M&A Transition Services: Pitfalls and Opportunities

Deals that involve Transition Services Agreements (TSAs) turn into our most challenging and satisfying M&A projects. Over the years, we’ve seen (and helped our clients avoid) many pitfalls unique to the TSA situation. Right now, we’re also really excited about the opportunities for creating a lean IT organization and architecture when planning out the strategy for getting acquisitions off of their TSAs.

TSAs: The Dangers

It’s important to begin vetting out the hidden risks of the TSA during the M&A IT due diligence phase.

1. Assuming that the IT staff of the carved out business unit can evaluate, negotiate and manage the relationship with the former owner during the transition period. Think about this: these are the people who used to take their orders from the parent company. They are good at executing to orders, and they are rarely quick enough to realize that they must now relate to their former bosses as service providers during the transition period. We have seldom seen the right mindset and leadership skills in an acquired company to radically and rapidly turn the tables on working relationships that may go back for decades. If a TSA is on the table, it’s an important component of our IT management evaluation during IT due diligence.

2. Failure to insist on the following key components of a comprehensive M&A TSA  during the evaluation and negotiation phases:

  • Service Level Agreements (SLAs) – treat the seller as an outsourced service provider, and demand adequate performance. Ask yourself about the quality of service you have received as a PART of the parent company, and assume that they will deprioritize your needs over their own once the deal has closed. You need SLAs and performance monitoring to safeguard against that. 
  • Definition of Termination Notice windows on a service by service basis.
  • Appropriate cost basis for each service offered under the TSA. Caveat emptor – I can’t tell you how many times we’ve seen cost allocations that made no sense in terms of the going-forward business model of the acquired company.

3. Failure to fully plan out Day 1 (day of close) operations. For each business functional area (including core IT services like email and help desk support) make sure there is either an included TSA service offering or a viable internal process and technology component that will be ready on Day 1.

TSAs: The Opportunity

Because a carve-out and the subsequent TSA migration offer the opportunity to create a new operating platform (process+technology+organization) for the stand-alone business, leveraging new technology approaches can result in significant run-time IT cost savings. By relying heavily on Software as a Service (SaaS) solution providers, outsourced hosting and support, and interim strategic IT advisory services, the run-time IT department can be kept quite small, and there is often a reduced need for big-ticket IT leadership resources as the helm.  Outside of IT itself, we can design the technology platform to support significant business process outsourcing of non-strategic, non-customer facing transaction processing to reduce other operating costs as well.

We’re excited about this approach because it provides a viable path for driving IT spending down below the current industry average of about 7% of revenue. In addition, it represents the quickest approach to getting off of the TSA. We’ll be laying out the broad strokes of a generalized virtual operating platform in future posts.

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