Determining Governance

Create the Governance Structure

The executive sponsor and separation manager typically get together to work out the appropriate governance structure for the divestiture.

This centralized structure creates a new layer of authority with a management framework for coordinating people, activities and milestones. 

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Board of Directors & Executive Leadership

The reporting lines within the divestiture governance structure should directly report into the most senior executive leadership forum within the seller organisation. Given the strategic nature and seismic impact of a divestiture, any delegation further down may lead to reduced oversight, lack accountability and limited focus.  The Board of Directors will look to the executive leadership team as the mediator for all things related to the divestiture.

Steering Committee

A Steering Committee should be established to act as a central governing body during the divestiture process. Perhaps the most critical element of this steering committee is its composition. 

Highly effective steering committees are often on the smaller side (three to seven members) to avoid long, drawn-out debates over milestone decisions. There must also be a representation of all the critical functions. This does not, however, mean that each function needs one person; a steering committee member may represent the interests of multiple functions. Finally, all members on the steering committee must have decision making authority. Without this authority, there is an increased risk that the transaction will suffer setbacks and delays as the committee is required to socialize milestone decisions with the key decision-makers.

The Steering Committee often includes the Chief Financial Officer, the Chief Operations Officer, the Chief Information Officer, and leaders of the remaining and divested business units. In order to help ensure this body is appropriately enabled to make decisions, select a combination of executive leadership that is appropriately enabled to make difficult decisions quickly in order to resolve red flags in a short period of time.

Nominate Workstream Leads

Strong, well-resourced functional teams are critical. Possibly, the most important of these streams are:

• Finance (Treasury, tax, corporate reporting) 
• Human resources (HR) (organizational design, employee carve-out, incentives, bonuses, payroll) 
• Information technology (IT) (systems, apps, IP, data, hardware) 

Functional teams are a key to divestiture success because they identify key milestones, raise issues, and support execution of the separation effort. Functional workstreams should comprise equal representation from the seller company and the divested entity. A leading practice is to follow a “two-in-the-box” approach in which the separation team for each workstream contains two leaders—one from the divested entity and one from the seller company. It minimizes risks for both entities and supports better collaboration. Companies divesting business units with the intent to sell should consider potential buyer priorities when developing separation plans to make the divested business unit more attractive to buyers.

Create a Separation Management Office

In the typical carve-out, time frames are shorter, the scope of activities bigger, the number of stakeholders larger, and the risks greater than the organization’s comfort level. Hence, the need for a separation management office (SMO) modeled on a program management organization (PMO).

There are generally two types of PMO: decentralized (passive) and command-and-control (active), as shown in the table below.

Given the strategic nature and high risks associated with a divestiture, and active command-and-control SMO should always be the preferred model.

The command-and-control model used in a divestiture should include guidelines on the appropriate depth of planning and plan maintenance, a fast-track mechanism for problem-solving or issue escalation, and the definition of penalties for decisions not made.

The SMO needs to act as the central nerve centre for the separation effort, gathering updates on the status of separation activities, identifying functional and work stream issues, evaluating the impact of issues on the overall divestiture program, and escalating issues, when necessary, to the executive steering committee. The SMO also focuses on establishing reporting cadence and determining critical divestiture milestones.

Define the Cross-functional Work Streams

Within a divestiture, there will be activities that span across all functional groups that need to be separately identified, managed and controlled. The common cross-functional work streams are as follows:

Cost Management

One of the key components of a divestiture is having an understanding of one-time costs. This may start off with a top-down budget by function or business unit based. However, it will be refined once planning for the divestiture effort gets underway.  This budget should include all costs associated with the disposal of the business. 

Change and Communications Management

A divestiture is likely to create a good deal of organizational change. Staff can quickly become confused, anxious and fearful, either because of job cuts, additional work, loss of stature or the threat of a new boss.  They may see only the risks, not the opportunities, and become more resistant as the change plays out. Communicating changes during a divestiture, therefore, becomes particularly important so that people at all levels get to hear what’s happening directly from the appropriate sources as opposed to rumor and innuendo. Culture is also a major factor, so any communication will need to pay special attention to cultural issues. 

Day 1 Readiness

Getting ready for deal close and transfer of ownership requires a particular focus so that the continuity of business remains unaffected on both sides. It, therefore, may be necessary to define Day 1 readiness as a separate stream in its own right with responsibility for coordinating all activities related to deal close.

Stranded Cost Management

Divestitures often result in an increased cost overhead for the seller company due to a reduction in economies of scale along with costs associated with the divested entity being left behind with the seller. These costs may adversely impact the ongoing profitability of the seller if they go unchecked. Costs associated with shared infrastructure, IT systems, real estate, headcount, third-party licensing/services need to be reviewed and rationalized as part of the divestiture exercise.