Is It Time for Your IT Department to Become a Standalone Company?

Have you ever felt like your company’s IT department is operating in a silo, detached from the core business? Do your tech teams struggle to keep pace with demand as your organization rapidly evolves? Is misalignment between IT strategy and corporate strategy hindering your ability to capitalize on new opportunities?

If this sounds familiar, you’re not alone.

“ Only 23% of CIOs rate their organization as effective at business strategy and planning”

Gartner

But what if the solution was right under your nose? More and more companies are realizing enormous benefits from spinning off their IT departments into standalone firms. Read on to find out if it’s time for your IT team to fly solo.

Challenges of operating an IT department within a multi-company holding group

For many enterprises, IT operates as a cost center embedded within a larger multi-company holding group. This traditional model poses inherent challenges, including:

• Lack of Focus – With split attention across holding group subsidiaries, IT leaders often struggle to deliver maximum value to any one client. Spread thin and pulled in multiple directions, their core mission becomes diluted.
• Resource Constraints – As demand outstrips bandwidth, IT teams fight an uphill battle trying to satisfy every internal stakeholder. With no direct revenue source, their budget depends on executive discretion, forcing them to do more with less.
• Misalignment – Corporate and IT strategy easily fall out of sync when IT reports into a broader C-suite with competing priorities. This disconnect can prevent tech innovations from fully supporting business goals.
• Innovation Limitations – With no mandate to pursue new technologies/services beyond holding group needs, opportunities for growth and competitive advantage go unrealized. IT innovation potential becomes artificially capped.
• Lack of Agility – Buried within a large bureaucratic organization, IT departments lack the agility to respond quickly to changing client needs or marketplace shifts. They move at the pace of the broader company strategy.
• Talent Retention – Without the exciting growth opportunities of external tech firms, holdings groups often struggle to attract and retain top tech talent. Long tenured staff skills stagnate relative to the external market.

While once accepted as the status quo, these challenges have become too costly to ignore for many enterprise holding groups today.

Converting the IT department into a standalone company

In recent years, a bold new model has emerged to resolve the inherent challenges of embedded IT departments outlined above. More and more holding groups are converting their IT functions into standalone subsidiary companies, owned by the parent group but operating entirely independently.

This spinoff model aligns IT strategy with the needs of clients rather than the broader organization. It empowers tech teams to operate with an agile, startup mindset focused on driving maximum value. Tech leaders are free to set their own vision and grow the business in response to market demand.

At the same time, client companies within the group gain access to a pool of specialized talent delivering tailored technology services built around their unique needs. Shared backgrounds and institutional knowledge enable smooth interfacing between the IT spinoff and internal teams.

In essence, the spinoff transforms IT from a constrained internal support function to an agile, growth-oriented business. This unlocks substantial benefits for both the parent group and the IT company, as the next section explores.

The Benefits

Spinning off IT into a standalone subsidiary unshackles its potential to better serve client businesses while pursuing aggressive growth as an independent firm. Consider these immense benefits:

For the IT Company:

• Increased Focus – As an independent entity, the IT spinoff can zero in on delivering maximum value to client companies within the holding group. Its strategic roadmap fully aligns with client goals versus competing priorities.
• Improved Growth – With the mandate to operate as a thriving business, the IT company can pursue new services, markets and partnerships. This fosters rapid growth unconstrained by the broader holding group strategy.
• Financial Stability – As an independent subsidiary with its own P&L, the IT firm runs on direct client revenue versus discretionary internal budget allocations. This provides financial stability even amidst macro-economic fluctuations.
• Autonomy – Freed from holding group bureaucracy, the IT spinoff gains immense autonomy over hiring, tooling, partnerships, expansions and more. Decision-making happens at startup speed.

For Client Businesses:

• Strategic Focus – Client companies within the holding group gain a technology partner laser focused on supporting their strategic goals versus a distracted internal team torn between competing priorities.
• Specialized Expertise – Tapping the spinoff’s broad bench of technical talent and purpose-built capabilities, clients gain access to specialized expertise tailored to their needs.
• Improved Service – With a mandate to drive customer success, the IT spinoff delivers premium service levels and uncompromising responsiveness. Their business depends on keeping clients delighted.
• Enhanced Agility – Unencumbered by corporate bureaucracy, the nimble IT firm can pivot on a dime in response to client needs and a dynamic marketplace.
• Cost Efficiencies – An independent IT company must ensure competitiveness with external providers on cost. This drives efficiency gains flowing down to clients within the holding group.
• Access to Innovation – As an external provider, the IT spinoff continuously invests in the latest innovations to maintain its competitive edge. Clients benefit from cutting-edge capabilities.

When executed thoughtfully, an IT carve-out breathes new life into technology teams while unlocking game-changing advantages for client businesses. But the journey isn’t without risks, as explored in the next section.

The Risks

Spinning off IT functions into an independent subsidiary is a proven success strategy – when done right. But the transition inevitably comes with hurdles and risks that must be navigated for the model to work long term:

• Revenue Instability – In the near term before establishing a solid client roster outside the holding group, the IT spinoff faces uncertainty around securing stable revenue to sustain operations.
• Loss of Internal Support – As an external provider, some support functions shift from the parent group to the IT spinoff, like HR, Finance and Legal. These must be fully built out.
• Strained Client Relations – With the IT team no longer “internal,” tensions could arise around expectations, service levels andstrategic alignment with client companies.
• Added Competition – The IT firm must earn client business and demonstrate superior value versus alternatives to succeed as an independent company.
• Brand Recognition – Starting from scratch, the IT spinoff must build brand equity and recognition within the markets it seeks to serve.
• Talent Acquisition – To scale rapidly, the IT company must attract top-tier talent – a challenge without an established brand reputation.
• Suboptimal Timing – If spun off during adverse macroeconomic conditions, growth and funding access become much harder for the new IT entity.

With careful planning and phased execution, these risks can be mitigated to ensure a successful carve-out. But the spinoff model clearly isn’t the right fit for every company. How do you know if it’s time to spin off your IT function?

Signs It’s Time For a Change

If your IT department struggles with the challenges outlined earlier, it may be time to consider an independent spinoff. Look for these telltale signs that a structural change could pay major dividends:

• Demand Outweighs Bandwidth – Your IT team’s backlog keeps growing as demand for new capabilities swamps their capacity. Important projects get continually pushed down the priority list.
• Misalignment with Corporate Strategy – There’s a glaring disconnect between leadership’s strategic plans and the IT roadmap. Digital innovations aren’t mapping to corporate growth initiatives.
• Untapped Market Potential – Your IT department has developed specialized vertical expertise and intellectual property with monetization potential in external markets, if only they had the mandate and focus to productize and sell it.
• Leadership Frustration – IT leaders express frustration with bureaucratic constraints on innovation, inability to pursue new services/tools, and misalignment with client needs. The CIO has bold ideas but lacks the autonomy to execute them.
• Talent Drain – Your top technical talent leaves for more exciting and better compensated roles at external tech firms, while inadequate recruiting hampers backfilling key roles with equivalent talent.
• Technological Lag – Due to constant firefighting, technical debt accumulation, and lack of investment, your technology platforms and architectures fall woefully behind industry state-of-the-art.
• Declining Service Levels – IT teams are spread so thin that service levels, system uptime and project delivery timelines suffer despite their best efforts and intentions.

If these scenarios hit a nerve, your organization likely faces a crossroads: Maintain a suboptimal status quo or boldly spin off IT into an independent firm to unlock immense mutual value. But this leads to the next key question…

Readiness Checklist 

Before taking the plunge on an IT carve-out, it’s essential to honestly assess your readiness across these key dimensions:

• Established Leadership – Does your IT department have a visionary leader or leadership team ready to step up as executives of an independent company? They will set the strategic course and drive success post-spinoff. Assess their preparedness.
• Proven Track Record – Have your current IT teams consistently delivered successful outcomes under time/budget constraints? Do they have a reputation for excellence among internal stakeholders? Past performance provides confidence in their ability to thrive independently. 
• Institutional Knowledge – Do IT staff have deep knowledge of your company’s systems, processes and strategic priorities? This enables them to accelerate post-spinoff and deliver tailored solutions leveraging insights only they possess given their legacy role embedded within the business.
• Specialized Capabilities – Has your IT group developed differentiated capabilities, intellectual property, or industry vertical strengths? These provide the new IT company headstarts in developing offerings and targeting external clients.
• Infrastructure in Place – To smoothly transition, foundational infrastructure – like HR, Finance, Legal, Procurement – must exist. If these functions are fully provided by the parent group today, they will need to be built from scratch.
• Sustainable Cost Structure – For the IT company to be viable, its operating costs and pricing must be competitive with external providers from Day 1 post-spinoff. This requires an efficient structure and spending discipline, even pre-separation.
• Culture of Excellence – Does your IT organization exude passion and rally around a shared mission to delight customers? The ideal culture instantly sets apart the new company from complacent competitors.

Use this checklist to perform an objective readiness assessment before committing to a spinoff. If most boxes aren’t firmly checked, you may have more groundwork to complete for the model to pay off.

Implementation Roadmap

Once leadership commits to spinning off IT and readiness criteria are met, it’s go time! Thoughtfully planned execution is critical to smooth this seismic transition. Follow this phased roadmap to get it right: 

Phase 1 – Building a Business

• Finalize spinoff leadership team, structure, and financial model based on target markets and growth plans.
• Detail the value proposition, positioning, and go-to-market strategy to win clients and talent.
• Identify business processes required on Day 1 independent from the parent group and build redundancies.
• Determine facility needs, acquire necessary licenses and equipment, and establish operational readiness.

Phase 2 – Transition Planning

• Create a detailed transition plan addressing people, processes, technologies and infrastructure.
• Determine transfer mechanics – which assets, contracts, and liabilities will stay with the parent vs. transfer to the newco.
• Develop a communications plan and change management strategy to support employees through the transition.
• Agree on a transition services agreement for any interim support the parent will provide.
• Identify Day 1 critical milestones and dependencies to ensure continuity of service.

Phase 3 – Launch and Stabilization

• Flawlessly execute the transition plan on launch day and provide ongoing support to employees as they adapt to changes.
• Stabilize operations, ring-fence revenue streams, and establish business rhythms and culture.
• Rapidly deliver value to holding group clients to build credibility and escape velocity.
• Begin pursuing growth initiatives through new client acquisition, service development and expansion into targeted markets.
• Solidify brand identity in the marketplace and make a splash as an exciting new entrant. 

Phase 4 – Growth Acceleration

• With stabilization achieved, aggressively scale growth into new customer segments, services, and geographic markets.
• Streamline operations and delivery models to drive efficiency gains as transaction volumes multiply.
• Continue enhancing competitive differentiation through innovation investments in emerging capabilities.
• Attract top talent by highlighting growth momentum and the exciting vision for the company.
• Establish the new brand as a recognized leader carving out an expansive niche in target markets.

While lengthy, this phased rollout enables the IT spinoff to launch from a position of strength and stability. The firm can aggressively pursue market leadership if the launch and growth foundations are laid right.

Conclusion

In closing, spinning off IT functions into standalone subsidiaries can unlock immense benefits for enterprise holding groups and their internal client businesses:

While not without risks that must be carefully managed, spinoffs are a proven success strategy already paying dividends for forward-looking Fortune 500 companies and their shareholders.

If your IT department shows signs of straining within the confines of a broader holding group, the time for a spinoff may be now. The opportunities are too great to ignore. With rigorous assessment and planning, a carve-out can transform your IT function from cost center to catalyst for enterprise growth.

The choice is yours. Maintain a status quo riddled with misalignment, fragmentation and untapped potential? Or catapult your company’s competitive advantage to new heights by unleashing the full disruptive power of technology? The takeaway is clear – the time for half measures has passed. Fortune favors the bold.