UNLOCKING VALUE IN
OPERATIONAL ASSETS
Can asset monetization benefit your company?
By Bill Miller and Rich Wightman, ISG Directors
www.isg-one.com
INTRODUCTION
Asset monetization is a business transaction that converts an asset from one
that does not directly generate income or other financial value into one that
does generate income or other financial value.
While nearly any asset can be monetized, the types of assets discussed here
are “operational” – those that a company owns or otherwise controls to
support internal operations and/or the delivery of services to internal
customers. These assets can be tangible or intangible and can include data
centers, business processing facilities, real estate and improvements,
information technology hardware and licensed software, intellectual property
(unique processes, internally developed software, etc.) and an experienced
workforce.
Asset monetization is just one of many strategies companies use to drive
better financial performance through revenue growth and better cost
management by unlocking some or all the economic value embedded in
various operational assets. This “unlocked value” might be in the form of
cash, longer-term changes to lower or introduce variability to the cost
structure, or other conversions of non-income generating assets to current or
future bottom-line value.
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.
UNLOCKING VALUE IN OPERATIONAL ASSETS
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BILL MILLER and RICH WIGHTMAN
1
TYPES OF MONETIZATION STRATEGIES
An 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 the
most common approaches to monetization.
Categories of Asset Monetization Strategies
The first major delineation is whether the company retains ownership of the asset. This is a fundamental difference and
defines the monetization strategies that can be pursued.
MONETIZATION WITHOUT OWNERSHIP
CHANGE
Monetization strategies that retain asset ownership tend
to be of two broad types, as described below.
Improved Asset Utilization
This approach generates income from underutilized
assets to help offset costs of those assets; e.g., real
estate, facilities, or equipment assets that are
underutilized. For example:
 Leasing unused space in a facility
 Leasing unused hardware or bandwidth
More complex strategies can involve a sequence of
several actions, such as consolidating operations to free
up and lease available space.
These strategies tend to be more opportunistic and
tactical and employ traditional asset valuation
techniques, using standard market, cost and income
approaches to valuation. Benefits include cost reductions
as well as incremental revenue to offset existing costs, as
opposed to a transformational change in operations
and/or costs structure.
Asset Commercialization
This approach is more complex than simply making
better use of underutilized assets, and tends to be more
strategic by converting an asset that has only internal use
UNLOCKING VALUE IN OPERATIONAL ASSETS
■
into a marketable asset that delivers a product or service
that can be sold to other companies. For example:
 Licensing a software application developed for the
company to other companies
 Converting an internal process into an outsourced
service for third parties
These strategies often require an investment in the asset
to make it marketable and applicable to a broad
customer base, with a serious management commitment
to develop the infrastructure necessary for sales,
implementation, customer support, invoicing, collection,
etc. In other words, the company essentially takes on the
characteristics of an outsourcing service provider or
a vendor.
ISG has found that these transformations are extremely
difficult to implement and manage, as they involve
forecasts of future sales and profits from marketing the
services to other companies. The financial and
organizational commitment is significant to move from
an internal services operation to a sales and external
customer-oriented provider. Few companies can do this
without substantial investments in new people with
different skills and a vendor-oriented infrastructure.
While the transformation can be done, we have found
the joint venture strategy (discussed later) is often more
successful.
BILL MILLER and RICH WIGHTMAN
2
MONETIZATION WITH OWNERSHIP CHANGE
Monetization strategies that involve ownership change
(in whole or in part) are usually driven by a company’s
strategic objectives. Specifically, monetization is ancillary
to some other desired change. These strategies tend to
fall into three categories:
Asset Sale
The most obvious monetization technique is the sale of
an asset and is common within many corporations. If the
assets are tangible (e.g., buildings, land, etc.) the
valuation is straightforward. Valuation of intangible
assets or going concern valuations (e.g., patents, carve
outs, business units, etc.) can be more complex.
For operational assets, the two most basic variation of an
outright sale are:
 Sale without future use: This is a standard
divesture of an asset where the seller has no
interest in having future use of, or access to
the asset.
 Sale with future use: This technique involves the
seller contracting with the buyer at the time of
sale for contractual rights for access to, or use of
the asset. The sale/leaseback of a building is
probably the most common use of this technique.
Another, more complex, example is the sale to a
third party service provider of a data center or
business processing shared services unit, with a
simultaneous agreement to “buy back” services
from the provider. This example is very similar to
an outsourcing transaction where operational
assets are transferred as part of the deal (as
discussed below). The difference is the “sale with
future use” technique is generally for a single
client for a specific asset. The outsourcing
technique is used when the service provider wants
to use the asset for additional clients.
Joint Venture with Third Party
This technique usually entails creation of a “Special
Purpose Entity” (SPE) owned by the company and a third
party. These are often generically referred to as joint
ventures. The SPE acquires the assets in question with
the expressed purpose of providing services back to the
company, and marketing the services to other
companies. Operationally, this looks very much like the
“commercialization” strategy mentioned earlier, but with
co-ownership by the company and another party
(or parties).
UNLOCKING VALUE IN OPERATIONAL ASSETS
■
An emerging joint venture trend is “industry utilities”
where multiple companies contribute similar operational
assets to reduce costs and take advantage of the greater
efficiencies a utility offers. Companies have banded
together for years to create purchasing co-ops and
consortiums, but more formal SPEs are being created to
manage the operations and sell the utility’s services to
other companies. Each contributing company gets an
ownership stake in the SPE for future value and revenue
possibilities.
Outsourcing to a Third Party
Transfer of asset ownership incorporated with an
outsourcing transaction is the third type of approach to
monetization with ownership change. In this case, the
new owner (the service provider) uses the asset to serve
clients in addition to the selling company. Valuing an
asset as part of an outsourcing transaction can be
complicated given the difficulty of assessing value prior
to engaging with service providers in a detailed way.
For example, a company may have a business processes
shared service facility that has additional capacity in floor
space, staff, and/or equipment. The company can
outsource the processing to a third party that takes over
the shared service center and provides services to the
company, with the intent to sell services to other
companies.
This approach has similarities with the sale of an asset
with future use approach, except the new owner
explicitly plans to use the center to support new clients.
In these instances, value is determined partially by
various traditional approaches, as well as how the asset
complements the service provider’s business objectives.
(See “Special Case of Monetization with Outsourcing”
below.)
ASSET VALUATION UNDER DIFFERENT
STRATEGIES
For any monetization approach, “what are the assets
worth?” is a central question. Since virtually all
monetization strategies have a financial objective,
valuation is often the factor that determines if the
strategy is a “go” or “no go.”
BILL MILLER and RICH WIGHTMAN
3
FIVE STEPS TO ASSESSING MONETIZATION
OPTIONS
ISG has a framework to support clients in their
assessment of asset monetization options. Through a
logical and sequential process of answering five critical
questions, companies can reach a “go/no” go decision
about monetization. If the decision is a “go”, the process
can help define a strategy that best suits specific
business requirements.
Five Questions
1. What are we trying to achieve?
The management team must be aligned on why an
asset monetization is even being considered. Without
concurrence on “why,” you will never get to “what”
or “how.”
Asset management strategy objectives are not always
internally aligned. Is it a cash infusion? Ongoing lower
operating costs? Improving the balance sheet and
capital structure? Maybe elements of all these? Other
motivations?
Clarity of objectives is especially important because
asset monetization is not a discrete strategy, but
complementary or integral to another. Therefore,
objectives may be much broader than just the
monetization component.
2. What assets do we want to monetize?
This (seemingly obvious) question must be considered
ensure management is in agreement about the assets
to be monetized. At this point, the level of specificity
does not have to be an audited inventory but the
company needs to decide, “what’s in and what’s out.”
The types of assets can be:
 Tangible assets such as data centers, business
processing shared services centers, call centers,
physical plant and equipment, IT hardware and
infrastructure, etc.
 Intangible assets such as developed software,
unique business processes, intellectual property,
royalty agreements, patents, etc.
 Assembled workforce is not always recognized
as an asset, but it has value in certain types of
monetization strategies.
UNLOCKING VALUE IN OPERATIONAL ASSETS
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For example, monetization as part of an
outsourcing transaction can drive value from the
assembled workforce if that workforce can be
used to expand the customer base for the
service provider.
3. How might a monetization approach or solution be
structured to support our defined objectives?
The deal structure possibilities are almost endless,
but as discussed previously, they tend to fall into two
major groups depending on whether ownership of
the asset is transferred.
From the list of potential monetization structures, the
one or two workable ways should be shortlisted for
deeper value and business impact analysis.
4. What are the assets worth?
The value of the asset is driven partially by the
strategy to be pursued; hence, the valuation will be
driven by the one or two workable strategies defined
in question #3.
The greatest variability in value tends to occur when
the asset is to be transferred to a service provider as
part of an outsourcing transaction. The reason is that
value estimates vary depending on how the asset is
presented to the service provider community, and the
level of service provider interest. Often, ad hoc
discussions with service providers help assess how
the asset will be viewed and valued. This valuation
scenario is discussed more fully later in this
white paper.
5. What is the business case?
A quantitative and qualitative analysis addresses how
the shortlisted monetization strategies and deal
structures impact the company’s financial,
operational, organizational and risk profile.
Asset monetization deals can be complex and the
financial assessment can be equally so. The best
results come from a collaboration of specialists in
operations, finance, accounting, tax and legal.
Monetization strategy risks vary widely depending on
the nature of the strategy. For example, simply
leasing unused space in a company-owned facility has
a small risk footprint. Conversely, commercializing an
asset or in a conjunction with an outsourcing
transaction carries a more substantial risk.
BILL MILLER and RICH WIGHTMAN
4
SPECIAL CASE OF MONETIZATION WITH
OUTSOURCING
The bottom line is that the marketplace of service
providers – not your value assessment – drives the deal.
Monetization as part of an outsourcing transaction
presents an additional set of unique considerations for a
go/no go decision. In ISG’s experience, these unique
considerations fall into five areas:
 Making the decision
 Valuing the assets
 Going to market
 Structuring the deal
 Avoiding the pitfalls
More specifically, the factors driving valuation in an
outsourcing transaction include:
Making the Decision
The decision to outsource a function needs to be
evaluated and assessed on its own merit. The
management team needs to look at the costs, risks, and
benefits separate from monetization.
The outsourcing decision has to be made ahead of the
monetization decision in priority and importance. In
other words, “the monetization tail should not wag the
outsourcing dog.”
Once the decision to outsource has been made, the
opportunity to monetize assets as part of that
transaction can be evaluated. If the decision is made to
forgo asset monetization, outsourcing can still be a
viable strategy.
Valuing the Assets
Value in connection with an outsourcing transaction is
driven by the service provider’s view of the company’s
assets; i.e., “value” is the buyer’s concept, not the
seller’s. From the service provider’s perspective, value is
determined by the broader business objectives, the costs
structure they acquire, their investment appetite, and
whether the asset fills a business void.
This last factor is especially important. Service providers
are particularly interested in acquiring assets when they
can be “opened up to the market.” For example, the level
of interest increases materially if the seller’s assets
provide more capacity the service provider wants and
can use for new clients, or if the assets give the service
provider new capabilities and offerings they can sell to
new clients. In order to gauge potential value,
understanding the service providers and their strategic
direction is therefore imperative.
Who is viewing it: The value of your operational assets is
not the same to all service providers. One service
provider may have a similar facility supporting other
clients nearby and find little or no value. Conversely,
another service provider may see a new line of business
or new market providing value beyond the scope of
your deal.
Ability to “open up” the asset: One of the keys to
perceived value by a service provider is the ability to use
your company’s asset beyond the obligation to provide
services back to the company. The more capability to
leverage the asset across more clients, the more valuable
the service provider will view the asset.
Obligations to use the asset: While your company is
transferring ownership of the asset, a coterminous
transaction obligates the service provider to continue
delivering services with the acquired assets. In other
words, the service provider is bound to the asset for a
specified period. The size and duration of that obligation
can have a material impact on how the service provider
views the asset’s value.
Encumbrance of the asset: Depending on the agreement,
you may restrict the service provider from utilizing assets
for purposes other than your operations, thus
diminishing value to the service provider. In general,
when restrictions increase, value decreases.
A service provider is highly unlikely to overvalue an asset
"just to get the deal.” As a result, don’t overestimate
your leverage in an asset valuation. While service
providers are eager for business, they are profit-making
enterprises, and as such invest capital only where there
is an opportunity for an adequate return.
Going to Market
If the decision is made to outsource, and if management
determines that asset monetization should be part of the
deal (or at least be a consideration), the go-to-market
strategy needs to be crafted carefully. The company
needs to recognize that it is both buying and selling, this
changes the way the market is engaged.
Because value to a service provider is dependent on their
business structure and strategies, not all service
providers will view the value of the specific asset the
same way.
UNLOCKING VALUE IN OPERATIONAL ASSETS
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BILL MILLER and RICH WIGHTMAN
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The company is “buying” in the traditional sense that it is
soliciting service providers to take over certain
operations of the company. This process normally
involves a Request for Proposal, provider evaluations,
due diligence, and the other typical steps in selection of
an outsourcing partner.
But the company is also “selling” the assets to be
monetized. The opportunity to sell any product or service
is improved when it is positioned and presented well to
the right target market. The company cannot assume
that just because it sees an attractive and valuable asset
that the market will. As discussed in the preceding
section, service providers will view the asset value in the
context of their business strategy and unique situation.
Consequently, the assets to be monetized need to be
packaged and presented to highlight the attractiveness
and “speak to” potential buyers (i.e., service providers).
As with any sale, the information about “what” is being
sold needs to be more than a litany of facts and data in a
spec sheet. It needs to be packaged and presented so
that the buyer will know how it can add value to their
business.
The right packaging and presentation of an asset
monetization opportunity requires a good knowledge of
the service providers being considered, and an
understanding of their business objectives. This will
optimize the way the asset is presented and valued by
the service providers.
The bottom line: the client company must know how
their asset will be viewed (and valued) by potential
service providers, and position the assets to spotlight
how the assets can help a service provider’s business.
Structuring the Deal
If asset monetization will be part of an outsourcing
transaction, the last consideration is how the deal will be
structured for the company to receive the value.
Typically, a company can realize the value in three
primary ways:
Cash Payment(s): The most straightforward way for a
company to receive value in return for the asset is for the
service provider to pay cash up front, either in a lump
sum or through a series of payments over a contractually
defined timeframe.
Shared Value: This approach can be more complex as the
payments are determined by an agreement to jointly
share in future value based on some triggers or
milestones.
UNLOCKING VALUE IN OPERATIONAL ASSETS
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These arrangements are usually associated with
transactions where the service provider is expanding the
use of the asset to other clients and will share the
revenue or profit with the selling company. Such
transactions can be more complex and often involve
greater value risk to the company, but usually have
greater upside value potential.
Lower Fees: Rather than cash up front, or the risk of
shared value, many companies want to lower their cost
structure over time. In these situations, the value may be
received as a lower fee structure from the service
provider than would be offered absent asset
monetization. To take a simplistic example, if the cost per
unit (of whatever is being outsourced) is $10.00 without
monetization, it might be $9.50 with the asset.
Avoiding the Pitfalls
Depending on how the deal is structured and value
received; some potential pitfalls should be avoided as
part of the outsourcing/monetization transaction.
Cash Infusions Treated as Loans or Off-Balance Sheet
Financing: If the contract is written to include any
upfront cash payments, these might be treated as loans
on the balance sheet.
Termination Charges: Outsourcing transactions typically
include charges associated with certain events that
trigger an early termination of the contract. Service
providers may want to structure termination fees to
ensure they recover their initial investment. These
charges are commonly considered as liabilities and need
to be assigned an appropriate risk factor.
Tax Treatment of Asset Sale: Avoid surprises at how the
IRS treats gain or loss of assets sold in a monetization,
and subsequent tax and impact on financial statements.
Additionally, if multi-national aspects are associated with
the transaction, country and local tax laws need to be
fully assessed for their impact on the economics of
the deal.
Future Use of Assets: Unless specifically written in the
contract, your company has no claim on, or rights to, use
of or limiting the use of the asset, so be careful how the
contract is written.
Use of SPEs: Under Sarbanes-Oxley, SPEs have to be
structured carefully to provide visibility of the company’s
true financial position.
BILL MILLER and RICH WIGHTMAN
6
Monetization During a Restructuring
Some asset monetizations are individual transactions,
but more and more frequently, monetization is part of a
company’s larger restructuring initiative. A specific asset
is just one part of a larger strategy and transformation.
Usually, these types of restructurings involve outsourcing
some functions, selling assets, and realigning staff.
In these scenarios, monetization considerations become
more complex. This is particularly true for assets with a
book value close to the original purchase price/cost, but
a market value below book value. By using restructuring
reserves correctly, the write-off amount between book
value and the sales value can be addressed to minimize
or eliminate the impact on current OpEx.
The strategies and tactics can be quite complex for using
restructuring reserves in conjunction with asset
monetization. Issues surrounding accounting
treatments, valuations, and contractual language require
specialist advisors supporting an overall strategy.
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BILL MILLER and RICH WIGHTMAN
7
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