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Separation anxiety: Ensuring successful separation and optimising costs in a carved-out business

Words: Vikas Tyagi
A carved-out IT services business engaged Efficio to help them manage the procurement challenges arising from the separation and to support the set-up of a new procurement team, in a challenging timeframe. Efficio not only ensured there was no operational disruption, but also delivered significant cost savings on key contracts.  

When the UK and Ireland business of a global IT services and software organisation was acquired by a private equity firm, it was agreed that all current procurement capability would stay within the global entity. Efficio was engaged to provide specialist procurement support to the carved-out business in readiness for separation, and to support the set-up of a fit-for-purpose procurement team for the future. This involved creating a clear strategy for activities leading up to, and following, separation – including the establishment of a commercially independent supply base. It also required a clear understanding of current spend, contracts and critical business requirements to minimise future spend and operational risk for the new business.

Background

Carve-out transactions are becoming more and more prevalent. These transactions mean smaller spend for the entities involved and reduced supplier leverage for procurement. However, Efficio’s experience has shown that despite these constraints, carve-outs still provide an opportunity to optimise procurement spend and operations.  

In this engagement, the first key objective was to establish a commercially independent supply base to ensure the carved-out business was able to operate with no disruption following the separation. This needed to be done at the same time as identifying opportunities to rightsize future spend. 

Efficio began with a careful review of the full spend landscape to understand the current situation and allow the creation of strategies to address the key financial and operational challenges in cases of contract split, novation, termination or continuation.

The team also developed strategies to identify cost-reduction opportunities, including rightsizing of contracts, demand review and the development of effective sourcing and/or negotiation strategies for key suppliers. These initiatives allowed the new business to create a stronger negotiating position than is usually the case in carve-out situations.   

The second major objective was to plan and help set up an internal procurement organisation that would both support the transition and continue to optimise the procurement operations of the new entity in the future. This was undertaken simultaneously to ensure a seamless handover when Efficio departed.

Approach

Achieving these objectives required a multi-faceted approach. This included:

  • Establishing clarity on spend and clear details on priority from a commercial and operational perspective. As part of this, Efficio had a particular focus in the early stages on areas where spend details availability and contractual positions are not always easily ascertained (such as IT software and services agreements, telecoms, printing and facilities management).
  • Reviewing rights to assign, rights to use (in divestiture scenarios) and other similar language in contractual documentation and planning the negotiation approach accordingly. In some cases, this was done in collaboration with the separating parent entity to ensure all historical context was known and the approach to the market was not disjointed.
  • Ensuring early legal involvement to support timely legal challenges and review.
  • Identifying alternative products and services and using this as a key lever where difficult supplier conversations were likely.
  • Rightsizing current requirements (e.g. review of the number of users ‘really’ required for software, and the level of service actually needed).
  • Driving strategic conversations with key suppliers by involving senior business stakeholders and legal, ensuring the messaging went beyond ‘price’ and towards ‘partnerships’.
  • Communicating a ‘big picture’ view to major suppliers to include future engagement and smooth commercial discussions.

 

“…Efficio’s experience has shown that despite these constraints, carve-outs still provide an opportunity to optimise procurement spend and operations.”

Results

The engagement exceeded expectations in all areas.

No operational disruption: Efficio worked with the client team to ensure a smooth transition to the separated state, with no operational disruption from a procurement perspective (while moving to independent commercial and contractual set-up with suppliers). More than 100 key supplier arrangements/contracts were reviewed and more than 30 key contracts were novated to align with the separation. 

Cost reductions: Following strategic negotiations and contract separations for multiple critical suppliers, initial costs offered by the suppliers were reduced by 20-40% across many contracts. Key levers used to achieve these results included the rightsizing of requirements, leveraging the potential use of alternate options and robustly planned negotiations with the right involvement from senior client stakeholders. 

Additional savings of around 17% (~£2m) were achieved with an incumbent supplier on a large operational contract that was a key revenue driver for the client. As well as these cost savings, revised KPIs and SLAs for the contract were also set up to deliver significant future improvements in governance and management over the contract duration.

New procurement capability: Efficio also supported the set-up of a new procurement team and transitioned current ongoing activities once the new team was in place. A clear and detailed plan for the next set of activities required in the 6-12-month period was developed and handed over to support continued optimisation of the procurement operations and costs.

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