ERP systems: the linchpin of a carve-out transformation
We see carve-outs from corporate sellers as an excellent opportunity for buyers and management teams to execute business transformations, ranging from critical functional improvements to wholesale changes to the organisation’s structure and operating model. The technology landscape is an essential part of that process, and the Enterprise Resource Planning (ERP) systems are perhaps the most critical pieces of technology infrastructure. But despite ERP’s importance to businesses, it is relatively rare to see investors and management give these systems the attention they demand during the carve-out process.
ERP software supports a vast range of different processes. Although often centred on financial data, their scope can extend to supply chain, HR, inventory and much more. If ERP migration is not executed properly for the new organisation, the IT cutover to a standalone operation can be disastrous.
In our view, a successful carve-out and the success of the subsequent transformation journey requires a coordinated and forward-looking ERP plan that responds to the needs of the whole business and positions ERP to add real value to the new entity.
Managing ERP risk: a chronological approach
ERP systems vary hugely from company to company, so properly managing ERP risk through a carve-out process requires a thorough approach that starts pre-deal and extends into the post-deal implementation phases.
Initial due diligence
Diligence of ERP readiness should be included in a typical operations due diligence scope. Stakeholders need to understand whether existing ERP systems are up to scratch and that the business processes (throughout finance, supply chain, inventory etc.) are robust and managed via the ERP. Gauging whether systems need expanding or upgrading, and a detailed assessment of ongoing ERP costs, are all important at this early stage.
In the first instance, we use the diligence phase to identify value creation opportunities where we assess whether business processes can be simplified across sites, geographies and/or business units. A simpler and standardised ERP environment, as a key enabler, can then equip a standalone organisation to carry out more effective transformation initiatives and value creation activities.
Deal signing to close
Once a deal is signed, data management becomes a key focus. During the sign-to-close period a successful carve-out requires pro-active segregation of data between the seller and carved-out entity. ERP is central to untangling financial and customer data, but stakeholders must decide the best way to conduct this process. Whilst the issue can often be resolved as simply as changing user access rights, the decision may be made to go further and duplicate the ERP in its entirety for use by the carved-out entity.
The sign-to-close period is also an opportunity to further understand the business processes the ERP system needs to support in a standalone model. This is not an independent line of work: it should align closely with value creation planning and the development of the target operating model.
The ideal outcome is for a clear and achievable ERP plan that covers three key areas:
- A detailed step-by-step plan to deliver the separation and standalone operation of the ERP system;
- The key opportunities for value creation across the enterprise, via business process standardisation, increased automation, and providing enhanced business insights etc.;
- Mapping the ERP components to be retained as existing, and identifying the components to be upgraded or transformed.
If the groundwork has been completed pre-closing, execution of the ERP plan and its role in the wider transformation can start immediately. Attention will then quickly turn to the effective management of the Transitional Service Agreement (TSA) and its wind-down, as well as dealing with any third parties involved in the implementation of the transformation plans. For many vendors, the pace will be unfamiliar and challenging. Implementation partners will need to have demonstrable carve-out experience and strong credentials in ERP and data migration to keep abreast of the wider business change.
A carve-out with reliance on a significant ERP separation requires robust project management like all large projects. Setting clear targets and breaking down goals into incremental milestones are determinants of success. Nevertheless, the risks of poor execution are heightened when dealing with ERP due to its importance as an enabler of business efficiency. With so many systems and sources of business value in play, buyers must create a robust plan that scopes these dependencies right through the course of a transaction.
A&M: Leadership. Action. Results.
A&M has worked with private equity firms in Europe and globally to stabilise financial performance, transform operations, catapult growth and accelerate results through decisive action.
Our professionals have extensive experience supporting sellers and buyers through carve-outs and divestments, helping guide businesses through tough, complex situations. To learn more about our expertise and to understand the full scope of our Private Equity Performance Improvement work, contact our team here.
