Disentanglements are omnipresent – be it due to a new business focus or to finance business portfolio management activities. Typically, it starts with formulating guiding principles, establishing the program structure, and estimating the separation cost, which should be the focus at the beginning of any disentanglement. The separation of IT is typically the largest cost item – especially the separation of the ERP system.
Dirk Becker, Partner at AdEx Partners, describes in this article a goal-oriented and efficient approach to choose the best ERP separation option. This prevents unnecessary costs, minimizes risk, reduces complexity, and paves the way forward.
Philips, Leoni, SAP, and Novartis successfully demonstrate how to adapt their business with disentangling1 units or subsidiaries. A separation is a highly complex process because it involves organization, employees, processes, contracts, business permits and technology in all business functions. The following figure illustrates this complexity:
Experience shows that deadlines and budget allowances for separations are often not met. IT, which typically makes up for 50% and more of the total cost, often fails to stay on budget. Reasons are manifold with unclear definition of the target state and insufficient considerations of complexities and dependencies being the most common.
The ERP-System is the heart of an IT separation
Shortly after the official separation announcement the CFO or the overall program lead will request from all functions an estimate of all separation related cost for Day 12. Misjudgment would lead to wrong decisions, like sales price determination and risk assessment during the vendor due diligence.
Within IT, the ERP-System is key having a stake in most business functions as Finance & Accounting, Supply Chain Management, and Procurement. From an architectural perspective the ERP-System is the center of gravity for all other business applications. Thus, the cost to separate an ERP-System is typically the highest3 and influences the separation options and associated cost of the surrounding applications. However, special SAP4 software tools can reduce cost and de-risk the program. SAP Consulting and SNP are specialized in this field and have dedicated separation tools to select and migrate the NewCo5 data in one go.
Three most common options to separate SAP
Nevertheless, the challenge is to choose the best Day 1 separation option for the ERP-System. The three most common options to separate SAP are:
- Company Code Copy – simple and quick to realize with limitations concerning IT Security
- Client Copy – provides ParentCo and NewCo more flexibility to follow their own IT roadmap
- System Copy – typically chosen when renewal of SAP ERP to SAP S/4 HANA is planned
Those options are visualized in the next figure and will be described in the subsequent paragraphs. Please note there are three variations for the Client Copy option.
1. Company Code Copy – same flat with separate rooms
When the existing SAP system is modified to support the newly created legal entities of the NewCo by separate company codes we call this approach company code copy. For example, the ParentCo6 has sales office in the US and the associated SAP company code is called “US01”. For Day 1 a second legal entity would be created in the US, if the NewCo plans to continue business in the US. Typically, the SAP Company Code associated with this new sales office will be called “US02” and it will be a copy of US01, but it will support the NewCo, while US01 continues to support the old legal entity within the ParentCo. In addition, there might be differences in the type of products that will sold via both company codes. Moreover, users will have different authorization and certainly financial consolidation will vary. In other words, both parties live in the same flat in two separate rooms, with different keys and distinct room furniture and guests, but share the rest of the flat.
As result, the existing SAP system has two sets of company codes: one for the current/remaining business and the second one for the to be divested business and its newly created legal entities. We see this scenario quite often for a separation.
2. Client Copy – same house with separate flats
The second option is to create a client copy within the SAP instance. There are three variations for the client copy:
- Empty Shell – Neither master nor transactional data will be copied to the NewCo client. Instead, all new legal entities, associated company codes and master/transactional data will be created from scratch in an empty shell. Moreover, the source client would be cleansed to only hold the remaining business entities.
- Slim Client – The difference to the “Empty Shell” variation is that the master data would be copied to the NewCo client and purged for non-NewCo related objects.
- Fat Client – In this variation a complete copy is made, configuration, master and transactional data are duplicated and renamed. Both ParentCo and NewCo client must be cleansed for non-related data objects.
Of course, various tricks and tools to simplify and smoothen the client copy exist, for example an incremental load as well as the synchronization of data objects prior Day 1 reduces the workload during cutover.
An analogy is that both parties live in the same house but within separate flats. If one party plans to tear down a non-bearing wall or replace the kitchen interior, it can do so without asking.
As result of the client copy, the existing SAP system has two clients: one for the current/remaining business (WP500) and the second one for the to be divested (WP501) business and its newly created legal entities. The company codes names (e.g. US01) can remain, but in each client, they fulfill different purposes.
3. System copy – two separate houses
While in the previous option both clients still reside within the same physical instance, one could choose to physically copy the SAP instance including master and transactional data. This would result in two physical instances each holding one client which would be both cleansed as previously described.
As result of the system copy, there are two physical separated SAP systems: one for the current/remaining business and the second one for the to be divested business and its new created legal entities. ParentCo and NewCo would live in their own house independently of each other.
Many companies use this option to define the renewal strategy of SAP ERP towards S/4 HANA. Based on experience, three dimensions determine such a transformation strategy to S/4HANA in terms of time, budget, and flexibility:
- Scope
- Hosting / Edition
- Transformation Path
With an S/4HANA strategy cube7, the decision space is visualized, and it gets also highlighting which combinations are not compatible to each other.
How to choose the best option?
In the following, the SAP separation options will be evaluated.
First, the overall criteria are defined. Second, each option will be analyzed using the defined criteria.
At the end, a visualization will summaries the findings.
Definition of overall criteria
Obviously, the options differ in time, cost/efforts, and risk. However, let us have a closer look on what those criteria mean
- Time looks at the time required for IT to create and configure the copy
- Cost / Effort considers
- Integration Complexity – when creating an SAP copy, integration topics must be dealt with, (1) setting up connectivity and security between other SAP systems and satellite systems (like HR-System); (2) potential modification of firewall for payroll and time recoding systems
- Data Cleansing – Master and Transactional data must be migrated to the NewCo copy and cleansed in the ParentCo and NewCo copy, and the effort depends on the option chosen
- Testing Efforts – a separation has a hard deadline to go-live; thus, testing is extensive to prevent surprises and comprise amended functionality (e.g. treasury and consolidation), configurations, interfaces, adapted good flows and above all data.
- Risk – ability to manage time, budget, and quality
Evaluation of three main options
Evaluation of Option 1 Company Copy:
With a structured and solution-oriented approach the creation of the company codes can be achieved within four to six months. Reducing the variations of company code types for the NewCo saves further time and minimizes maintenance effort in production. Compared to the other options it is the fasted separation. However, it comes with a prize, to achieve full standalone by Day 28 will take longer than starting from option 2 and 3 if the buyer of the NewCo is a financial investor or an IPO is planned. First the NewCo has to set-up and configure their own SAP system and thereafter migrate the data from the NewCo company codes to the new SAP system.
The key advantage of a company code copy is that all business transactions remain within same SAP client, i.e. the business logic of this environment can be used for the NewCo company codes. Additionally, the IT landscape remains unchanged, no new system is created nor any new connectivity requirements between parts of the IT landscape must be introduced. Thus, integration complexity and testing efforts are rather low. Furthermore, data cleansing is limited to the ParentCo company codes.
In summary, the company code copy is the low cost and low risk option but shifts the workload towards Day 2. Moreover, many ParentCos have IT security concerns and dislike the idea that the buyer has access to their ERP-System – even if it is limited to the NewCo company codes.
Evaluation of Option 2 Client Copy:
The creation of the client copy including the NewCo company codes can be realized in six to nine months subject to the data objects to be copied. The complexity of this option lies in:
- Potential integration work, like workarounds which must be established for satellite applications, which will not be copied and are not SAP multi-client capable
- Correct data cleansing within both ParentCo and NewCo client
- Testing – especially in the slim and fat client variation, because of the copied master and transactional data objects. Additionally, the integration of the NewCo client in the IT landscape requires extra testing
In summary, the client copy results in medium cost and acceptable risk compared to the other options. In addition, it paves the way for Day 2 already more than half-way and the degree of freedom for ParentCo to follow their own IT roadmap after Day 1 is much higher.
Evaluation of Option 3 System Copy:
Despite cloud computing – hardware lead-time and setup to establish the NewCo system copy and NewCo company codes lead to a realization time of 9 to 12 months. Looking at integration, this approach introduces new connectivity requirements between components within the IT landscape, e.g. the connection to other systems like CRM, BI and HR, which might require a middleware redesign. Additionally, there is an extensive impact in the IT infrastructure area to address data center connectivity, fire walls configurations, etc.
Like the fat client variation of Option 2 extensive data cleansing and testing in both SAP systems is crucial.
In summary, the system copy comes with significant cost and risk due to extra hardware, software, integration efforts and much larger team size – especially in the IT infrastructure area. However, it provides the highest levels of IT security and completes 80 to 90% of the Day 2 efforts. In addition, ParentCo and NewCo can follow their individual IT roadmaps right after Day 1 – at least for their SAP system.
The following table summarizes the evaluation of the three options.
So, what – which path is the best for your company?
At a start of a separation, it is often unclear what the destiny of the divested business will be (financial or strategic investor, IPO, …). Hence the Company Code Copy certainly minimizes time and cost including potential sunk costs for Day 2. For example, a strategic investor might only request NewCo data to load into his SAP system. Therefore, it is the most common one.
The Client Copy takes a middle ground. If an IPO or a financial investor is more likely than a strategic investor scenario, it will be the best choice, because it paves the way for Day 2 (i.e. standalone) and typically the pre-investment can be recovered via the sales price.
The System Copy excludes itself almost automatically, while typically the timeline until Day 1 is rather short and the significant budget required to realize it is not at hand. However, this option is chosen when an ERP renewal to S/4HANA is pending, or IT security concerns prevail on the part of management.
Footnotes
- In this article we use the words ‘disentangle’ and ‘separate’ synonyme. The word ‘divest’ is used, when the business unit being disentangled / separated is sold to someone. ↩︎
- First Day of NewCo (i.e. line of business or business unit selected to be separated) operating as own legal entity and transferring the business, assets, and employees to the NewCo or the Buyer. ↩︎
- Cost of more than one million Euro for an ERP separation is not uncommon also for mid-size businesses. ↩︎
- In the following, we will focus on ERP-Systems from SAP and therefore use SAP terminology. However, a similar approach would work for other products. ↩︎
- The line of business, business unit or business/support function that has been selected to be separated. ↩︎
- A company or business group, which decides to separate one of its business units or business/support functions. ↩︎
- For further details please see: Planning your transition to SAP S/4HANA – AdEx Partners ↩︎
- Point in time where the full physical IT separation and stand-alone state of NewCo are completed (while all TSAs have ended). This is typically 6–12 months after Day 1. ↩︎