Divestitures: Growth Redirected. Can Cloud ERP Help?

In Cloud ERP: The Great Enabler of Growth, Mint Jutras examined how Enterprise Resource Planning (ERP) solutions delivered as software as a service (SaaS) help companies fuel and simplify growth by addressing people challenges and mitigating risk, while maintaining governance and control. Cloud solutions enable you to fail (or succeed) faster, allowing you to focus on the next and best opportunity for growth. But with the ever-increasing pace of change, sometimes growth leaves you too diversified, or with less focus and efficiency than desired. While mergers and acquisitions are quite common today, so are divestitures. These transactions have the potential of being painful and messy. The goal is to get through them as quickly and painlessly as possible. Can cloud ERP play a significant role in smoothing these transitions?

Because growth is so often hailed as the holy grail of businesses in general, a shrinking business is sometimes assumed to be a failing business. This can be very far from the truth. Growth aspirations often lead companies to expand and/or diversify and the accelerated pace of business today leads companies down many different paths. As we discussed at length in Cloud ERP: The Great Enabler of Growth, cloud solutions enable you to fail faster and allow you to move on to the next (and better) opportunity. Smart companies recognize the need for this quickly and take action to correct the course. They refocus efforts back to core competencies and redirect growth.

Some of the factors that tend to add complexity to these course corrections include the information technology (IT) infrastructure and solutions that support the entity being divested. These solutions need to stay in place right up until the actual closing of the transaction. After all, the business continues to run even as preparations for its sale are underway. And business doesn’t stop on the day of the divestiture either. Transactions continue, but must be removed from the seller’s balance sheet and profit and loss statement, and recorded on the buyer’s.

Because acquisitions and divestitures are typically cloaked in secrecy, the IT department might be one of the last to know and rarely has much time to prepare for the transition. Very often some arrangement is made for the divested business to continue to use solutions in place for some period of time after the closing. But the clock is ticking. The divesting company is anxious to be relieved of the administrative burden. For the acquiring company, it can be costly as the cost of leaving these former solutions in place is likely to escalate dramatically after a relatively short period of time.

How can cloud ERP help? That question can perhaps best be answered through the story of one of these real-life divestitures.

Case in Point: Evonik Industries

Evonik Industries is one of the world’s leading specialty chemicals companies. Headquartered in Germany, it employs about 33,000 employees in 25 countries around the world and generates sales of €12.9 billion. About 78% of sales are generated outside of Germany.

Evonik strives for sustained value creation through profitable growth and efficiency, while maintaining corporate values. Developing ideas to market readiness as quickly as possible is both a challenge and an economic necessity. The goal is to offer the maximum benefit to customers and to society. As a pioneer in specialty chemicals, Evonik actively follows high-growth megatrends, especially health, nutrition, resource efficiency and globalization. These megatrends tend to be very volatile, causing Evonik to periodically re-evaluate, re-focus and restructure.

Like most companies today, Evonik has established corporate standards for enterprise solutions. The 2015 Mint Jutras Enterprise Solution Study found those with the highest performing ERP implementations (those we define as World Class) even more likely to have both established and implemented standards (Figure 1).

Figure 1: Have you established corporate standards for ERP?

Fig 1 EvonikSource: Mint Jutras 2015 Enterprise Solution Study

Sometimes these standards are single-tier (all business units and corporate headquarters use the same ERP) and sometimes they are multi-tier (operating units run one or more standard ERP solutions that are different from that used at corporate). Evonik has established a single-tier standard, running corporate headquarters and all its divisions and subsidiaries on SAP ERP. In fact it runs the entire enterprise on a single instance and in doing so, it also imposes its “best practices” on all subsidiaries.

When Evonik decided to divest itself of some of its operating units, in order to focus purely on chemicals, it needed to carve those business units out of their SAP ERP implementation. Initially the approach had been to make a copy of SAP ERP and run the business unit from this separate instance until the new owner took responsibility or migrated the business off SAP ERP to a different solution. While on the surface that might sound fairly simple, extricating the business unit being sold from shared services added complexity and Evonik had to make sure corporate data, and data from other retained business units was not visible and available to the new owner.

Also complicating matters was the fact that once an operating unit was carved out, it became a much smaller organization and SAP ERP was actually overkill. Those “best practices” had been imposed on all subsidiaries, admittedly, whether they were truly required or not. In addition, Dr. Marcus Schiffer (heading the Research team of the Global IT & Processes department) had vision enough to realize that a cloud solution would lend itself much better to this transition, providing increased secure transparency to all parties involved. But Evonik’s SAP ERP implementation was on-premise.

These two factors combined led Evonik to consider SAP Business ByDesign as an interim solution for the units being divested. The first divestiture to take this approach was a subsidiary located in the state of Arkansas in the United States. Instead of cloning the existing SAP ERP, Evonik migrated the Arkansas subsidiary to SAP Business ByDesign and managed to have it all up and running prior to the close.

Even after paying for the user subscriptions for one year and doing the migration themselves, with the assistance of iTelligence (an SAP business partner and Business ByDesign reseller), Evonik says they saved more than half of the originally estimated (IT) cost of the transition. The savings came from freeing up resources from shared services and enormously simplifying the implementation of the solution that will be turned over to the new owner. And when they were done, the implementation could stand on its own. Evonik provided support for an additional six weeks, giving the new owner ample time to also take ownership of the implementation.

According to Dr. Schiffer, “It took three years to get management to agree to move to the cloud. Doing it was easy.” This first divestiture was an experiment. But the experiment was deemed a success and Evonik is planning to repeat the process with another divestiture. This one will be in Germany and compliance requirements will be more challenging. With even tighter time restrictions, Evonik will continue to manage and run the system for an additional two months after the closing – still an incredibly fast and efficient transition.

Was there any downside to using SAP Business ByDesign for the transition? As an admitted “SAP bigot,” Dr. Schiffer finds the solution “not very configurable,” citing that he can configure the solution in less than a day. Of course, he is comparing SAP Business ByDesign to SAP ERP, for which he projects there are 10 80 different options for configuring orders, delivery and invoicing. “And you can’t really customize the solution when [the users] might wish they could do something not supported. But on the other side, it is good – discussions are short and decisions are easier. After learning Business ByDesign, I became a fan. Most processes can be satisfied.”

Some others might see this simplicity of configuration as a plus. In The Three Dimensions of SAP Business ByDesign Set the Stage for Growth we emphasized SAP’s current mantra of “Run Simple,” noting SAP Business ByDesign can indeed help simplify the growth process through its three-dimensional design philosophy incorporating simplicity, flexibility and extensibility.

But we also cautioned that you would need to fight added complexity every step of the way. New generations of ERP, with new and improved user experiences, can help you win the battle of complexity and gain more transparency. By putting those new generations of ERP in the cloud, you can simplify: Simplify your IT; simplify your access to data; simplify your business. And now, simplify mergers and acquisitions, regardless of which side of the transaction you sit on. Whether you are buying or selling a business, consider the cloud as one way to simplify that transition.

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