Variations: Divestiture of Facilities and Personnel

Divestiture at Inception. In the early era of outsourcing in the 1990’s and 2000’s, divestiture of the enterprise customer’s existing service delivery infrastructure and transfer (“re-badging”) of its in-scope personnel. Such transactions were analogous to sale-leasebacks of real property, in which an enterprise would monetize its investment in real property in cash in return for agreeing to become a tenant for an extended term. In the field of services, such divestitures of facilities and personnel might be called a “sale-service-back” since the divestiture would be followed by a long-term services agreement for services provided using facilities and personnel who were formerly controlled by the enterprise customer.

Limiting Conditions. More recently, such divestitures and transfers have become less frequent for outsourcing deals for several reasons.

  • Financial Impact. Relationships may have a short term (such as three to five years), leaving less opportunity for the service providers to impute financing costs for acquiring infrastructure. Financing may be available, but drawdowns on credit soak up credit that might otherwise be used for acquiring service delivery centers or competitors.
  • Price Impact. The cost structure for such assets may make the pricing non-competitive.
  • Employment Laws. Employment laws may impose costs, delays, procedural barriers and even, through acquired rights, prevent the transfer without severance compensation.
  • Unnecessary Assets. Service providers may have acquired their own proprietary methods and industry expertise that enables them to deliver services without taking on many enterprise employees. Further, the age and technological competitiveness of the enterprise’s divested facilities might not justify a service provider’s use for expanding its service delivery platform to the target market.

Accordingly, divestitures and rebadging occur but are less frequent that in the early era of outsourcing.

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