Global Corporate Divestment Study 2017: can divesting help you capitalize on disruption?

About this study

The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business amid massive market disruptions. The 2017 study results are based on more than 900 interviews with corporate executives between October and December 2016 conducted by FT Remark, the research and publishing arm of the Financial Times Group.

Excerpt taken from the full report.

How can you improve the agility of your remaining business in the new digital economy?

Once you have divested, how can you develop a flexible operating model that enables your remaining company to move businesses in and out more quickly, efficiently and cost-effectively in the new digital economy? Leading companies are creating greater optionality in a world of frequent portfolio turnover and disruption.

Take a holistic approach — align investment team and operational management goals

Most companies (66%) say they plan to formalize the responsibility and communication between the investment (M&A) and operational roles. This step is critical because their key performance indicators (KPIs) are often different and conflicting. For example, the relevant M&A KPI may be to achieve maximum value. However, if an asset sale, in isolation, removes scale and therefore utilization from a production facility, this could adversely affect an operational KPI based on capacity utilization or return on assets employed.

In addition to normalizing operational KPIs for M&A, companies can consider these key ways to accomplish a more holistic, rounded approach to goal-setting:

  • Communicate the M&A strategy in detail and involve operations teams in the strategic thinking around operational footprint before launching a divestment process
  • Instead of thinking about a divestment as a single event, factor in broader thinking about how the operational footprint will develop over time — consider structuring the sale as an enabler of a broader facility-consolidating plan
  • Rather than regarding a divestment as an immediate separation, consider whether a softer approach, such as a longer-term manufacturing agreement, can ease the impact of the separation for both buyer and seller
  • Set a mixture of operational and M&A-driven KPIs, including dynamic KPIs specifically linked to the impacts of the separation
  • Refine the future operating model to increase business agility and reduce divestment cost and time

Reassess your operating model to become lean and agile

You should not be doing what you don’t want to do. In disrupted markets, a company may want to consider a fundamental rethink of its operating model. Companies should consider selling what’s non-core (e.g., infrastructure and other back-office assets) and focus on what truly drives growth. This could start anywhere, from outsourcing particular administration functions right up to reimagining the business with everything outsourced. The fundamental premise is to make the cost base as flexible and variable as possible by separating the business model from a fixed cost base.

In addition to replacing some contracts with cloud providers, outsourcing routine business processes and commodity IT services, creating a mobile workforce is an emerging trend that enables a new way of working. Companies are considering what intellectual capital is critical to maintain in-house versus what could be outsourced, especially back-office functions that have enormous benefits of scale.

Only 25% of companies are planning to outsource back-office functions to focus on the core business activities that drive growth. There is clearly room for improvement here. We see large companies, in particular, starting to commission carveout offices from third-party service providers. These offices serve as a transition point between the seller and the new owner of a divested asset. The carve-out office assumes all back-office functions and can mitigate or completely avoid stranded costs at the seller while also making it much quicker for the new owner to assume responsibility. This not only increases efficiency but can also reduce the time between sign and close.

Invest in emerging technology platforms and innovative companies

Just under half of executives (49%) say they plan to invest in more agile technology platforms (e.g., pay-per-use, cloud infrastructure) to enable a quicker increase or decrease of capacity. In light of recent technology advances, this percentage should be higher.

To increase competitive advantage, companies must take advantage of new ways to reduce costs and enable growth. Particularly as companies consider divestments, some technologies can greatly reduce stranded costs and the need to right-size the business post‑sale. For example:

  • Robotics: automation of manual, rules-driven tasks (e.g., financial reporting, processes of order to cash, payments)
  • Artificial intelligence: self-learning technologies that provide deeper insights across organizational and customer behavior as they acquire additional data
  • Software as a service (SaaS) and cloud infrastructure: capacity enablers that scale up or down quickly based on usage, enabling easier separation and lowering fixed costs
  • Digital supply chain and Internet of Things: tools that help companies track goods, inventory and quality of assets within the supply chain to increase efficiency

EY Legal Services Contacts:

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Richard Norbruis – Global Transaction Law Leader

 

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Richard Goold – Technology Sector Law Leader

 

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Rutger Lambriex – Global Corporate Law Leader (OME)

 

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Roselyn Sands – Global Labor and Employment Law Leader

 

Also see: EY Labor and Employment Law Guide.