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somenathb
Explorer

Introduction


Often organizations evaluate their existing business operations and decide to sell off a whole or part of its business units to focus on future strategic market. The exercise of selling of a business unit is popularly known as Spin-off or Carveout. Every carveout operations has two perspectives. While the seller’s perspective of the exercise is to properly identify the business units that they want to sell off to focus on the future strategies, the buyer’s perspective is to acquire the existing business operation to generate synergy to migrate to strategic market. A carveout exercise can only be successfully accomplished by selling to a buyer followed by completing necessary transition. In order to complete successful transition, the organizations (buyer and seller) need to define a transition timeline with necessary agreement to have a smooth handover from seller to buyer, this is popularly known as Transition Service Agreement (TSA). Both buyer and sellers are responsible to take necessary actions to ensure all transfer are made within TSA based on agreed schedule. Following diagram shows a life cycle of a carveout exercise.


Fig: Carveout Life Cycle


Amongst many other activities, one of the critical aspects of any carveout exercise is IT separation. The seller needs to make the entire IT ecosystem ready before selling it off and is responsible to ensure a smooth transition during TSA. SAP being the most popularly used ERP application, often used at the centre of the IT ecosystem. SAP practitioners often face divestiture requirement from the organizations or clients and thus face requirements to execute carveout projects. This article will focus on SAP carveout exercise to focus on how to make the system ready for separation and discuss about different strategies that can be adopted depending on the situations.

System Carveout Approach


The organizations need to define a carveout approach based on the spin off strategy undertaken by business. While spin-off strategy involves multi-dimensions approach covering People, Process and Tools, the System Carveout Approach focuses on the IT system separation in line with the spin-off strategy. Overall, an IT separation strategy primarily depends on two things.

  1. The current state of the organization and its associated system architecture, e.g. global vs local, single SAP instance vs multiple SAP instances, distributed architecture vs consolidated global template etc.

  2. The targeted spinoff organization, e.g. selling off an independent company code vs splitting of business from existing company codes, selling of business units withing a business line vs complete spinoff of business line, global spin-off vs local spinoff etc.


Any carveout projects deals with two sets of organizations. One which will remain as part of the existing organization after completing the spin-off, called the RemainCo. The other which will be carved out of existing organization and will be sold to buyer, called the SpinCo. For further illustration these terminologies will be referred in this article.

Day One and Day Two Readiness


SAP system separation approach is a two-step process for any carveout project. The first step is to perform a logical separation to define RemainCo and SpinCo entities. It can also be considered as a preparation of the spin-off, and often run in parallel when buyer is not finalized. The purpose of this step is to define the entities as an independent organization (company codes, plat, warehouse etc.) within the existing SAP system and map the required business processes so that it can run business as an independent regulatory body. This defines the logical readiness for both RemainCo and SpinCo organizations, this is called as Day One Readiness. By achieving Day One readiness the organizations should be able to run their business as listed but not limited to the below diagram.


Fig: Day One Readiness


Once the organization achieve Day One readiness the system is ready for buyer testing. If the buyer is identified, they can be engaged to validate the SpinCo entity.

At this point the selling process get finalized between buyer and seller and both of them get into TSA agreement. The next step is to perform physical separation of the IT assets and systems based on TSA agreement. In this process sellers SAP system / solution is moved to buyer network and gets physically separated from seller’s infrastructure. Important to note that data separation is a critical part of this exercise, when RemainCo data is permanently separated from SpinCo entity thus only SpinCo relevant data is transferred to buyer. At the end of this step the SAP separation process is completed and buyer can run SpinCo business on their own network as buyer organization, this is called as Day Two Readiness.

System Separation Approach


SAP separation approach is driven by the current state of organization and identified SpinCo organization structure. The first step is to define the SpinCo entity based on the spin-off strategy. Most often this would involve alignment of enterprise functions to the SpinCo and RemainCo company codes. Important to note that as part of the separation some of the business operations may no more required for RemainCo entity, thus the related functionalities need to be switched off from RemainCo. Refer to the following diagram which explains the logical approach of entity separation.


Fig: Alignment of functions between RemainCo and SpinCo


As a result of the alignment two sets of organizations are formed, who can run business independently. Note that some business operations may continue to exist between RemainCo and SpinCo organization. Depending on the nature of business possible relation needs to be build between these companies (e.g. Intra Company, Vendor – Customer relation etc.) and necessary interfaces needs to be build.


Fig: RemainCo and SpinCo Company Codes



System Carveout Strategy


SAP system carveout strategy defines a guideline on how organization can plan system separation activities though a best fit mechanism. It focuses on the existing entity definitions in current system architecture to derive how smoothly SpinCo organization can be separated. Following diagram shows the logical steps which can be followed to decide appropriate strategy.


Fig: Logical separation strategy


 

These strategies help organization to decide on a migration path that would be best suitable based on the existing architecture. Important to note that while it looks like a logical sequence flow, rather it provides a reference guideline. Organizations may like to choose one or more other strategies even if those strategies may not seem to be the best fit option. For example, an organization can choose to do a new implementation even if they have a choice of separating existing systems. Each strategy come with its own benefits and challenges. Depending on the spin-off strategy an organization can decide execution approach. Following diagrams shows a comparison of each strategy based on their fitment.

 


Fig: Strategy Comparison



Conclusion


Depending on the usage of SAP application there are multiple strategies that can be used for a successful system separation. These strategies are driven by spin-off strategy adopted by the organization. Depending the spin-off strategy organization may choose to implement one or more system separation approach, which will need respective readiness.


Event Coverage:


This topic was presented in the SAP Inside Track Kolkata 2023 event. It was a community connect event for all SAP practitioners. To know more about it, please refer and follow the community.

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