Managing the changes that come with divestment is a challenging process but there are some clear dos and don’ts that can smooth the way.

Merger and acquisition activity in Australia slowed considerably in 2020, however as organisations rebalance their portfolios to position for a stronger recovery, divestment activity is on the rise. Research suggests that following the GFC, companies learned the lessons of how divestment can help companies to accelerate out of a slowing economy.

An integral part of any divestment is a Transition Service Agreement (TSA) that prescribes the services the seller will continue to provide the purchaser and for what period. Services typically include Shared Services such as IT, Finance and Admin, along with Business Services such as Procurement, Payroll and Tax.

Usually, the TSA is considered late and crafted at the final throws of the sale and at times lacks sufficient in detail or coverage. For example, the services shall be provided at no less standard than pre-sale – without any definition of what that standard is.

Setting up a TSA for success is critical to successfully transitioning services to any new entity. Here we explore the dos and don’ts of TSA projects and highlight a few gotchas to watch out for.

Establish a holistic perspective

A critical part of a successful transition is having a dedicated Transition Services Manager (TSMs) in place to oversee the delivery of the TSA.

A TSM can provide the holistic perspective on any services that will ultimately exit the business from the seller’s side and be established on the buyer’s side, particularly that they are maintained to similar service standards during the transition.

A successful and on-time transition usually happens when there are TSMs – or the equivalent capability – on both the buyer and sellers sides of the transition.

Remain cognisant that there are people and process impacts

One of the unfortunate consequences of transition is that people and processes are often impacted – and overlooked.

In some instances, people who are providing the services earmarked for transition will be out of a job on completion of the TSA (or even during it) or they will transition with the business to the buyer. Some of the impacts that typically occur relate to staff workloads and capacity management which are important to analyse, especially for the staff in a business services role for both the buyer and the seller during the transition.

Understanding and preparing for the change management aspects of transition are critical, as without a carefully considered and thought-out change management strategy, the ability to provide an increase of services at expected levels is a real risk. Having a Change Manager onboard throughout transition is highly recommended for both sides of the transition to facilitate and smooth the process changes that are likely to occur.

The BAU Hard Stop vs the Establishment Phase

One of the critical elements to understand about a TSA is how it’s viewed by the seller vs the buyer. Often the TSA is viewed as BAU by the seller with a hard contractual stop, whilst in many cases, the establishment of the services for the buyer is a project in and of itself.

For example, the buyer must consider IT and systems establishment, the business-critical priorities, procedures, and standards, some of which may not have been included in the sale.

Our experience strongly contents that TSAs are best run as a project with the dedicated Transition Services Manager leading delivery. As with any project, TSAs have implications for both people and financial management that require focused attention to ensure that the budget allocated for TSA (usually within the sale) is sustained and that the expected benefits are realised on completion.

Leaving this to BAU staff is a high-risk strategy and fraught with potential for failure.

Watch Out for These Four Gotchas

Our recommendation is that the seller and buyer agree a joint Transition Services Plan (TSP) with shared governance to ensure that milestones and transition occurs per the TSA. This enables business continuity to remain in focus during transition, which is paramount, and fosters equal collaboration and input from both sides of the process.

That said, there are some real gotchas that should be actively managed as part of this process

Understand that it’s complex

A good example of the complexity in TSPs is perhaps best shown by a recent example in insurance projects running on a legacy platform run by the seller that needed to be transitioned to a new platform on the buyer side.

A simple lift and shift, security, and data migration proved to be extremely complex and resulted in those products being left on the seller’s platform for an additional 12 months – a situation that was not in the interest of either party and incurred additional costs for both sides.

Without a detailed understanding of how the system and information integrations, these types of issues are not uncommon and it’s easy to undercook just how complex the transition may be

Undefined Service Levels

‘Same-same’ is too high level as a descriptor for service provision and without some rigour in their definition and monitoring of delivery, this can cause some angst between parties involved in the transition.

In many cases, the seller may want to reduce headcount as soon as possible after a sale, which can adversely impact on the ability to provide the service at the same level. Some effort is needed to define what the buyer’s expected service level is, how it will be monitored, and how it will be reported.

Lack of an identified and dependency-driven critical path in the TSP.

Without the seller having line-of-sight of a target state they are transferring to, it is near-impossible for them to adequately plan and deliver migration of its services. Data, information, people, and processes etc all require careful planning and a target state in order to execute a successful transition.

It may eventuate with the seller refusing to provide services beyond the agreed transition period, leaving the buyer short to support the business and any newly acquired customers.

Right to Use

Application software underpins most services and usually provisioned in a limited use basis for the procuring entity. Most licence agreements prohibit the use of the software for third-party use unless it’s specifically agreed and licenced (often with additional cost).

Furthermore, accreditations and certifications are usually organisation-centric as opposed to service-specific and that will require a buyer to establish their own certifications to remain compliant with customer contracts.

For a buyer, obtaining such new certifications, there is usually a bridging period of about three months offered by certifying bodies that will allow the buyer to continue operating with the same cover.

Is Failing to Plan Planning to Fail?

There are many facets of selling or buying a business that are complex, but in our experience, it’s often at the pointy end of integration and service delivery that it becomes clear whether or not the transition and change strategies have been given their due consideration.

While it may be in the interest of companies to divest assets and businesses that no longer serve their growth strategies, being seen to be proactive in transition strategy may in fact help facilitate the sale. For buyers, it’s a ‘buyer beware’ situation and having an incoming change strategy will be critical for smoothing the way.

As project specialists, we work with organisations to manage the project delivery aspects of divestment.  Contact us here to find out more about how we work with your teams or call 02 9098 6300.

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Quay Consulting is a professional services business specialising in the project landscape, transforming strategy into fit-for-purpose delivery. Meet our team ...