Is your Business Unit being spun off? Five reasons you should consider including an ERP upgrade in your (IT) separation project.

(Co-written with Quentin Samelson)

We admit that this is somewhat counterintuitive. Including an ERP upgrade as part of the divestiture process sounds suspiciously like the old joke about swapping the engine on a racecar in the middle of a race. It isn’t always appropriate or even possible. But there are situations where it may be one of the smartest things you can do. 

To briefly describe the situation, a corporation will sometimes recognize that a particular business doesn’t fit its overall strategy, product line, or market position in some fairly significant way. Sometimes this is part of a decision to take the corporation off in a new direction – to shift focus from consumer to medical products & services, for instance. Sometimes the company has decided to “double down” on an existing business and wants to jettison everything that doesn’t fit that new focus. At the point of actual divestiture, firewalls will be set up between the original corporation and “Newco.” “Newco” will be allowed to access systems that are still hosted on the corporation’s servers for a period of time, but there will be (significant) costs if it continues to use those systems past a year or perhaps a bit longer. 

“Newco,” therefore, is going to move to a new set of systems whether it likes it or not. The real question is whether those new systems will just be cloned copies of the old ones, forced upon Newco, or something better-suited to the new company: a better match in functionality to the new company’s business model, a more robust infrastructure, with the appropriate number and type of auxiliary systems, etc. Remember that in the executive deliberations that led up to the spin-off, there was a considered judgement that Newco could operate independent of the mother company; it only makes sense to take steps to ensure that it can succeed as an independent business. 

There are five potential reasons to at least consider the idea of upgrading to a new ERP system as part of the divestiture process: 

1. A significant mismatch between Newco’s business model and existing systems. “Mismatch” may be too mild a word: the copied old system may bring with it a lot of old “garbage” in the form of incorrect operating assumptions, processes that were designed for a different business model, and even incorrect master data.  One of the authors once worked at a company that had an ‘industrial’ business model but was stuck with an ERP system that had been configured for a consumer business. It worked, kind of. But it was far less satisfactory, and far more frustrating, than an ERP system that was configured for working in industrial markets. A mismatched system is difficult for employees to work with; but more importantly, it hinders execution of desired new business strategies.
2. The separation process is disruptive anyway – so why not leverage that disruption? Winston Churchill was the first to say ““Never let a good crisis go to waste” (a saying that was subsequently picked up by former White House Chief of Staff and mayor of Chicago Rahm Emanuel). Disruptive events can be an opportunity to do things you didn’t think you could do. (And the future of a spin-off is anything but certain. This may be Newco’s best, or only, chance to upgrade its systems for years to come.[1]) 
3. It can be an opportunity to create an “environment for success.” Too many times a company’s operations are held back by system limitations. This can be a chance to eliminate old, dysfunctional and expensive legacy systems and replace them with newer, more capable and often cheaper-to-maintain systems. This applies even in situations where the spin-off is acquired by a VC firm. That new, modern environment may be seen as an investment that will boost the future sales value when the VC is ready to sell off the company. 
4. In some cases, a new environment or application infrastructure can drive down costs significantly. At one IBM client, for instance, this strategy results in IT costs being reduced by more than 40%. 
5. Beyond just improving operating systems, new software platforms may provide real competitive advantage. Switching, for instance, from ECC to SAP S/4HANA means that data will be kept more up-to-date; combining that with a robust e-commerce system could provide Newco with a platform that permits them to be much more responsive to customer demand. 

Of course, this opportunity isn’t without its constraints – sometimes very significant constraints. Typically, you will only have a year and a few months to make a decision and execute a project to upgrade a system. That means: 

• You’ll have to choose your risks. This is probably not the time to switch to a different software provider’s platform – there are likely too many different issues that would need to be resolved. 
• The project should be managed to minimize the risk of delay and cost overruns. Upgrade projects need to leverage all tools available to ensure that they can be executed without surprises. Using a strong template like SAP’s Model Company and IBM’s IMPACT program will make a big difference here. 
• You’ll need to find a systems integration partner that not only knows your ERP environment but also adjacent applications, cloud infrastructure and – of critical importance – your industry. Industry expertise will inform the ERP experts on best practices, why a process needs to work a particular way and will help remove / mitigate additional risk from the project. 
• You’ll need to think hard about data. For instance, moving from SAP’s ECC ERP system to their new standard, S/4HANA, involves a completely new data structure. Fortunately, there are automated tools that can perform the move; and if you also need to “harmonize” (clean up) your data as it goes into the new system, IBM offers a cognitive tool that can do that as well. 
• It’s often easier to move data than replace whole systems; this may be the time to consider removing some third-party auxiliary systems and switching to modules of the core ERP system. You may not need a stand-alone Warehouse Management System, for instance; the Extended Warehouse Management solution from SAP is quite capable. Furthermore, it’s a great opportunity to get rid of many interfaces, unnecessary system architecture complexity, and reports that are rarely used. This permits streamlining operations in a way that supports the future business in an affordable way. 

In closing, going through a divestment and the accompanying disentanglement from the former parent company disrupts a spin-off’s business, processes and organization. There is certainly a necessity to manage risk and cost during this process, but it creates a huge opportunity as well: to get your business & IT infrastructure ready for the new era of independence to come. 

[1] There is, of course, a possibility that Newco may be acquired shortly after spin-off; and that the acquiring company may have very different ideas about IT strategy, ERP architecture, etc. This risk should be included in considerations. At the same time, going into an acquisition with a brand-new ERP system that is well-suited to Newco’s business will provide Newco with a stronger position than going in with a cloned copy of its old parent company’s system.