Transition Service Agreements: Early Planning Avoids These 10 Common Pitfalls

David Haufler, Managing Director Global M&A Practice Leader
Ryan Reents, Associate Director Transaction Services

Divestitures and carve-outs are a big change for an organization and can bring a great amount of disruption to its operations. During this disruptive period, transition service agreements (TSAs) – temporary agreements to continue to provide services to the carved-out organization until it is up to speed on its own – typically serve as the focal point of divestiture planning, bringing both security and peace of mind to the broader transaction. When planned and executed correctly, TSAs can contribute greatly to a smooth and painless divestiture process. On the flip side, they can also create unnecessary churn and headache when not properly addressed. It is the role of the separation management office (SMO) to ensure that the divestiture is not plagued by the pitfalls associated with TSAs. Below, we outline some of the most commonly overlooked areas of executing TSAs.

1. TSA as an afterthought

Drawing up a TSA at the eleventh hour can result in a bevy of costly oversights. It can leave the newly carved out organization feeling overwhelmed, ill-equipped and unprepared for what comes next. Getting an early start with TSAs allows the buyer and seller ample time to consider the required scope, review and properly negotiate the terms of the agreement, and make any last-minute changes as needed.

2. Foregoing expert help

Involving the appropriate stakeholders from both organizations in the crafting of the TSA is crucial to ensure the correct coverage of scope, pricing and timing. Organizations should identify individuals (either internally or externally) with prior experience executing TSAs in similar transactions to help guide the process. These individuals typically have a process and the necessary tools to succeed. TSAs are always specific to an organization but there are methodologies that can be applied to avoid the need to “reinvent the wheel.”

3. Miscalculating costs

TSA pricing involves granular planning and analysis of fully loaded salaries, hourly rates, system contracts and even third-party and standup costs. When these costs are not properly accounted for, value can be lost. A note of caution: No matter the costing strategy of the organization, it is imperative to also account for unplanned costs and reflect upon worst-case scenarios to ensure proper coverage.

4. Poorly describing services

A critical component of TSA planning is to thoughtfully define both scope and pricing methods. Organizations should consider asking the question: “For this transaction, what will make or break my organization in critical functional areas?” Using broad and general language to discuss transition services can cause confusion in critical areas like human resources, information technology and accounting. By writing TSAs in a clear and thorough format, organizations can prevent a lot of headaches further down the road. For example, TSAs should clearly articulate the specific services to be provided/received over the given period of time and to minimize scope creep.

5. Sacrificing efficiency for speed

When operating under a TSA, the goal is efficiency, not haste. All too often, organizations strive to transition off TSAs before they are truly ready to do so. This can result in unnecessary clean-up work and costs for key functional stakeholders and can cause business continuity and customer experience issues to arise. By setting expectations early and often, organizations can successfully minimize the number of surprises set to occur in a given transaction. TSAs revolve around practicality and efficiency; in this arena, there is no room for sacrifice.

6. Failing to plan for the worst

The goal of any transaction is to minimize disruption to both organizations as much as possible. Even so, some disruption to the business is unavoidable and plans could deviate from their intended target. Worst-case scenarios should be considered in the pricing and scope of the TSA. Initiating the TSA process early and tapping the knowledge of those with prior TSA experience will allow for these scenario considerations.

7. Failing to identify third-party consents

Working with third-party vendors can add additional time to an already tight schedule, so it’s important to begin outreach early. Ideally, third-party consents should be identified as early in the diligence phase as possible, as related services could require significant time to properly transition. Third-party consent fees may also be significant and should be taken into consideration as part of the broader TSA rationale, and certainly the pricing.

8. Lack of proper TSA governance

Once a TSA is in effect, oversight and structure is required to ensure that things not only move but move in the right direction. The last thing a transaction needs is a chain-of-command and authority issues causing bottlenecks. Organizations should define roles and responsibilities for TSA oversight and management early on, which will help guide expectations for the entirety of the TSA period.

9. Poorly defined performance standards

It is not enough to simply define the scope of the TSA. Organizations must continuously monitor the services provided to ensure contractual obligations are being met. Additionally, organizations must consider the ramifications of non-performance of service levels and incorporate any necessary provisions into TSA planning and execution. Performance standards must be realistic and reflect the nature of the transaction, the timeline of the TSA, and any other critical factors at play.

10. Failing to establish a formal TSA exit protocol

Lastly, organizations must establish a proper protocol for effectively exiting a TSA and getting back to business as usual. Both parties should be aware of the effective termination date and understand all the necessary steps to officially close-out the agreement. The exit protocol should be outlined when initially drafting the TSA and should include all critical fees, clauses and provisions.

Dealing with TSAs can seem like the last straw for an organization in the midst of a complex transaction. It doesn’t have to be. Early planning and consideration of the items above, including reaching out for help where needed, can provide comfort in the midst of uncertainty and will certainly position organizations to address similar challenges in subsequent transactions with greater confidence.

Add comment