In the high-stakes world of corporate carve-outs, the Enterprise Resource Planning (ERP) system emerges as both the central nervous system and a potential Achilles’ heel. Having recently navigated the complexities of setting up the engine for a massive EUR 3Bn carve-out, one question echoed repeatedly: what will this separation truly cost? This wasn’t just about the financial outlay, but encompassed a spectrum of scenarios – from complete operational independence for the spun-off entity (SpinCo) to varying degrees of ongoing shared services agreements (GSAs/SLAs) with the parent company (RemainCo). The permutations seemed endless: levels of separation, duration of agreements, solution choices, and geographical variations. Experienced firms like Alvarez & Marsal (A&M) understand that these transactions are about more than just legal separation; they are about disentangling often deeply interwoven businesses to unlock value and mitigate risks throughout the entire lifecycle [1]
Overwhelmed by the sheer volume of variables, the most resonant advice was deceptively simple: the simple way is the complex way. There’s no magic bullet, no off-the-shelf methodology to neatly disentangle two decades of intricate business processes and organizational complexity, regardless of how insightful one believes themselves to be. As A&M highlights, navigating carve-outs successfully requires a tailored approach, recognizing that “conventional approaches are not enough to create transformation and drive change” [2]. This complexity is further underscored by Bain & Company, who identify “underestimating the complexity of disentanglement” as a common pitfall in carve-outs [5]
Joining a carve-out as an ERP / Technology expert is a humbling experience. You’re essentially reviewing the life’s work of numerous predecessors, each with their own expertise, successes, and failures. This perspective is crucial – it fosters openness to dialogue and diverse viewpoints, essential when tackling such multifaceted projects
The process of ERP separation is indeed intricate, demanding a more nuanced approach than a standard ERP checklist. To effectively manage ERP carve-outs, The following approach emphasizes key priorities that go beyond the typical ERP specialist’s playbook
1. Defining the separation perimeter
The initial, and perhaps most critical, question revolves around the separation perimeter. What level of autonomy is truly desired for SpinCo? In some instances, companies contemplate a “carve-in,” maintaining operations tightly linked yet partially standalone for a potential future separation. This optionality is particularly relevant when the buyer profile is unclear. A strategic buyer might favor integration and synergy, while a financial buyer may prioritize stand-alone operations. The ultimate strategic direction – full or partial sale, joint venture, etc. – profoundly shapes the ERP program’s trajectory. Being open to various strategic options from the outset is not just prudent; it’s essential for cost-effectiveness and adaptability. A&M stresses focusing “due diligence on items that impact deal price / structure most” during the pre-close period, highlighting risk mitigation as a core priority from day one [3]. BCG also emphasizes the need for “strategic clarity” at the outset of a carve-out, ensuring alignment on objectives [6]
2. Assessing separation readiness
Forget the notion of ERP as a singular “solution.” In reality, it’s a sprawling ecosystem, often a hybrid of on-premise and cloud components, spanning geographies, business units, and third-party integrations. Readiness assessment begins with a granular inventory: which components will SpinCo retain? What needs cloning? For which countries and templates? Consider geographic nuances – a US retail distributor and its Japanese counterpart operate under vastly different regulatory and market conditions, often necessitating distinct system architectures. Japan’s Retail Association requirements, for example, are universally applied within that market
Furthermore, a comprehensive integration map is crucial. Understanding the intricate web of tightly and loosely coupled applications, both globally and locally, provides the essential blueprint for a successful, and less failure-prone, separation. A&M advocates for pursuing a “zero IT TSA Approach” whenever possible, aiming for a “fully standalone IT environment for the carved-out entity” to accelerate control and minimize disruption [4]. BCG echoes this, highlighting “Day-One Readiness” as a critical success factor [6]
3. The Separation exercise: Scenarios, costs, and budget realities
Engaging consultants to explore separation scenarios is akin to commissioning a financial X-ray. The initial focus is on quantifying dis-synergies and costs for both RemainCo and SpinCo. Presenting various scenarios – from a complete 100% clone to more targeted approaches – is crucial. The “100% clone everything” scenario often reveals sticker shock, prompting management to seek more economically viable alternatives. A pragmatic approach, aligned with A&M’s focus on value creation, is to prioritize cloning core, value-driving applications. This ensures business continuity for both carve-in and carve-out scenarios from day one. IT separation, while a significant stream, is just one component within a larger, multi-faceted carve-out program encompassing tax, organizational design, real estate, and more. (While fascinating, these are topics for another article.) A&M emphasizes a “Value Creation Mode” in the “First 100 Days,” urging companies to “capture ‘low hanging fruit’ synergies” and implement performance improvement initiatives [3]
Furthermore, A&M’s IT Cost-Out approach highlights the importance of “reinvesting the savings into strategic initiatives that drive growth and innovation” [2], suggesting a focus beyond just cost-cutting. McKinsey also suggests an “ERP platform play” to optimize costs and speed [7]. Bain & Company adds that “poor planning and execution” is another key pitfall to avoid, emphasizing the need for robust cost management [5]
For IT, establishing guiding principles is paramount. Can RemainCo truly justify maintaining solutions that carry multi-million Euro price tags? (Is driving to the supermarket in a Lamborghini truly necessary? Do you even have enough space for groceries?) Budgetary realities dictate the art of the possible. Will a new ERP or CRM deployment be feasible? Is that middleware layer justifiable for a mid-sized SpinCo? Carve-outs also present a unique opportunity to rationalize legacy IT – shedding aging middleware, cumbersome ERP templates, and outdated processes. A&M’s IT Cost-Out approach advocates for “running a modern and simplified tech stack” and “reducing the application landscape” [2], aligning with this rationalization goal. McKinsey suggests considering a “façade layer” to decouple the core ERP for more modular upgrades [7]. Marrying management’s aspirations with practical IT realities is key to a successful vision
4. Orchestrating the IT team: A symphony of experienced operators
Structuring the IT team for a carve-out is akin to conducting a complex orchestra. One team must manage the overarching integration of all solutions. Another focuses on replicating and migrating regional and global applications to the new premises/cloud. A dedicated infrastructure team is essential, alongside teams managing global and local System Integrators (SIs) operating across various regions. This intricate mix, while potentially “money-draining” as one might jokingly observe, is the engine of transformation. A&M’s emphasizes the need to select the right operators, bringing a “commercial focus” and “leadership and expertise to help turn strategy into execution” [4], highlighting the need for seasoned professionals. BCG stresses the importance of “disciplined execution” and strong program management to keep carve-outs on track [6]
5. ERP: The central tempo-keeper
Within this orchestration, the ERP system is the central metronome. The ERP go-live date sets the tempo for all other application migrations – some must precede it, others coincide, and some follow, depending on intricate operational dependencies. This sequencing is critical for minimizing disruption and ensuring a smooth transition
6. The specialized nature of ERP carve-out SIs
ERP carve-outs are fundamentally different from typical ERP implementations. They necessitate specialized System Integrators (SIs) for both RemainCo and SpinCo. Beyond traditional SIs, “Landscape Separation Services” are crucial. These specialized providers facilitate selective data transition – migrating only necessary organizational data to the new ERP. This selective migration is far from trivial. Separating entities with previously intertwined data within a monolithic ERP can trigger a multi-million Euro program in itself. It might require a separate project to create distinct entities within the system, meticulously segregate data across countries, and ensure all interconnected solutions understand the newly partitioned landscape
7. Synced timelines and rigorous testing (First 100 Days – value creation mode)
For all SIs involved, synchronized timelines are non-negotiable. This ensures smooth cloning of the existing system, swift duplication, and efficient data migration programs. Environment availability and the capacity to replicate without disrupting ongoing business activities are paramount. This synchronized approach is crucial for testing newly defined processes. Processes that previously existed within a single ERP now traverse new middleware and integration flows, driving fundamentally different integration patterns and flows. Factor in the complexity of adapting interfaces for applications that now communicate with two ERP systems instead of one, and the scale of the challenge becomes clear. A&M’s focus on the “First 100 Days – Value Creation Mode” underscores the need for rapid and efficient execution to maintain momentum and realize value quickly post-carve-out [3]. Bain & Company also stresses the importance of “speed and decisiveness” in carve-out execution [5]
8. Experience Matters: Avoid shortcuts (they only exists in Mario Kart)
Finally, resist the temptation to populate your carve-out team with novices or generalists. In ERP carve-outs, experience is not just valuable; it’s indispensable. Seemingly trivial decisions, like opting for a phased rollout over a more complex but ultimately simpler solution, can have catastrophic consequences. Sometimes, in the world of ERP carve-outs, embracing complexity is the only path to simplicity and success. At A&M we explicitly includes former CIOs, domain experts and industry leaders and complement our offering with interim CIO support [4], emphasizing the critical role of experienced leadership in navigating these complex transformations
Sources:
[1] Alvarez & Marsal – Merger Integration & Carve-Out
[2] Alvarez & Marsal – IT Cost-Out Approach
[3] Alvarez & Marsal – Merger Integration & Carve-Out
[4] Alvarez & Marsal – Executing Carve-outs without IT TSAs
[5] Bain & Company – Unlocking value from corporate carve-outs
[6] Boston Consulting Group – The Art of the Corporate Carve-Out
[7] McKinsey & Company – The ERP platform play: Cheaper, faster, better
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