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.

1. UNLOCKING VALUE IN OPERATIONAL
ASSETS
Can asset monetization benefit your company?
By Bill Miller, Director, ISG
www.isg-one.com

2. 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 ■ BILL MILLER 1

3. 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 into a marketable asset that delivers a product or service
CHANGE that can be sold to other companies. For example:
 Licensing a software application developed for the
Monetization strategies that retain asset ownership tend company to other companies
to be of two broad types, as described below.
 Converting an internal process into an outsourced
Improved Asset Utilization service for third parties
This approach generates income from underutilized These strategies often require an investment in the asset
assets to help offset costs of those assets; e.g., real to make it marketable and applicable to a broad
estate, facilities, or equipment assets that are customer base, with a serious management commitment
underutilized. For example: to develop the infrastructure necessary for sales,
 Leasing unused space in a facility implementation, customer support, invoicing, collection,
 Leasing unused hardware or bandwidth etc. In other words, the company essentially takes on the
characteristics of an outsourcing service provider or
More complex strategies can involve a sequence of a vendor.
several actions, such as consolidating operations to free
up and lease available space. ISG has found that these transformations are extremely
difficult to implement and manage, as they involve
These strategies tend to be more opportunistic and forecasts of future sales and profits from marketing the
tactical and employ traditional asset valuation services to other companies. The financial and
techniques, using standard market, cost and income organizational commitment is significant to move from
approaches to valuation. Benefits include cost reductions an internal services operation to a sales and external
as well as incremental revenue to offset existing costs, as customer-oriented provider. Few companies can do this
opposed to a transformational change in operations without substantial investments in new people with
and/or costs structure. different skills and a vendor-oriented infrastructure.
Asset Commercialization While the transformation can be done, we have found
This approach is more complex than simply making the joint venture strategy (discussed later) is often more
better use of underutilized assets, and tends to be more successful.
strategic by converting an asset that has only internal use
UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 2

4. MONETIZATION WITH OWNERSHIP CHANGE An emerging joint venture trend is “industry utilities”
Monetization strategies that involve ownership change where multiple companies contribute similar operational
(in whole or in part) are usually driven by a company’s assets to reduce costs and take advantage of the greater
strategic objectives. Specifically, monetization is ancillary efficiencies a utility offers. Companies have banded
to some other desired change. These strategies tends to together for years to create purchasing co-ops and
fall into three categories: consortiums, but more formal SPEs are being created to
manage the operations and sell the utility’s services to
Asset Sale other companies. Each contributing company gets an
The most obvious monetization technique is the sale of ownership stake in the SPE for future value and revenue
an asset and is common within many corporations. If the possibilities.
assets are tangible (e.g., buildings, land, etc.) the
Outsourcing to Third Party
valuation is straightforward. Valuation of intangible
assets or going concern valuations (e.g., patents, carve Transfer of asset ownership incorporated with an
outs, business units, etc.) can be more complex. outsourcing transaction is the third type of approach to
monetization with ownership change. In this case, the
For operational assets, the two most basic variation of an new owner (the service provider) uses the asset to serve
outright sale are: clients in addition to the selling company. Valuing an
 Sale without future use: This is a standard asset as part of an outsourcing transaction can be
divesture of an asset where the seller has no complicated given the difficulty of assessing value prior
interest in having future use of, or access to to engaging with service providers in a detailed way.
the asset.
For example, a company may have a business processes
 Sale with future use: This technique involves the shared service facility that has additional capacity in floor
seller contracting with the buyer at the time of space, staff, and/or equipment. The company can
sale for contractual rights for access to, or use of outsource the processing to a third party that takes over
the asset. The sale/leaseback of a building is the shared service center and provides services to the
probably the most common use of this technique. company, with the intent to sell services to other
Another, more complex, example is the sale to a companies.
third party service provider of a data center or
business processing shared services unit, with a This approach has similarities with the sale of an asset
simultaneous agreement to “buy back” services with future use approach, except the new owner
from the provider. This example is very similar to explicitly plans to use the center to support new clients.
an outsourcing transaction where operational In these instances, value is determined partially by
assets are transferred as part of the deal (as various traditional approaches, as well as how the asset
discussed below). The difference is the “sale with complements the service provider’s business objectives.
future use” technique is generally for a single (See “Special Case of Monetization with Outsourcing”
client for a specific asset. The outsourcing below.)
technique is used when the service provider wants
to use the asset for additional clients. ASSET VALUATION UNDER DIFFERENT
Joint Venture with Third Party STRATEGIES
This technique usually entails creation of a “Special For any monetization approach, “what are the assets
Purpose Entity” (SPE) owned by the company and a third worth?” is a central question. Since virtually all
party. These are often generically referred to as joint monetization strategies have a financial objective,
ventures. The SPE acquires the assets in question with valuation is often the factor that determines if the
the expressed purpose of providing services back to the strategy is a “go” or “no go.”
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 ■ BILL MILLER 3

5. FIVE STEPS TO ASSESSING MONETIZATION For example, monetization as part of an
OPTIONS outsourcing transaction can drive value from the
assembled workforce if that workforce can be
ISG has a framework to support clients in their used to expand the customer base for the
assessment of asset monetization options. Through a service provider.
logical and sequential process of answering five critical
3. How might a monetization approach or solution be
questions, companies can reach a “go/no” go decision
structured to support our defined objectives?
about monetization. If the decision is a “go”, the process
can help define a strategy that best suits specific The deal structure possibilities are almost endless,
business requirements. but as discussed previously, they tend to fall into two
major groups depending on whether ownership of
Five Questions the asset is transferred.
1. What are we trying to achieve? From the list of potential monetization structures, the
The management team must be aligned on why an one or two workable ways should be shortlisted for
asset monetization is even being considered. Without deeper value and business impact analysis.
concurrence on “why,” you will never get to “what” 4. What are the assets worth?
or “how.” The value of the asset is driven partially by the
Asset management strategy objectives are not always strategy to be pursued; hence the valuation will be
internally aligned. Is it a cash infusion? Ongoing lower driven by the one or two workable strategies defined
operating costs? Improving the balance sheet and in question #3.
capital structure? Maybe elements of all these? Other The greatest variability in value tends to occur when
motivations? the asset is to be transferred to a service provider as
Clarity on objectives is especially important because part of an outsourcing transaction. The reason is that
asset monetization is not a discrete strategy, but value estimates vary depending on how the asset is
complementary or integral to another. Therefore, presented to the service provider community, and the
objectives may be much broader than just the level of service provider interest. Often, ad hoc
monetization component. discussions with service providers help assess how
2. What assets do we want to monetize? the asset will be viewed and valued. This valuation
scenario is discussed more fully later in this
This (seemingly obvious) question must be considered
white paper.
ensure management is in agreement about the assets
to be monetized. At this point, the level of specificity 5. What is the business case?
does not have to be an audited inventory but the A quantitative and qualitative analysis addresses how
company needs to decide “what’s in and what’s out.” the shortlisted monetization strategies and deal
The types of assets can be: structures impact the company’s financial,
operational, organizational and risk profile.
 Tangible assets such as data centers, business
processing shared services centers, call centers, Asset monetization deals can be complex and the
physical plant and equipment, IT hardware and financial assessment can be equally so. The best
infrastructure, etc. results come from a collaboration of specialists in
 Intangible assets such as developed software, operations, finance, accounting, taxand legal.
unique business processes, intellectual property, Monetization strategy risks vary widely depending on
royalty agreements, patents, etc. the nature of the strategy. For example, simply
 Assembled workforce is not always recognized leasing unused space in a company-owned facility has
as an asset, but it has value in certain types of a small risk footprint. Conversely, commercializing an
monetization strategies. asset or in a conjunction with an outsourcing
transaction carries a more substantial risk.
UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 4

6. SPECIAL CASE OF MONETIZATION WITH The bottom line is that the marketplace of service
OUTSOURCING providers – not your value assessment – drives the deal.
Monetization as part of an outsourcing transaction More specifically, the factors driving valuation in an
presents an additional set of unique considerations for a outsourcing transaction include:
go/no go decision. In ISG’s experience, these unique Who is viewing it: The value of your operational assets is
considerations fall into five areas: not the same to all service providers. One service
 Making the decision provider may have a similar facility supporting other
 Valuing the assets clients nearby and find little or no value. Conversely,
 Going to market
another service provider may see a new line of business
or new market providing value beyond the scope of
 Structuring the deal
your deal.
 Avoiding the pitfalls
Ability to “open up” the asset: One of the keys to
Making the Decision perceived value by a service provider is the ability to use
The decision to outsource a function needs to be your company’s asset beyond the obligation to provide
evaluated and assessed on its own merit. The services back to the company. The more capability to
management team needs to look at the costs, risks, and leverage the asset across more clients, the more valuable
benefits separate from monetization. the service provider will view the asset.
The outsourcing decision has to be made ahead of the Obligations to use the asset: You are not truly “selling”
monetization decision in priority and importance. In the asset in the classic sense. While you are transferring
other words, “the monetization tail should not wag the ownership, the service provider is obligated to continue
outsourcing dog.” delivering services with the acquired assets for the
duration of the outsourcing agreement. In other words,
Once the decision to outsource has been made, the
the service provider is bound to the asset for a specified
opportunity to monetize assets as part of that
period of time; during the course of that commitment,
transaction can be evaluated. If the decision is made to
the asset may or may not turn out to be as valuable as
forgo asset monetization, outsourcing can still be a
the service provider anticipated.
viable strategy.
Encumbrance of the asset: Depending on the agreement,
Valuing the Assets
you may restrict the servicer provider from utilizing
Value in connection with an outsourcing transaction is assets for purposes other than your operations, thus
driven by the service provider’s view of the company’s diminishing value to the service provider. In general,
assets; i.e., “value” is the buyer’s concept, not the when restrictions increase, value decreases.
seller’s. From the service provider’s perspective, value is
determined by the broader business objectives, the costs A service provider is highly unlikely to overvalue an asset
structure they acquire, their investment appetite, and "just to get the deal.” As a result, don’t overestimate
whether the asset fills a business void. your leverage in an asset valuation. While service
providers are eager for business, they are profit-making
This last factor is especially important. Service providers enterprises, and as such invest capital only where there
are particularly interested in acquiring assets when they is an opportunity for an adequate return.
can be “opened up to the market.” For example, the level
of interest increases materially if the seller’s assets Going to Market
provide more capacity the service provider wants and If the decision is made to outsource, and if management
can use for new clients, or if the assets give the service determines that asset monetization should be part of the
provider new capabilities and offerings they can sell to deal (or at least be a consideration), the go-to-market
new clients. In order to gauge potential value, strategy needs to be crafted carefully. The company
understanding the service providers and their strategic needs to recognize that it is both buying and selling;this
direction is therefore imperative. 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 ■ BILL MILLER 5

7. The company is “buying” in the traditional sense that it is These arrangements are usually associated with
soliciting service providers to take over certain transactions where the service provider is expanding the
operations of the company. This process normally use of the asset to other clients and will share the
involves a Request for Proposal, provider evaluations, revenue or profit with the selling company. Such
due diligence, and the other typical steps in selection of transactions can be more complex and often involve
an outsourcing partner. greater value risk to the company, but usually have
greater upside value potential.
But the company is also “selling” the assets to be
monetized. The opportunity to sell any product or service Lower Fees: Rather than cash up front, or the risk of
is improved when it is positioned and presented well to shared value, many companies want to lower their cost
the right target market. The company cannot assume structure over time. In these situations, the value may be
that just because it sees an attractive and valuable asset received as a lower fee structure from the service
that the market will. As discussed in the preceding provider than would be offered absent asset
section, service providers will view the asset value in the monetization. To take a simplistic example, if the cost per
context of their business strategy and unique situation. unit (of whatever is being outsourced) is $10.00 without
monetization, it might be $9.50 with the asset.
Consequently, the assets to be monetized need to be
packaged and presented to highlight the attractiveness Avoiding the Pitfalls
and “speak to” potential buyers (i.e., service providers). Depending on how the deal is structured and value
As with any sale, the information about “what” is being received; some potential pitfalls should be avoided as
sold needs to be more than a litany of facts and data in a part of the outsourcing/monetization transaction.
spec sheet. It needs to be packaged and presented so
that the buyer will how it can add value to their business. Cash Infusions Treated as Loans or Off-Balance Sheet
Financing: If the contract is written to include any
The right packaging and presentation of an asset upfront cash payments these might be treated as loans
monetization opportunity requires a good knowledge of on the balance sheet.
the service providers being considered, and an
understanding of their business objectives. This will Termination Charges: Outsourcing transactions typically
optimize the way the asset is presented and valued by include charges associated with certain events that
the service providers. trigger an early termination of the contract. Service
providers may want to structure termination fees to
The bottom line: the client company must know how ensure they recover their initial. These charges are
their asset will be viewed (and valued) by potential commonly considered as liabilities and need to be
service providers, and position the assets to spotlight assigned an appropriate risk factor.
how the assets can help a service provider’s business.
Tax Treatment of Asset Sale: Avoid surprises at how the
Structuring the Deal IRS treats gain or loss of assets sold in a monetization,
If asset monetization will be part of an outsourcing and subsequent tax and impact on financial statements.
transaction, the last consideration is how the deal will be Additionally, if multi-national aspects are associated with
structured for the company to receive the value. the transaction, country and local tax laws need to be
Typically, a company can realize the value in three fully assessed for their impact on the economics of
primary ways: the deal.
Cash Payment(s): The most straightforward way for a Future Use of Assets: Unless specifically written in the
company to receive value in return for the asset is for the contract, your company has no claim on, or rights to, use
service provider to pay cash up front, either in a lump of or limiting the use of the asset, so be careful how the
sum or through a series of payments over a contractually contract is written.
defined timeframe.
Use of SPEs: Under Sarbanes-Oxley, SPEs have to be
Shared Value: This approach can be more complex as the structured carefully to provide visibility of the company’s
payments are determined by an agreement to jointly true financial position.
share in future value based on some triggers or
milestones.
UNLOCKING VALUE IN OPERATIONAL ASSETS ■ BILL MILLER 6

8. LOOKING FOR A STRATEGIC PARTNER?
For further information, please contact Alex Kozlov, Director of Marketing, Americas, at alex.kozlov@isg-one.com
or +1 617 558 3377
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services
company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and
public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting
and managed services, with a focus on information technology, business process transformation, program management services
and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the
deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory
services. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries. For additional
information, visit www.isg-one.com.
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