IT TSAs are service agreements between buyer and seller companies (or divested entities) in M&A transactions in which one entity (the TSA provider) provides services and support (network infrastructure, business applications, information security services) to another (the TSA receiver) after the closing of the transaction.

An increasing number of IT solutions are becoming available in the market that could be used to accelerate a separation of IT systems and a transition to a standalone IT estate¹; however due to aggressive separation timelines, IT TSAs often cannot be avoided as they are needed to enable business continuity and de-risk the transaction.

An early exit from a TSA eliminates dependency on another entity and may also provide opportunities for both seller and buyer to unlock resources and focus on strategic priorities:

• Greater agility for the seller to move more quickly towards its strategic goals and business priorities, by focusing IT resources on the retained business, eliminating stranded costs, decommissioning IT redundant infrastructure, and improving IT efficiency and effectiveness.
• Opening up the possibility to undertake future M&A transactions, by earlier release of key resources that could be needed in other deals.
• Increased cost synergies for the buyer, achieved by integrating the carved-out entity into its existing business.
• Removing the buyer’s reliance on the seller’s IT systems and resources, removing constraints around systems development and expansion, and enabling the buyer to fully realise the deal’s rationale and objectives.

Various challenges to exiting IT TSAs are often overlooked by the parties:

1. Seller not a professional IT services provider: the seller company is usually not in the business of providing professional IT services to third-party organisations and would like to avoid becoming a service provider for the divested entity. Additionally, the strategic roadmaps of the seller company and the divested entity will diverge rapidly after the transaction close, making long-term TSAs problematic.
2. Transparency of pricing and invoicing mechanism: it can be difficult to price and execute transitional IT services due to the complexities inherent in a shared IT environment, such as dependency on IT contracts with external parties, lack of a clear separation timeline, and inadequate baseline costs and consumption data for various IT components.
3. Clarity on exit governance and approach, including solutions for the systems database: the parties may have different priorities when it comes to the exit process and how to formalise it, such as requesting exit from each service independently or bundling together the exit from several services within a fixed time frame. Additionally, the divested unit may want to store information on its own application database (rebuilt, or cloned following the divestment), while the divesting unit may want to work in its own proprietary environment.
4. Divested unit’s vision for its target IT estate: ideally the divested unit should have a clear idea about its operating model requirements in order to formulate the appropriate requirements for the IT TSAs. However this might not happen due to lack of information, resulting in a request for additional services or a change to the existing one, adding an additional layer of complexity.
   

Scoping, planning, and execution for effective service exit

To facilitate IT TSAs exit on time and within budget, it is important to have a well-defined approach. Key steps involve:

• Appropriate design of terms and conditions
  • Provide both parties with the flexibility for early termination without incurring penalties, where necessary having considered third party contractual obligations.
• Scoping
  • Clear articulation of IT services requested under the TSA together with additional key details, such as pricing of services, duration of service to be provided, closing and exit strategy. A key requirement is for the buyer to be clear about what IT services to perform internally and what services to buy from the seller via the IT TSA.
• Planning
  • Establish a governance arrangement for the IT TSA exit that embeds the 2-in-a-box principle (where each stream has at least one representative from the Seller and one from the Buyer), with an execution team to manage the IT TSA exit process and ensure that it is completed on time and within budget. This team will also be the decision-making body for change requests, early exits, and other major issues.
  • Articulate the exit activities and key milestones for each IT TSA, defining responsibilities and resource requirements (for example one-off exit costs for data extraction and transfer of applications), and considering the applicable upstream and downstream interdependencies such as licences, IT personnel and knowledge transfer.
• Execution
  • Engage execution teams for regular monitoring and reporting of the completion of activities, and proposing mitigation plans where required.

Additional considerations: It is essential to avoid giving undue emphasis to the short-term commercial implications that might arise from an early termination of the TSA, such as one-time penalties. Instead, the primary focus should be on the overall value of the agreement.

Understanding stranded costs in an IT TSAs exit

After divestiture and an IT TSA exit, the seller is often left with stranded IT costs – expenses that are linked to the IT operations of the divested business that cannot be easily eliminated after the carve-out. Stranded costs inflate the IT cost base of the retained business. Areas such as IT personnel (IT services, application management teams), IT vendor and licences and IT infrastructure (data centres and hosting, servers, network services) can be major stranded IT costs. The graph below outlines a typical make-up of how the costs distribute across these areas in large cross-border deals.

The seller has an opportunity to review its cost position and determine if the carve-out deal can be a catalyst to reduce other costs and improve margins. The sooner this exercise is undertaken, and certainly before the end of the IT TSAs, the greater are the chances of minimise or eliminating stranded IT costs.

Clear articulation of cost reduction targets and incentives for budget owners, complementing by the following three steps approach, may help local IT teams to accelerate the reduction of IT TSA-linked stranded costs:

1. Determine cost reduction targets: Set objectives for cost reduction and allocate responsibilities for the identification of superfluous expenditures.
2. Develop implementation plans: Develop an implementation plan for each identified opportunity, including required actions, critical milestones, accountabilities, and interrelationships.
3. Track progress in eliminating stranded cost: Monitor progress in reducing costs and integrating them into the overall planning and budgetary framework; additionally, consider linking those to performance objectives and mandatory KPIs.
   

Maximising success with IT TSAs exit

It is crucially important to align the IT separation roadmap with plans for the IT landscape post-divestiture. Following the divestiture, both the CIO of the seller and the CIO of the buyer have an opportunity to review their IT operating models and enhance their efficiency and responsiveness to the needs of their businesses.

When planning new IT operating models, it is worth scrutinising projects and IT operations, standards and practices to validate whether they remain relevant and fit for purpose, cost efficient and appropriately sized. Speeding up the exit from IT TSAs enables the CIOs to concentrate on strategic initiatives and freeing up resources for IT investments that are needed to remain competitive, as well as innovative, in this era of constant change.

A thoughtfully planned and executed strategy, combined with the appropriate tools and resources, can facilitate a seamless and effective IT TSAs disengagement process. This can help to mitigate risks, resolve interdependencies, contribute to the overall success of the carve-out, and maximise the deal value for both parties involved.

Note and sources

¹ - IT Transitional Service Agreements (IT TSAs) – how much are they needed?
² - Deloitte analysis on proprietary database