Executive sponsor, separation manager and deal team
Meeting Agenda, Whiteboard, Strategy Documents
Spend one day or more to prepare materials for a two hour play.
This can be a challenging task for IT teams, in particular, to define services for a TSA due to the complexities inherent in a shared IT environment. To get around these issues, it’s common to bundle IT services for a TSA. Beware when bundling services; while this simplifies TSA costing, it may create complexities later if the buyer attempts to remove a TSA service independently of another.
Also, consider if TSAs need to play a role when the divested business unit retains IT assets and services required by the seller. In such a scenario, a reverse TSA where the transitionary services are provided by the divested business back to the seller.
Finally, make sure service details are written with simple and direct language to describe services unambiguously. Key performance metrics (KPIs) to measure service levels may allow the service provider to technically abide by the TSA, but not provide the service level needed by the receiver. Using terms such as “reasonable,” “commercially reasonable,” or “best commercial efforts” can lead to such scenarios.
To provide a clear understanding of the services to be delivered, the service description section should specify the services that are both in scope and not in scope. The scope of a TSA should be constructed based on individual service elements that may get phased out at different milestones throughout the TSA duration. This allows TSA service costs to ramp down for the buyer as individual services are exited before others. The TSA should also list discrete services (e.g., infrastructure and application support) and their costs, as well as the SLA requirements for each of the identified service elements.
Documented SLAs help mitigate a common root cause of discord between service providers and receivers regarding the quality of services delivered. Adequate metrics and a practical measurement approach should be specified to help ensure the appropriate expectations are set before service commencement, as well as enable transparency in audit and reporting of service performance during the TSA period.
Both the divested entity and the seller company should establish expected duration for each of the services plus an overall limit for TSA duration. Allowances for limited-term request-based extensions may be added to provide flexibility for continuity of a small subset of transitionary services for a longer duration than others.
In large divestitures involving multiple countries, the regulatory environment in each country becomes a critical factor in determining the scope and duration of TSA services. Lack of country-specific legal guidance during the scoping of TSAs can lead to regulatory risk exposure post-Day 1. Embedding legal counsel with business and IT teams driving the TSA effort will help avoid this risk before it is too late.
Typically, third-party IT vendors may have little to no incentive to support provisioning of transition services for the service provider. Lack of explicit rights secured from vendors in support of TSA services may result in contractual risk for the service provider. Both the buyer and seller organizations should review their contractual obligations and put the wheels in motion to negotiate and obtain sufficient TSA rights from third-party IT vendors early on in the TSA documentation process.
TSA service costs are often a source of disagreement and dispute between the buyer and seller organizations during the TSA planning phase and TSA execution. Usage of ambiguous cost metrics or lack of knowledge about the cost components and assumptions used to calculate cost estimates may lead to poorly defined service costs. Key cost elements often overlooked:
Sometimes it’s hard to determine what the baseline costs for services are. In such scenarios, the TSA documentation should include a detailed costing methodology that identifies key metrics, benchmarks, and calculations used to identify actual service costs during service execution.
It’s common for parties to agree to a cost mark-up on services. The mark-up can be set to increase over time, in order to encourage the buyer to move off the TSA. The mark up on services may start at 5–7% and then to 15–25% over time.
The list below provides a comprehensive overview of the elements driving the cost:
Note that restrictions are usually imposed by third-party service providers, specifically on the use of software as a service to others than the Parent company. The license agreements for ERP or HR tools do now allow the user to provide services to users outside of the company. Some software providers will allow for a grace period, but then require the Buyer to buy its own license.
TSA documentation should be standardized and provide comprehensive details on every aspect of the services to be provided. In particular, a governance model needs to be agreed upfront. Typically this involves TSA owners for each of the services reporting into a TSA manager. The TSA manager has overall responsibility for the services provided to the seller.
A transition committee with representatives from the buyer and the seller would also meet on an agreed basis to monitor the execution of the TSA.