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Unlocking Value in Operational Assets
 

Unlocking Value in Operational Assets

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Whether to monetize an asset or not (and if so, how) is a strategic question with long-term implications on financials, operations, organization, and risk management. This ISG white paper describes ...

Whether to monetize an asset or not (and if so, how) is a strategic question with long-term implications on financials, operations, organization, and risk management. This ISG white paper describes different types of asset monetization strategies and outlines an objective, fact-based approach to assessing requirements and determining whether asset monetization is a viable option.

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    Unlocking Value in Operational Assets Unlocking Value in Operational Assets Document Transcript

    • UNLOCKING VALUE IN OPERATIONALASSETSCan asset monetization benefit your company?By Bill Miller, Director, ISGwww.isg-one.com
    • INTRODUCTIONAsset monetization is a business transaction that converts an asset from onethat does not directly generate income or other financial value into one thatdoes generate income or other financial value.While nearly any asset can be monetized, the types of assets discussed hereare “operational” – those that a company owns or otherwise controls tosupport internal operations and/or the delivery of services to internalcustomers. These assets can be tangible or intangible and can include datacenters, business processing facilities, real estate and improvements,information technology hardware and licensed software, intellectual property(unique processes, internally developed software, etc.) and an experiencedworkforce.Asset monetization is just one of many strategies companies use to drivebetter financial performance through revenue growth and better costmanagement by unlocking some or all the economic value embedded invarious operational assets. This “unlocked value” might be in the form ofcash, longer-term changes to lower or introduce variability to the coststructure, or other conversions of non-income generating assets to current orfuture bottom-line value.Whether to monetize an asset or not (and if so, how) is a strategic questionwith long-term implications on financials, operations, organization, and riskmanagement. This ISG white paper describes different types of assetmonetization strategies and outlines an objective, fact-based approach toassessing requirements and determining whether asset monetization is aviable option.UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 1
    • TYPES OF MONETIZATION STRATEGIESAn asset can be monetized in a wide variety of ways, depending on a company’s objectives and the nature of the asset.While the variety of combinations and permutations of these approaches is extensive, the diagram below illustrates themost common approaches to monetization.Categories of Asset Monetization StrategiesThe first major delineation is whether the company retains ownership of the asset. This is a fundamental difference anddefines the monetization strategies that can be pursued.MONETIZATION WITHOUT OWNERSHIP into a marketable asset that delivers a product or serviceCHANGE that can be sold to other companies. For example:  Licensing a software application developed for theMonetization strategies that retain asset ownership tend company to other companiesto be of two broad types, as described below.  Converting an internal process into an outsourcedImproved Asset Utilization service for third partiesThis approach generates income from underutilized These strategies often require an investment in the assetassets to help offset costs of those assets; e.g., real to make it marketable and applicable to a broadestate, facilities, or equipment assets that are customer base, with a serious management commitmentunderutilized. For example: to develop the infrastructure necessary for sales,  Leasing unused space in a facility implementation, customer support, invoicing, collection,  Leasing unused hardware or bandwidth etc. In other words, the company essentially takes on the characteristics of an outsourcing service provider orMore complex strategies can involve a sequence of a vendor.several actions, such as consolidating operations to freeup and lease available space. ISG has found that these transformations are extremely difficult to implement and manage, as they involveThese strategies tend to be more opportunistic and forecasts of future sales and profits from marketing thetactical and employ traditional asset valuation services to other companies. The financial andtechniques, using standard market, cost and income organizational commitment is significant to move fromapproaches to valuation. Benefits include cost reductions an internal services operation to a sales and externalas well as incremental revenue to offset existing costs, as customer-oriented provider. Few companies can do thisopposed to a transformational change in operations without substantial investments in new people withand/or costs structure. different skills and a vendor-oriented infrastructure.Asset Commercialization While the transformation can be done, we have foundThis approach is more complex than simply making the joint venture strategy (discussed later) is often morebetter use of underutilized assets, and tends to be more successful.strategic by converting an asset that has only internal useUNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 2
    • MONETIZATION WITH OWNERSHIP CHANGE An emerging joint venture trend is “industry utilities”Monetization strategies that involve ownership change where multiple companies contribute similar operational(in whole or in part) are usually driven by a company’s assets to reduce costs and take advantage of the greaterstrategic objectives. Specifically, monetization is ancillary efficiencies a utility offers. Companies have bandedto some other desired change. These strategies tends to together for years to create purchasing co-ops andfall into three categories: consortiums, but more formal SPEs are being created to manage the operations and sell the utility’s services toAsset Sale other companies. Each contributing company gets anThe most obvious monetization technique is the sale of ownership stake in the SPE for future value and revenuean asset and is common within many corporations. If the possibilities.assets are tangible (e.g., buildings, land, etc.) the Outsourcing to Third Partyvaluation is straightforward. Valuation of intangibleassets or going concern valuations (e.g., patents, carve Transfer of asset ownership incorporated with anouts, business units, etc.) can be more complex. outsourcing transaction is the third type of approach to monetization with ownership change. In this case, theFor operational assets, the two most basic variation of an new owner (the service provider) uses the asset to serveoutright sale are: clients in addition to the selling company. Valuing an  Sale without future use: This is a standard asset as part of an outsourcing transaction can be divesture of an asset where the seller has no complicated given the difficulty of assessing value prior interest in having future use of, or access to to engaging with service providers in a detailed way. the asset. For example, a company may have a business processes  Sale with future use: This technique involves the shared service facility that has additional capacity in floor seller contracting with the buyer at the time of space, staff, and/or equipment. The company can sale for contractual rights for access to, or use of outsource the processing to a third party that takes over the asset. The sale/leaseback of a building is the shared service center and provides services to the probably the most common use of this technique. company, with the intent to sell services to other Another, more complex, example is the sale to a companies. third party service provider of a data center or business processing shared services unit, with a This approach has similarities with the sale of an asset simultaneous agreement to “buy back” services with future use approach, except the new owner from the provider. This example is very similar to explicitly plans to use the center to support new clients. an outsourcing transaction where operational In these instances, value is determined partially by assets are transferred as part of the deal (as various traditional approaches, as well as how the asset discussed below). The difference is the “sale with complements the service provider’s business objectives. future use” technique is generally for a single (See “Special Case of Monetization with Outsourcing” client for a specific asset. The outsourcing below.) technique is used when the service provider wants to use the asset for additional clients. ASSET VALUATION UNDER DIFFERENTJoint Venture with Third Party STRATEGIESThis technique usually entails creation of a “Special For any monetization approach, “what are the assetsPurpose Entity” (SPE) owned by the company and a third worth?” is a central question. Since virtually allparty. These are often generically referred to as joint monetization strategies have a financial objective,ventures. The SPE acquires the assets in question with valuation is often the factor that determines if thethe expressed purpose of providing services back to the strategy is a “go” or “no go.”company, and marketing the services to othercompanies. Operationally, this looks very much like the“commercialization” strategy mentioned earlier, but withco-ownership by the company and another party(or parties).UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 3
    • FIVE STEPS TO ASSESSING MONETIZATION For example, monetization as part of anOPTIONS outsourcing transaction can drive value from the assembled workforce if that workforce can beISG has a framework to support clients in their used to expand the customer base for theassessment of asset monetization options. Through a service provider.logical and sequential process of answering five critical 3. How might a monetization approach or solution bequestions, companies can reach a “go/no” go decision structured to support our defined objectives?about monetization. If the decision is a “go”, the processcan help define a strategy that best suits specific The deal structure possibilities are almost endless,business requirements. but as discussed previously, they tend to fall into two major groups depending on whether ownership ofFive Questions the asset is transferred.1. What are we trying to achieve? From the list of potential monetization structures, the The management team must be aligned on why an one or two workable ways should be shortlisted for asset monetization is even being considered. Without deeper value and business impact analysis. concurrence on “why,” you will never get to “what” 4. What are the assets worth? or “how.” The value of the asset is driven partially by the Asset management strategy objectives are not always strategy to be pursued; hence the valuation will be internally aligned. Is it a cash infusion? Ongoing lower driven by the one or two workable strategies defined operating costs? Improving the balance sheet and in question #3. capital structure? Maybe elements of all these? Other The greatest variability in value tends to occur when motivations? the asset is to be transferred to a service provider as Clarity on objectives is especially important because part of an outsourcing transaction. The reason is that asset monetization is not a discrete strategy, but value estimates vary depending on how the asset is complementary or integral to another. Therefore, presented to the service provider community, and the objectives may be much broader than just the level of service provider interest. Often, ad hoc monetization component. discussions with service providers help assess how2. What assets do we want to monetize? the asset will be viewed and valued. This valuation scenario is discussed more fully later in this This (seemingly obvious) question must be considered white paper. ensure management is in agreement about the assets to be monetized. At this point, the level of specificity 5. What is the business case? does not have to be an audited inventory but the A quantitative and qualitative analysis addresses how company needs to decide “what’s in and what’s out.” the shortlisted monetization strategies and deal The types of assets can be: structures impact the company’s financial, operational, organizational and risk profile.  Tangible assets such as data centers, business processing shared services centers, call centers, Asset monetization deals can be complex and the physical plant and equipment, IT hardware and financial assessment can be equally so. The best infrastructure, etc. results come from a collaboration of specialists in  Intangible assets such as developed software, operations, finance, accounting, taxand legal. unique business processes, intellectual property, Monetization strategy risks vary widely depending on royalty agreements, patents, etc. the nature of the strategy. For example, simply  Assembled workforce is not always recognized leasing unused space in a company-owned facility has as an asset, but it has value in certain types of a small risk footprint. Conversely, commercializing an monetization strategies. asset or in a conjunction with an outsourcing transaction carries a more substantial risk.UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 4
    • SPECIAL CASE OF MONETIZATION WITH The bottom line is that the marketplace of serviceOUTSOURCING providers – not your value assessment – drives the deal.Monetization as part of an outsourcing transaction More specifically, the factors driving valuation in anpresents an additional set of unique considerations for a outsourcing transaction include:go/no go decision. In ISG’s experience, these unique Who is viewing it: The value of your operational assets isconsiderations fall into five areas: not the same to all service providers. One service  Making the decision provider may have a similar facility supporting other  Valuing the assets clients nearby and find little or no value. Conversely,  Going to market another service provider may see a new line of business or new market providing value beyond the scope of  Structuring the deal your deal.  Avoiding the pitfalls Ability to “open up” the asset: One of the keys toMaking the Decision perceived value by a service provider is the ability to useThe decision to outsource a function needs to be your company’s asset beyond the obligation to provideevaluated and assessed on its own merit. The services back to the company. The more capability tomanagement team needs to look at the costs, risks, and leverage the asset across more clients, the more valuablebenefits separate from monetization. the service provider will view the asset.The outsourcing decision has to be made ahead of the Obligations to use the asset: You are not truly “selling”monetization decision in priority and importance. In the asset in the classic sense. While you are transferringother words, “the monetization tail should not wag the ownership, the service provider is obligated to continueoutsourcing dog.” delivering services with the acquired assets for the duration of the outsourcing agreement. In other words,Once the decision to outsource has been made, the the service provider is bound to the asset for a specifiedopportunity to monetize assets as part of that period of time; during the course of that commitment,transaction can be evaluated. If the decision is made to the asset may or may not turn out to be as valuable asforgo asset monetization, outsourcing can still be a the service provider anticipated.viable strategy. Encumbrance of the asset: Depending on the agreement,Valuing the Assets you may restrict the servicer provider from utilizingValue in connection with an outsourcing transaction is assets for purposes other than your operations, thusdriven by the service provider’s view of the company’s diminishing value to the service provider. In general,assets; i.e., “value” is the buyer’s concept, not the when restrictions increase, value decreases.seller’s. From the service provider’s perspective, value isdetermined by the broader business objectives, the costs A service provider is highly unlikely to overvalue an assetstructure they acquire, their investment appetite, and "just to get the deal.” As a result, don’t overestimatewhether the asset fills a business void. your leverage in an asset valuation. While service providers are eager for business, they are profit-makingThis last factor is especially important. Service providers enterprises, and as such invest capital only where thereare particularly interested in acquiring assets when they is an opportunity for an adequate return.can be “opened up to the market.” For example, the levelof interest increases materially if the seller’s assets Going to Marketprovide more capacity the service provider wants and If the decision is made to outsource, and if managementcan use for new clients, or if the assets give the service determines that asset monetization should be part of theprovider new capabilities and offerings they can sell to deal (or at least be a consideration), the go-to-marketnew clients. In order to gauge potential value, strategy needs to be crafted carefully. The companyunderstanding the service providers and their strategic needs to recognize that it is both buying and selling;thisdirection is therefore imperative. changes the way the market is engaged.Because value to a service provider is dependent on theirbusiness structure and strategies, not all serviceproviders will view the value of the specific asset thesame way.UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 5
    • The company is “buying” in the traditional sense that it is These arrangements are usually associated withsoliciting service providers to take over certain transactions where the service provider is expanding theoperations of the company. This process normally use of the asset to other clients and will share theinvolves a Request for Proposal, provider evaluations, revenue or profit with the selling company. Suchdue diligence, and the other typical steps in selection of transactions can be more complex and often involvean outsourcing partner. greater value risk to the company, but usually have greater upside value potential.But the company is also “selling” the assets to bemonetized. The opportunity to sell any product or service Lower Fees: Rather than cash up front, or the risk ofis improved when it is positioned and presented well to shared value, many companies want to lower their costthe right target market. The company cannot assume structure over time. In these situations, the value may bethat just because it sees an attractive and valuable asset received as a lower fee structure from the servicethat the market will. As discussed in the preceding provider than would be offered absent assetsection, service providers will view the asset value in the monetization. To take a simplistic example, if the cost percontext of their business strategy and unique situation. unit (of whatever is being outsourced) is $10.00 without monetization, it might be $9.50 with the asset.Consequently, the assets to be monetized need to bepackaged and presented to highlight the attractiveness Avoiding the Pitfallsand “speak to” potential buyers (i.e., service providers). Depending on how the deal is structured and valueAs with any sale, the information about “what” is being received; some potential pitfalls should be avoided assold needs to be more than a litany of facts and data in a part of the outsourcing/monetization transaction.spec sheet. It needs to be packaged and presented sothat the buyer will how it can add value to their business. Cash Infusions Treated as Loans or Off-Balance Sheet Financing: If the contract is written to include anyThe right packaging and presentation of an asset upfront cash payments these might be treated as loansmonetization opportunity requires a good knowledge of on the balance sheet.the service providers being considered, and anunderstanding of their business objectives. This will Termination Charges: Outsourcing transactions typicallyoptimize the way the asset is presented and valued by include charges associated with certain events thatthe service providers. trigger an early termination of the contract. Service providers may want to structure termination fees toThe bottom line: the client company must know how ensure they recover their initial. These charges aretheir asset will be viewed (and valued) by potential commonly considered as liabilities and need to beservice providers, and position the assets to spotlight assigned an appropriate risk factor.how the assets can help a service provider’s business. Tax Treatment of Asset Sale: Avoid surprises at how theStructuring the Deal IRS treats gain or loss of assets sold in a monetization,If asset monetization will be part of an outsourcing and subsequent tax and impact on financial statements.transaction, the last consideration is how the deal will be Additionally, if multi-national aspects are associated withstructured for the company to receive the value. the transaction, country and local tax laws need to beTypically, a company can realize the value in three fully assessed for their impact on the economics ofprimary ways: the deal.Cash Payment(s): The most straightforward way for a Future Use of Assets: Unless specifically written in thecompany to receive value in return for the asset is for the contract, your company has no claim on, or rights to, useservice provider to pay cash up front, either in a lump of or limiting the use of the asset, so be careful how thesum or through a series of payments over a contractually contract is written.defined timeframe. Use of SPEs: Under Sarbanes-Oxley, SPEs have to beShared Value: This approach can be more complex as the structured carefully to provide visibility of the company’spayments are determined by an agreement to jointly true financial position.share in future value based on some triggers ormilestones.UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 6
    • LOOKING FOR A STRATEGIC PARTNER?For further information, please contact Alex Kozlov, Director of Marketing, Americas, at alex.kozlov@isg-one.comor +1 617 558 3377Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory servicescompany, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private andpublic sector organizations to transform and optimize their operational environments through research, benchmarking, consultingand managed services, with a focus on information technology, business process transformation, program management servicesand enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, thedeepest data source in the industry, and more than five decades of experience of global leadership in information and advisoryservices. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries. For additionalinformation, visit www.isg-one.com. 021313 © Copyright 2013 Information Services Group – All Rights Reserved