IT Carve-Outs: Frequently Asked Questions
July 4, 2022 |Fission

IT Carve-Outs: Frequently Asked Questions

A critical step in separating an acquired business unit (NewCo) from its current organization (Parent) is the IT carve-out. In summary, an IT carve-out refers to the activities needed to identify and separate NewCo’s IT assets from Parent’s IT environment. To operate as an independent company, NewCo will need to establish its own IT environment to support the business after separation. As part of this process, the new IT environment is populated with a copy of Parent’s systems that are critical to NewCo’s business operations. These system copies will then need to be loaded with NewCo data and extensively tested for proper functionality to ensure that the business is ready for independent operations after separation from Parent. The following summarizes the high-level activities that take place in an IT carve-out:

1. Clone relevant Parent systems and applications to set up copies in NewCo’s IT environment.

2. Identify and migrate all NewCo-specific data from Parent’s IT environment to NewCo’s IT environment. Data validation checks will be implemented to ensure that Parent data is not migrated as part of the IT carve-out.

3. Test NewCo’s systems and applications to ensure proper system functionality on day one of separation. Multiple rounds of testing will be conducted to mimic day-to-day system interactions and identify issues.

4. Execute the final system cutover plan to begin NewCo business operations in the standalone IT environment.

To accomplish separation before the TSA deadline, IT carve-outs are not new system implementations. Taking a copy of Parent’s systems will enable existing configuration, customizations, reports, and workflows to be present in the new system so functionality will not change. The only major difference between NewCo’s system and Parent’s system will be that Parent data is no longer present in NewCo’s environment.

Fission’s recommended approach to an IT carve-out is to collaborate and form a project team comprised of Parent, NewCo, and third-party resources (where applicable).  Parent resources are subject matter experts and should participate in design sessions to support the identification of data objects (i.e., custom data, reports, etc.) for migration, gather existing documentation for test script development, and assist NewCo resources in building the infrastructure necessary for the project. NewCo resources should also participate in design sessions, creating and executing test scripts, and infrastructure development. Third-party resources are useful for project management roles to establish a project plan and oversee successful execution. Third-party subject matter experts can also fill in existing knowledge gaps for areas such as system functionality, infrastructure setup, testing, data validation, and organizational change management/training.

Our team has compiled the most common questions that are asked when beginning a new carve-out project below:

1. What are the different approaches to an IT carveout?

A: As NewCo prepares to separate from Parent, NewCo must create standalone departments (e.g., IT, Legal, Finance, HR, etc.) that will be used to support the new business. A NewCo-specific IT environment will also be created to house all relevant systems, applications, and data needed to run the business. The new company has multiple options from an IT perspective when making decisions on how to set up the new environment:

1. NewCo makes an exact copy of Parent’s IT environment. This means that all systems and applications that were in use for Parent will be in place for NewCo. However, only NewCo’s data will be populating these systems upon separation (including shared data like customers, vendors, items, etc.).

2. NewCo makes a selective copy of Parent’s IT environment and discontinues the use of any Parent applications that are not relevant. All systems that are necessary for NewCo to support the business are installed while other applications used by Parent that are unrelated to NewCo will not be migrated.

3. NewCo makes a selective copy of Parent’s IT environment and installs new applications to maximize cost-savings and optimize for scale. Training on the use of new systems will be provided to employees to increase productivity and ease of adoption.

Approaches to NewCo IT environment setup will vary on a project to project basis. However, regardless of approach, all NewCo data will need to be identified and migrated to successfully run the business post-separation.

2. What is the difference between an IT carve-out and a system implementation?

A:  An IT carve-out is not the same as a typical system implementation and is intended to simplify the separation from Parent to avoid business disruption.  Little or no modification will be made to NewCo systems and applications during this project. The carved-out IT environment will be almost an exact copy of Parent’s environment and employee interactions with systems will not change unless a new application is installed.

In contrast, a system implementation requires many business decisions to be made regarding module configuration, process design, definition of data objects, creation of reports, etc. While NewCo will have an ability to redefine IT operations post-separation, the carved-out system setup will ultimately be the same in NewCo’s IT environment as in Parent’s IT environment. The IT carve-out is structured to avoid the pains that plague a typical system implementation.

3. What are the project phases and critical activities that must happen to achieve a successful IT carve-out?

A: Fission approaches a carve-out by dividing the work into six distinct phases with key activities that must be accomplished during each:

1. KickoffProject team resources are identified, system access is provided to prepare for data migration activities, the infrastructure build plan is established, and documentation is requested for a list of all custom data objects as well as any process and system specific materials that can be used to create test scripts.

The kickoff phase allows Fission to communicate with each project team member and understand the magnitude of information that needs to be gathered to properly design the project plan, identify all NewCo-specific data, and develop extensive test scripts in preparation for cutover. The more information that can be gathered upfront in the process correlates with an easier separation phase and a predictable working schedule throughout the project.

2. DesignExisting documentation is reviewed to create and finalize test scripts which will simulate all business activities that employees perform in the system. Carve-out rules are then developed and finalized to identify and migrate all NewCo data to the new IT environment. Custom data objects are comprehensively documented and examined to determine the logic for migration to NewCo’s environment. The project plan will be finalized with all resources required and hours allocated for work. The cutover plan is drafted and will be refined throughout the coming weeks. Project phases after Design will be focused on executing the finalized project plan.

Identifying custom data is the most important part of the design phase. Out-of-the-box system functionality does not tend to differ from project to project; however, the number of system customizations will impact the carveout logic being used for data migration. If all standard and custom data rules are identified and developed during this phase, the system will function properly with NewCo data during testing as this is not a new implementation, but a migration of a working system populated with NewCo data only.

3. Infrastructure BuildThe technical team will hold design sessions to: gather requirements and build the project landscape for data migration, ensure that resources have system access for data migration activities, set up the NewCo hosted IT environment, and identify the interfaces and connectivity requirements that NewCo will need to function as a standalone IT environment post-separation.

The Infrastructure Build phase can start in parallel with the Design phase because of the lead time needed to prepare and build the IT landscape necessary for a successful project. Once the IT landscape is created, technical resources will support the project by preparing the systems for data migration, manually executing necessary batch jobs (if applicable), and being on call in case of issues.

4. Migration Execution – Three rounds of data migration and system testing are conducted to extensively check for issues in system performance and functionality in NewCo’s IT environment. Post-migration, the data is validated to ensure that all data belonging to NewCo is migrated and Parent data is no longer present. The test scripts developed during the Design phase are then executed to identify system functionality errors. At the end of each round of migration, all issues are documented, and the data ruleset is revised accordingly for use during the next round of data migration testing. A mock cutover is performed at the end of Migration Execution to simulate the final cutover plan that will be used for the separation of NewCo from Parent’s IT environment.

If test scripts are comprehensively developed during Design, system issues are easier to discover and fix during the migration execution phase of the project. Identifying and resolving issues upfront leads to a properly functioning system during later rounds of testing as the NewCo data ruleset becomes more refined.

5. Cutover After a successful execution of the mock cutover plan, NewCo is ready to separate from Parent. Starting on Friday afternoon, the separation process will commence with the migration of the most recent copy of NewCo data. The entire project team will be on call over the weekend to execute their assigned tasks according to the cutover plan. Once the migration phase is completed, selected NewCo functional users will login to the new system to ensure that no critical errors occurred during the cutover process. Normal operations are resumed on Monday with NewCo employees performing their job responsibilities in the new system as separation has completed.

Cutover requires an effort in coordination with Parent, NewCo, and Fission team members. Travelling to a centralized location for cutover weekend is the most efficient way to ensure that all activities are taking place according to the cutover plan and team members are present if issues arise.  

6. Run the Business – The Fission team will be on call to resolve any issues encountered during the initial weeks following cutover. Communications will also be distributed to NewCo employees to provide the proper contact information for system support. When IT support responsibilities are transitioned to NewCo’s designated provider, the carve-out project has concluded.

Due to multiple data migration and testing cycles, system functionality errors are rarely encountered during the initial weeks following cutover. In our experience, the most common issue is related to system access which can be resolved by submitting a ticket to the designated IT support provider.

4. What does IT carveout success look like for the Parent company?

A:  A clean separation between Parent and NewCo signals success for the Parent company. NewCo will no longer rely on Parent’s IT environment or Parent employees for support in accordance to the terms of the TSA. Parent data will be completely purged from NewCo’s environment and the two organizations will begin to act as distinct entities on day one of separation.

5. What does IT carveout success look like for NewCo employees?

A:  An ideal IT carve-out is a non-event for business users and results in a clean separation from Parent support. The goal is for NewCo employees to operate according to business as usual on the Monday following cutover. All standard and custom systems, modules, applications, workflows, and reports will be functioning properly for users and only NewCo relevant data will be present in the IT environment. If new applications are in place, training will be provided to ensure that employees get up to speed as quickly as possible to avoid business disruption.

6. Which Parent resources are needed for the project and what are the time constraints?

A: Based on the complexity of the IT carve-out, resource requirements will differ on a case by case basis. Typical Parent resource requirements are as follows:

1. PMO – Responsible for managing Parent project team members and driving executive alignment. PMO resources are normally 10 – 50% allocated for the duration of the project.

2. Technical and Infrastructure TeamAssist NewCo technical and infrastructure team in the creation and administration of the project landscape to facilitate data migration. Participate in design sessions as subject matter experts. Technical and Infrastructure team members are normally 15 – 50% allocated throughout the project lifecycle.

3. IT Business Analysts – Participate in design sessions to assist in carve-out criteria identification. Assist with test script validation and answer business process questions as required. IT Business Analysts are normally 5 – 25% allocated for the duration of the project.

7. Which NewCo resources are needed for the project and what are the time constraints?

A: NewCo resources are an important part of the project team as they will ultimately be the end users of the new system. Typical NewCo resource requirements are as follows:

1. PMO – Responsible for managing NewCo project team members and driving executive alignment. NewCo PMO resources are normally 25 – 50% allocated for the duration of the project.

2. Technical and Infrastructure Team (if applicable) – Create and manage the project landscape and new IT environment to facilitate data migration and system setup. Participate in design sessions as subject matter experts. Technical and Infrastructure team members are normally 15 – 50% allocated throughout the project lifecycle.

3. IT Business Analysts (if applicable) – Participate in design sessions to assist in carve-out criteria identification. Assist with test script creation and answer business process questions as required. IT Business Analysts are normally 30 – 50% allocated for the duration of the project.

4. Functional TestersAssist with the creation and validation of test scripts. Participate in three rounds of system testing as part of the Migration Execution phase. Functional testers are normally 30 – 50% allocated for the duration of the project.

About Fission

Fission assists buy-side and sell-side clients with TSA negotiations, IT carve-out planning and execution, and post-separation optimization. Please reach out to us with comments or questions at fissionmarketing@fissionconsulting.com.

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