Demergers: A CIO’s survival guide to IT break-ups
Illustration: Bill Butcher
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Demergers: A CIO’s survival guide to IT break-ups

Jessica Twentyman — June 2016
When organizations split, CIOs are faced with the highly complex task of subdividing a morass of existing IT infrastructure. We talk to leaders who have lived through the process.

In 2011, US-based conglomerate ITT — once a poster child for industrial diversification — announced plans to split into three, more specialized businesses: an industrial process and flow control business that would retain the ITT name; a defense business, Exelis; and a water and wastewater management business, Xylem.

Carol Zierhoffer, ITT CIO at the time and now CIO at Bechtel, was the person charged with unpicking ITT’s vast technology infrastructure and ensuring that each of the three new businesses had the systems, applications and data they needed to thrive as separate entities – all within a non-negotiable nine-month deadline.

In the 2014 book, Confessions of a Successful CIO, she gives a compelling account of a process that was painfully complex, frequently fraught but ultimately successful.

“We often joked that the project was like having triplets in nine months. And one of our ground rules was that we wanted three healthy babies — not two healthy and one anemic or weak. All three had to be strong,” she recalls.

Other CIOs often find themselves similarly responsible for the safe delivery of new ‘babies.’ Last year, for example, it fell to PayPal CIO Bradley Strock to divide 25,000 users and 900 applications into a separate entity, following the split of the payments giant from eBay. And it is perhaps no surprise that David Boyle, CIO of National Australia Bank — which recently spun off its British business, Clydesdale and Yorkshire Banks — lists “Mergers and Acquisitions, delivering sustainable synergy benefits” as his top specialty on his LinkedIn profile.
An increase in demergers

Indeed, divestitures or demergers are on the rise, as more companies decide to refocus on core operations or to sell off business units to raise cash or dispose of non-strategic assets. According to the M&A Trends Report 2015 from accountancy firm Deloitte, which surveyed 2,500 executives worldwide, almost four in 10 corporate respondents expect to pursue divestitures in 2015-16, while three-quarters of those working for private equity firms expect to do more divestments.

Todd-Tucker
Todd Tucker, GM, Technology Business Management Council
As a result, it’s a hot topic for members of The Technology Business Management (TBM) Council, a non-profit organization for CIOs and IT leaders, confirms the council’s general manager, Todd Tucker. As he points out, there’s a wealth of advice and guidance out there for IT leaders looking to integrate the IT systems and personnel that come via an acquisition but rather less for those faced with a demerger.

Nonetheless, he says, the challenges involved are no less daunting for a CIO tasked with disentangling the application licenses, systems and services needed by both the parent company and the divested business — and figuring out how good service levels can be maintained for both throughout the break-up and in its aftermath.

He recalls a recent conversation with an unnamed CIO knee-deep in the process. “He told me, ‘It’s all my people are focused on right now. It’s all they’ve been focused on for months. And it’s clear that it’s going to take far longer and cost far more than we ever thought it would.’”
Financial and logistics challenges

Indeed, unanticipated complications often lead to busted budgets and deadlines. During ITT’s three-way split, Zierhoffer consulted with industry peers, IT leaders from companies including Motorola, Altria and Century Healthcare, who had already been through demergers. She was warned to expect the costs associated with infrastructure separation alone to consume as much as 20% to 40% of the company’s overall annual IT spend.

“If, as a CIO, you’re simply being reactive to the news that a demerger is planned, then you have to accept that the whole process is going to take up a lot of your time and energy.”

At many companies, says Tucker, the problem lies in a lack of clarity of the complete IT assets of the business pre-split and how the company’s data, applications and services are consumed by employees and customers. TBM, as promoted by his organization, provides a taxonomy and framework for CIOs and IT heads to measure, manage and communicate the budget, costs, consumption and delivered value associated with IT — and as such has been a big help to several of its members working on demerger processes.

But it can only really help in IT functions where the TBM framework has been practiced for some time, prior to a divestiture. “You really need to have that discipline in place already,” Tucker warns. “That’s the big lesson: if, as a CIO, you’re simply being reactive to the news that a demerger is planned, then you have to accept that the whole process is going to take up a lot of your time and energy.”
Transition service agreements

Either way, that understanding of what IT systems exist and who is using them is a vital step on the path to defining a transition service agreement (TSA). Such a TSA takes the form of an agreement between a parent company and a business due for divestment. It outlines how the latter will function in its early days of independence by relying on the former for specific services for a given time period for continuity purposes. However, this is undertaken with a view to achieving a clean break at a point in the future. In a divestiture, there will typically be separate TSAs in place for different departments such as IT, HR and payroll.

In the case of ITT, 23 TSAs were defined for IT alone, each outlining the cost to provide a given service, the associated service levels, the exit plan, and the cost to exit. As Zierhoffer puts it: “You have to figure out how to get there, how to live there and how to get out of there, because you don’t want to live in a state where you’re buying services from your sister [company].”

“The biggest challenges [with demergers] arise around shared data and shared applications, especially those that are customer facing.”

With that in mind, she took the approach of modeling each TSA on the lines of a commercial outsourcing contract, using the ‘lessons learned’ of good and bad outsourcing in ITT’s past. That’s important because, just as with outsourcing contracts, poorly drafted TSAs can lead to disputes between former owners and divested companies around the scope of services to be provided.

On a positive note, following a divestiture, the parent company’s IT footprint may shrink, offering the CIO and their team a great opportunity to rationalize infrastructure, capacity and applications — while shedding legacy IT — to fit the new shape and size of the remaining business.

If the rise of demergers is increasingly bringing this issue to the attention of CIOs, the rise of digital business is compounding its complexity, according to Tucker. “In many of the demergers of the past, clear lines could be drawn between segments of customers, but that’s not always the case these days,” he says. A particular website or mobile app may serve both B2B and B2C customers, but connect to different back-end systems.”

He continues: “We’re hearing more and more that the biggest challenges [with demergers] arise around shared data and shared applications, especially those that are customer facing — because there you have legal agreements, privacy implications, revenue implications and so on. Getting all this right in plenty of time for a split isn’t just desirable, it’s absolutely crucial.”
First published June 2016
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