Selecting Target Operating Models: Structural Considerations Part I

By now you should have a good idea of how to design or adapt a Target Operating Model given the structure of your deal or deals, and your company’s propensity to acquire.  The next step is to evaluate whether your chosen TOM is impacted by aspects of your company’s structure.

Shared Services Impacts

For our purposes let’s define shared services as centralized administrative groups, usually located in low-cost jurisdictions, that perform back-office activities for much or all of the enterprise using an employee model.  Whew- that was a mouthful, but the key phrase for TOMs is “using an employee model”.  This generally means that acquirers have sufficient span of control over the shared service organization to adapt it to the needs of the integration.  And indeed, most adapt fairly well so long as sufficient time and budget to achieve are provided. 

To assess the budget and timeline requirements certain key aspects should be considered:

• Do we indeed have sufficient span of control over shared services to manage the required changes?  As stated above this is usually the case; however, if the acquirer is a small business unit within a large organization, it may be more appropriate to treat the shared service center like an outsourced provider (more on that below).
• Does the transaction introduce new requirements, such as a new line of business, new geography, or new language?
• Are the company’s tools and processes robust enough to handle the additional workload, or are upgrades required?
• Are we targeting personnel synergies from the acquisition in the same geography where our shared service center is located?  Some countries can prohibit laying off acquired talent whilst simultaneously staffing up at the acquirer, so it is important to plan for sufficient shared service bandwidth early, well before Close and any targeted reductions in force.

If the seller utilizes a shared service model, spend time in diligence getting an understanding of how the team is structured and incentivized.  Painful integration delays can result if the shared service team is focused on routine operational metrics and thus neglects integration tasks such as data migration.  If incentives are skewed, you will want to incorporate new incentives and/or penalties into the deal agreements if under TSAs, and/or address these immediately upon on-boarding any shared service resources.

Outsourcing Impacts

Outsourcing is similar to shared services, except the activities are performed by third parties under contract rather than employees, and thus the span of control is limited.  If either or both the buyer and seller use outsourcing, expect substantial time and additional costs to achieve the desired TOM due to the need to create new service contracts for the extraordinary activities resulting from the transaction.  Try to get access to any outsourcing contracts early in M&A diligence- even if a clean room is required- so as to get a head start on the process of identifying the scope of required that will be required for TOM achievement. Also, be sure to consider capabilities of outsourced staff, and be aware that most outsources are reluctant to be flexible with regards to interim or exception processes. 

This means that more time will be required up front to design and standardize a process, enter into a contract to have the outsourcer perform the process, and train the outsourced staff.  You will want to develop an integration plan that minimizes the number of transitions, which can be particularly challenging if your value drivers call for an interim TOM. Regardless, any TOM you plan to achieve will have to be well-defined and validated in advance, and you need to be prepared to operate in that model until the next well-defined transition can be executed- usually at least a few months.  Bottom line: if either party uses outsourcing, you can anticipate less iterative flexibility and higher costs for TOM achievement than you would experience in a shared services model.