system or software usage across the affected enterprises
- Preparation of a "tool kit" establishing the transaction-enabling infrastructure, including technology tools to facilitate communication (e.g., database repository for contracts and licenses, tracking progress against transaction milestones and reporting protocols)
- Development of templates (such as due diligence checklists, template document forms of consents, rights to use and amendments to supplier contracts)
- Formation of rules of engagement and roles and responsibilities across the affected organization(s) and advisory team (legal, technical, operational, financial)
- Definition of "guiding principles" to foster alignment across key stakeholders and project leadership on areas including risk allocation, cost and use apportionment (e.g., seat licenses, MIPs, etc.), and the assignment of rights and responsibilities from the legacy enterprise to the post-spin enterprise(s)
2. Due Diligence Review. A disciplined process to facilitate and expedite:
- Legal review of the affected contracts (leveraging template checklists)
- Operational, technical and commercial review and definition of post-spin business requirements under these contracts (licenses required by post-spin enterprise, contracts or licenses to be assigned, etc.)
- Refinement of project plans and template documents to ensure realization of these requirements
3. Assessment. Based on the legal review and business-driven decisions reached in Due Diligence phase:
- Formation of strategic and tactical approaches for structuring post-spin relationships with third-party service providers, licensors and suppliers
- Assessment of critical customer-supplier organizational adjustments, including, for example, realigned governance and adjustments to shared service organizations
4. Action. Execution of the aligned decisions reached in the Assessment phase, including:
- Preparation of definitive documentation (leveraging pre-approved template forms of consents and amendments from the Mobilization phase)
- Engagement with third-party service providers and suppliers
- Negotiation of definitive post-spin contract documentation
Keys to Success
While the breadth and complexity of the tasks underlying a spin-off cannot be captured in summary fashion, the following principles have proven essential for successful execution of these transactions.
1. A robust contract repository and management system is critical to a successful transition with third-party suppliers.
All companies, no matter the size or sophistication of their document management systems, are challenged by the process of organizing their third-party agreements in an efficient manner. A haphazard process for document identification and organization leads to chaos. The result can be significant and unanticipated legal and financial exposure for the post-spin enterprises.
Companies are well served by formulating document repositories and tracking systems specific to the spinoff transaction. This is particularly important in cases where a company may not have a robust document management system and hence a "proxy" for such a system must be established for the spin-off.
A tandem process in the nature of an informal audit is often useful to identify historical and projected use requirements for IT products and services (especially software) by the affected enterprises and business units. This effort will identify what actions will be required for the transfer or apportionment of, for example, licenses in connection with the spin-off.
2. Demand integrated service and collaboration among the spin-off advisory team.
Spin-offs frequently require input from a wide array of executive, management and operational stakeholders, together with a broad cast of advisors, including investment bankers, sourcing counsel, corporate transaction counsel, and technical and management consultants. Collaboration and cooperation among stakeholders and the advisory team is crucial. Effective collaboration requires a well-defined (and documented) statement of roles and responsibilities, including escalation protocols (for approvals and issue resolution), scheduled integration and status meetings and comprehensive reporting across work streams. Companies often find it useful to develop transaction governance charters or "rules of engagement" as a vehicle to document these protocols and collaborative elements.
3. Design a process that leverages uniformity but establishes defined parameters for flexibility.
With hundreds (potentially thousands) of third-party contracts, work orders or statements of work to address in a spin-off, establishing some measure of uniformity across different types of contracts is paramount. Creating template forms for technology agreements, service contracts, consulting agreements and software licenses permits the working teams to engage with suppliers under a consistent approach. Companies can streamline the effort by creating "menus" of template documentation to address broad categories of transitional contractual arrangements. For example, in spin-offs where multiple new enterprises are created or tight timeframes are imposed, interim contractual arrangements may be necessary. Companies often need to develop template "right to use" consents that permit the succeeding companies to use existing products or services, including software, within defined parameters until new contracts can be executed.
Some measure of uniformity, though essential, is not practical in all cases. Flexibility to meet supplier demands and overcoming practical impediments within defined timeframes requires that the company adopt alternatives. The "guiding principles" referred to above are tools employed to define the parameters within which exceptions to the templates are addressed. For example, in spin-offs where interim arrangements are pursued with third parties and "apportioned usage" of software is required across the post-spin enterprises, the rules for determining these apportionments can be defined in the guiding principles. This has proven critical in disaggregating enterprise software licenses (e.g., apportioned MIPs, site licenses, or use licenses) and shared service arrangements (separating volumes or baselines in IT or business process outsourcing contracts).
4. Form aligned strategies and tactics to respond to the inevitable—the suppliers’ appetite for additional revenue opportunities.
The pressure to complete a publicly announced spin-off, coupled with the legal requirement for contract separation or transitioning, often places the client in an unfavorable leverage position. Many suppliers, particularly those who know their products or services are critical for business continuity (such as enterprise software providers) will posture for additional, incremental revenues from the post-spin enterprises. Companies are commonly confronted with supplier demands for new license fees, transfer charges, increased unit rates or higher pricing metrics when trying to strike a deal with these suppliers for post-spin contractual arrangements.
Where the spin-off will result in multiple surviving companies, the decisionmaker of each enterprise may naturally be inclined to "cut the best deal" for his or her company. This behavior further shifts the balance of negotiating power to the supplier by fostering a divide-and-conquer paradigm. Though sometimes difficult to achieve, when the leadership team is able to arrive at unified approach (even a "script") for responding to supplier demands, the end result will more likely be favorable to the post-spin companies.
Closing Thoughts
In addition to appointing a seasoned leadership team to these transformational initiatives, companies recognize the importance of engaging professionals with multi-disciplinary skills to lead the transaction. Many firms offer a deep bench for corporate securities, M&A, financial modeling, tax and related fields of expertise. While companies should engage advisors with broad and complementary skills, it is equally important that the advisory team understand the operating models and technical environment of the pre-spin and post-spin enterprises, as well as the marketplace within which the succeeding enterprises will be competing. The success of a spin-off (and the value of the advisory team) ultimately is measured by whether the succeeding enterprises are positioned to execute on their business models as the spin dust settles.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.