Other parts of this series:
In the first of this three-part series, we discussed how Australia’s financial services (FS) firms need to regain customer trust via a return to core banking offerings and values. That requires them to divest non-core assts. In our second blog, we mapped how to conduct due diligence and shape the deal. In this final post, we will discuss how best to carry out those deals.
Three steps to efficient execution
By this stage, FS firms have published their divestment strategy and aligned key parties. They can now execute that strategy in three stages:
- Navigate the chaos using data analytics tools and a value-chain approach
- Avoid being re-routed from the plan by transition service agreements (TSAs). Scoping the TSAs and leveraging data will uncover and manage hidden costs.
- Stay on course by digitising elements of the transaction
Step 1: Navigate the chaos
Simplifying the process
Divesting an asset is complex, so the first stage is to break down this task by using a value-chain approach and business-process mapping. Doing so divides the transaction into clear sections (see diagram).
That provides the best way to scope the TSAs, identify which capabilities will stay with the asset and which won’t, then track how that split is carried out.
The next stage is to identify capability gaps and related business needs by mapping test cases to business processes. Doing this helps to provide a way to manage execution downstream and is critical in terms of handling IT complexity.
The value of analytics
Data analytics and artificial intelligence (AI) tools speed the separation process by reducing the number of people needed for data-mapping and analysis. These tools can help interrogate unstructured content from multiple data sources and use defined criteria to tag content as “approved for separation” or “retain”.
Looking ahead, the continuing evolution of technologies such as the cloud, digital ecosystems, blockchain and bridge services from third parties could one day do away with the need for transition service agreements.
Additionally, the sophistication and flexibility of cloud-based platforms and services provide a clean room in which to integrate data from both parties without disrupting in-house systems. This helps minimise business disruption.
Getting it wrong on systems can be costly, as hotel group Marriott International found following a 2018 data breach that exposed the credit card details and passport information of up to half a billion Starwood hotel guests.¹ In fining Marriott nearly £100m (US$130m), the UK Information Commissioner’s Office (ICO) said it had “failed to undertake sufficient due diligence” during its 2016 acquisition of Starwood Hotels “and should also have done more to secure its systems”.²
Step 2: Don’t be re-routed by TSAs
TSAs – Hidden costs and challenges
While TSAs can prove invaluable for business continuity, they often vary in quality. Sellers commonly underestimate the cost of providing TSA services. And, although TSAs are attractive to buyers, they can pose complications that—if improperly executed—can lead to higher stranded costs for sellers.
Additionally, timelines that are too long can bring excess costs and lower value for the seller, while those that are too short increase the risk for the buyer.
Firms can take steps to help avoid such difficulties:
- A TSA should be clearly scoped at every stage, with an exit plan defined in advance
- It should set strict time boundaries for support post-divestment
- It should use a data-driven approach that defines the boundaries of the divested assets and lists the functions and services the seller will provide
- Using a TSA alongside a data-based split and allocation of services can help with cost discovery and management—for example, determining the work that divested assets require from employees
Looking ahead, the continuing evolution of technologies such as the cloud, digital ecosystems, blockchain and bridge services from third parties could one day do away with the need for TSAs.
Take the last, for example: We helped a client eliminate the need for a TSA by leveraging lean distribution from third parties across key markets. This made the asset more attractive, with the private equity buyer focused on increasing revenue rather than on the TSA exit plan. That saw our client extract US$80 million more from the sale.
Step 3: Stay on course
Digitising the essentials is central to staying on course.
One aspect is a dedicated team that manages the execution process. To succeed, members must be able to view execution activities across functions and dependency clusters. A team can also help to manage conflicting priorities.
Another aspect is a formal, robust change-management process, with a clear communication path across business functions and involved parties to build collaboration and support.
The third is using digital tools and dashboards to track milestones. Speed is key, and often differentiates successful and unsuccessful divestments. Smart project tools and digital software can help flag issues, track milestones and highlight risks.
With the non-core asset sold and with NewCo stabilised, the question that organisations now need to ask is: How can we fully live and breathe our new purpose?
1Marriott faces £100m fine over Starwood data breach, Financial Times (7/9/2019)