Standing up a NewCo
Standing up a NewCo through an initial public offering (IPO), sale to private equity (PE) firm, or a divesture presents a unique opportunity for company leadership to unlock stakeholder value.
TCS recently partnered with Cordis, a leading medical device manufacturer based in the US, to assist with its process of separating from its parent company. Going in, we knew that aligning early on an end-state strategy, having full financial visibility, and preparing for operational control would be critical factors for long-term success.
TCS and Cordis followed six principles to ensure value creation for shareholders and employees. Based on our shared experience throughout the process, here are the lessons we learned.
1. Establish a robust governance that comprises cross-functional senior leaders.
By establishing a cross-functional governance model early on, a NewCo can have a focused approach, balancing transactional challenges and risks with appropriate contingency plans. The governance team should be ready to drive a comprehensive list of stand-up activities and key performance indicators (KPIs) from Day 1.
The company must also empower the governance team—such as a transaction management office (TMO)—to make timely decisions as a collective body. This empowerment is critical to gain operational control, have financial visibility, and drive innovation while still working with the selling company.
At Cordis, we established a robust, cross-functional leadership team, which drove stand-up activities and owned critical decisions.
2. Drive profitable revenue growth by focusing on key products and customers while optimizing operations.
To drive profitable growth, a NewCo must adopt a two-pronged approach: focus on core product lines and key customer markets, while optimizing operations and reducing costs in supply chain. For a product company, this includes reducing costs related to planning, manufacturing, distribution, and logistics.
We learned early on that Cordis’ supply chain operating model and distribution KPIs needed to be redesigned, as Cordis became a standalone entity with its own corporate vision and strategy. Our approach included streamlining the build and logistics processes at Cordis to reduce freight costs, optimize the supply chain network, and increase customer satisfaction. This also allowed Cordis to make faster decisions on its manufacturing posture, including its product mix, financial needs, and cost areas.
3. Establish a culture of innovation to drive R&D, expand market opportunities, and improve customer satisfaction and loyalty.
Aside from the obvious financial benefit of additional revenue, the establishment of a NewCo as a disruptive innovator can attract top-level talent as well as prospective shareholder interest. The new company often can build a culture that is different from that of the seller’s, which empowers employees to innovate and more directly align their activities to the new operating model.
“We found that positioning Cordis as an independent company with unique opportunities to build greenfield IT and innovative business solutions was attractive and exciting to talented new hires and existing staff,” says Joe DiPrima, CIO of Cordis. “The chance for our teammates to put their fingerprints on the new Cordis was a major selling point.”
The NewCo should have a clear long-term vision, with milestones broken down into waves or move groups. Aim to achieve 80% of stand-up activities in the first 12 to 18 months.
4. Gain operational control as quickly as possible by minimizing dependencies on Transitional Service Agreements (TSAs) and the seller.
The need for operational control isn’t important only in IT, but also in supply chain, manufacturing, and beyond. For example, at Cordis, gaining operational control in sales and marketing functions can help Cordis management make decisions on pricing, product mix, and customer service, with an aim of driving customer satisfaction and revenue growth. In addition, it is best practice to assess company policies and procedures for efficiency, cost, and corporate priorities.
Successful demonstration of operational control early on—especially in the areas of manufacturing, supply chain optimization, and customer experience—can build confidence among all stakeholders, including customers, employees, and shareholders.
5. Rightsize the organization to reduce costs and set up the company for long-term success, innovation, and transformation.
Early in the spin-off or divestiture process, companies need to quickly assess the talent pool, identify upskilling requirements, and plan for the next-gen capabilities that will be needed to create an optimal organization structure and vendor ecosystem.
As it nears full independence, Cordis is building a leaner, more agile organization. This includes key partners that will support Cordis in the longer term, such as shared services and strategic advisers for business and technology. These partners are also responsible for bringing innovation to the ecosystem, supporting Cordis through market fluctuations, and serving its customer base.
6. Find the right balance between centralization and autonomy to achieve timely execution.
A structured approach to executing the NewCo stand-up activities requires striking the right balance between a highly centralized approach versus an autonomous approach. This balance is required across all functions to achieve the timely execution of program tasks.
The NewCo should have a clear long-term vision, with milestones broken down into waves or move groups. Aim to achieve 80% of stand-up activities in the first 12 to 18 months. This will reduce dependency on TSAs and allow the company to focus on growth as an independent entity. In addition, have a clear and detailed project plan that provides the NewCo visibility into which and when business capabilities will be stood up, as jointly agreed upon by business and technology owners.
For the Cordis standup, we learned early on that establishing a well-thought-out wave plan would be fundamental for the success of the transaction.
By successfully leveraging these six principles, Cordis has minimized its reliance on the seller and placed focus on selected transformation programs to establish a strong foundation for growth.
In addition, developing a right partner ecosystem helped Cordis manage peaks and valleys of demand, while providing continuous innovation for product development and its operational operating model.