What’s the Best Way to Split Up? | Article

cogsA 20 year old fast food hamburger company once attributed its success to its integrated operations. Today, however, it decides that it wants to concentrate only on its core business, which is flipping burgers. It decides to sell its trucking and warehouse company to get out of the food distribution business.

The burger chain consummates the sale of this non-core division. Then it discovers breaking up is hard to do.

As one company, the restaurant had an integrated IT department. The same people used the same computers that were linked by the same network. Now, who gets what?

,p>Matthew Maccoby, a partner in the west Los Angeles law office of Arnold & Porter and a specialist in shared services law, says many of these corporate issues apply to all outsourcing contracts. But when shared services are involved, these issues need to be resolved differently. And there are additional issues, too.

The first issue is price. How much should the customer pay for these services? Maccoby says he worked on one transaction where the buyer insisted the seller provide the services free as a condition of the sale. The two parties eventually agreed that the seller would provide the shared services at its cost.

In the example case, the distribution company accounts for 50 percent of the IT use at the hamburger chain. But the buyer balks at paying 50 percent of the cost because it argues the restaurant company needs to have an IT department anyway. So it may only want to pay 20 percent or the incremental cost of the additional IT services.

Agreeing On A Time Frame

Time frames are another issue the two parties have to address. Few buyers want to face a wrenching IT change on day one or install a new IT infrastructure at the outset. Typically, Maccoby says most buyers require the seller to continue to provide IT services for at least the first six months after the divestiture while a controlled transition occurs.

However, time frames are open to negotiation. Maccoby says he completed one deal where the seller agreed to provide IT services to the new buyer for 20 years. The attorney says this condition was one of the attractions to convince the buyer to make a purchase offer. In this case, Maccoby says the company was so highly integrated the buyer insisted on insuring a steady, reliable source of IT services. With technology changing so quickly today, Maccoby says such long terms would probably not be possible in contemporary agreements.

After term, the next issue becomes the scope of the shared services arrangement. What will the original owner provide to the new buyer? The attorney says in a successfully integrated company, people come to work and do their jobs. No one has taken the time to describe exactly what they do. Consequently, it becomes very difficult for the seller to describe in the outsourcing contract exactly what it will do for the new buyer. Buyers must perform a lot of detailed due diligence to ensure they receive what they want.

If both companies use the same IT department, which employees are staying with the seller and who joins the new firm? This can be a complicated decision, notes Maccoby. “Little tentacles reach out everywhere,” he says.

The same conundrum applies to the computers themselves. If the seller continues to provide services to the buyer and both have the same needs, a transition can flow smoothly. Maccoby says troubles arise when one party wants to change or upgrade and the other does not.

Deciding On Software Changes

For example, the parent company might have all its applications using Microsoft Windows. Now it decides it wants to upgrade to Windows NT. But the new company balks because it does not want to have to purchase new software to makes its programs compatible with the NT architecture.

Or, one company wants to use a specific application that the other doesn’t need. The other company will not want to go to the time and expense of training its employees to use a software program they will rarely need for their company’s business. “Now you have two independent companies with difference interests but they still have to agree and act as one,” points out the lawyer.

Maccoby says the two operative questions are:

  • Who gets to determine if a change is going to be made?
  • Who has to pay for the change?

One criteria is criticality to the business. If that function is core to one side but not the other, the company that needs the program may be the likely candidate to foot the cost. The same applies to the usage percentage. If one partner uses the program 95 percent of the time, that partner probably will bear the cost.

Service level agreements (SLA) can also be tricky. What should be the benchmark? Maccoby argues that the industry standard should not be the metric. “Industry standards are fine for companies who are in the full time business of providing that service,” he says. The seller, however, is in the restaurant business. So standard IT benchmarks are inappropriate. However, over time, it is fair to ask the supplier to match the industry metric.

Sharing Data

What should the two companies do about any shared data? In this example, restaurants have to know how many burgers they are selling. The distribution business needs to know that, too. “If there is any confidentiality to this data, it can be sensitive,” says Maccoby.

Eventually the two companies will have to learn how to separate their data. This can be very tough because most databases are linked in today’s connected world. Sometimes erecting security walls can be the only answer.

Finally, the seller has to learn how to manage an outsourcing relationship, a whole new skill. Maccoby suggests hiring an outsourcing account manager to ensure things run smoothly…and the monthly bills get in the mail on time.

Lessons from the Outsourcing Primer:

  • Dividing up duties after a company sells an integrated subsidiary can be tough.
  • Price is an issue. Is the price a percentage of the actual usage or the incremental cost?
  • If there needs to be a change in computer applications, who gets to make them and who pays for them?
  • Sellers should hire an outsourcing manager to manage the new relationship.

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