5 steps in managing the operational aspects of a demerger

There is a growing trend in regard to successful demergers. Bruce Nixon explains the five key steps in managing the operational aspects of breaking up a business. 

2014 saw a surge in demergers including the $14 billion BHP Billiton demerger of its non-core assets, manufacturer Orica as well as shopping centre giant, Westfield Group.

A demerger is when a single business is broken into components, either to operate on their own, to be sold or to be dissolved. Companies generally announce a demerger on the grounds that separating the parts of a business will create value for shareholders by allowing a better strategic approach to tackling costs and growing earnings. In other cases, they may be necessary to satisfy regulators such as the Australian Competition and Consumer Commission.

While most headlines regarding demergers focus on the financial implications, such as impact on shareholders, the element that is equally important is the operational aspects of how an entity splits itself.

Shared systems, processes and functions can create logistical challenges and risks that need thorough planning to ensure the demerger is successful. Other elements requiring consideration include the ongoing compliance of newly created entities, in both the transition phase and once the demerger has been finalised.

A demerger should be approached like any other transformation project, with thorough planning that takes into consideration the new requirements of each new entity, identification and minimisation of potential exposure to risk and communication strategies to keep stakeholders informed.

From an operational perspective the steps that should be followed include:

1. Review the situation
It’s important to fully understand the scope of the demerger, understanding what you’re starting from (the present state) and the requirements involved in where you need to go.

Building a model of the business operations will facilitate this process and give some clarity to which parts of the business will be divested or kept and what the likely impacts will be. The model should be include the processes, procedures, use of systems and compliance obligations to help ensure nothing is overlooked in consideration of the demerger.

Having an accurate representation of the current business will provide great assistance in the demerger process, providing clarity for those people impacted by identifying how roles and responsibilities will change.

2. Assess the difficulty
Costs and risks need to be thoroughly considered. Use your model to assess what additional people will be required, what systems will be needed by the new entities, what processes and procedures will be relevant, how will compliance obligations be met by the new entities and how will value be created in each of the new organisations.

Many organisations may decide not to proceed when the scope of the transformation is too large and the benefit doesn’t outweigh the cost. If you don’t proceed you can be confident that great expense will have been avoided.

However, the model built in step 1 will provide much better clarity in the detail of its operations. This can then be transitioned into an operational model that is used to improve consistency, reduce costs and increase compliance. This will allow for further improvements to be made without the cost and risk of a demerger.

3. Simulate the demerger transformation
If the demerger proceeds, a clear path forward will be better understood. The model of the current operation can be used to identify processes to be separated, those that need to be duplicated, organisation structures required, people impacted and systems required. The capacity planning, based on known volumes of work, staff numbers and systems capability will be contained in the business models.

Splitting the model in two will allow you to simulate the demerger and start to look at the workload for each entity and the capability of systems and how many people will be required. Simulating the demerger will remove much of the risk associated with the transformation and will allow you to understand what will be involved in the actual process.

Each of the new business operating models can be developed to the level of detail necessary to allow the businesses to be effective very quickly and to for them to undertake further change and improvement as time goes on.

4. Implementation
Once simulated, you can start to implement the demerger transformation using the new business models to guide the process. The models will also provide guidance on requirements such as training and realignment of responsibilities and how this will affect employees and their roles. Standard operating procedures (SOPs) will also be easier to develop using the models.

The majority of the risk and cost of demerger lies in the implementation phase, however, if you do your due diligence, use a modelling approach and undergo simulation you can have a high degree of confidence in a successful outcome.

5. Build a business management system
At this stage it’s a good time to use the operating models to create a business management system for each entity that can act as a single source of truth for managing the assets created in developing the models, like new training materials, compliance and regulation information and SOPS.

Having clarity around the processes and systems built in one repository, will help you to understand your resource needs based on volumes of work, costs and capabilities of each new entity.

For project and change managers who understand the trend and these steps to successful demergers, there will be significant opportunity as this trend gathers pace.