IT managers are thus faced with the challenge of creating a concrete cost estimate within a very short time. If it turns out during the carve-out that the estimated costs were too low, additional financial resources must be provided for the IT area, which, however, are planned and needed in other business areas. If the costs for the IT carve-out are set too high, financial resources are unnecessarily tied up. At the same time, the estimate must be created at short notice to enable overall planning of the carve-out. Experience shows that the IT carve-out is one of the most complicated and long-lasting processes, which often reveals hidden costs only in the course of separation. To determine these costs early and as accurately as possible, IT managers can apply some measures and thereby support the overall process in the best possible way.

Estimating IT Costs for Carve-Outs in 3 Steps

Gaining an Overview

Initially, it is crucial to analyze the existing cost structure and divide it into individual areas. The main cost drivers within the IT carve-out are the monthly costs of the TSA (Transitional Service Agreement) itself, licenses and other IT contracts, the ERP system, other non-ERP applications, IT infrastructure as well as hardware and telephony costs. In practice, it is shown that companies benefit from a consistently maintained inventory in connection with the associated historical data. Through this initial analysis, various cost points can be identified and necessary priorities set.

Definition of Target State (Baselining)

After the IT management has gained a general overview (Baselining) and thus generated a suitable starting position, it is necessary to determine what the future IT landscape should look like. This depends, among other things, significantly on what type of deal (e.g., asset or share deal) is involved and whether IT components of the buyer will be adopted or whether a so-called green field approach is present and the IT landscape must be completely rebuilt.

Cost Estimation

The actual cost estimation follows as the most complex and time-consuming part of the process. This can best be managed by combining a bottom-up and top-down analysis. Practice shows that the final estimate often lies in the middle of both approaches. Typically, costs are estimated using the top-down approach by IT management, often drawing on the extensive experience of external consultants.
Due to the heterogeneity of individual transactions, the result of this analysis is only conditionally correct and should be supplemented by a detailed cost analysis according to the bottom-up principle. Additionally, responsible IT managers benefit from further input from lower hierarchy levels within this approach, thereby avoiding completely forgetting cost points. For topics with a smaller scope, a pragmatic approach should be chosen and the costs should be roughly quantified and proportionally aligned with the overall estimate.
Additionally, the necessary personnel days must be estimated together with the responsible managers for the individual segments. Depending on the size of the company and the internal resources available, additional costs for external specialists may need to be considered.
Finally, a cost buffer should always be factored in, in case costs turn out higher than expected or if there are still cost points that were not recognized or not apparent at the beginning of the carve-out. This avoids discussions in case the budget is exceeded and additional funds are needed.

Conclusion

The cost estimation of an IT carve-out presents a significant challenge for IT managers, which can be well mastered through a few measures. An initial estimate can be presented after just a few weeks. This estimation simultaneously serves as a basis to be enriched with further data in the following steps, ultimately providing a binding outlook on the costs to be incurred.