5 tips for turning a business unit into a startup

Turning a business unit like IT from internal to external-facing is tricky. Here are five keys to make it a successful change.

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Large and mid-sized companies are particularly well-suited for enhancing existing products or for coming up with new ones that are directly within their lines of business. However, a trickier proposition is commercializing a business unit like IT, which traditionally is viewed as an internal cost center that serves the needs of other company departments.

First, there is a natural bias against turning IT (or any other administrative function) into a business unit that has external as well as internal customers. This is because there is fear and trepidation that IT cannot serve more than one master--and that, inevitably, service levels within the company will fall if IT also has to worry about pleasing outside customers.

There is also the problem of who is going to head up an entity that has always been an internally focused department, and that now is being tapped to serve outside customers. CIOs and IT'ers in general tend to be technical and introspective. They do not always make good salespersons and promoters.

Nevertheless, there are companies that have successfully spun off profitable businesses from internally focused departments like IT, and from these efforts we have learned what works. Here are five best practices that characterize these successful startups:

1. Perform the upfront due diligence to validate that there is a viable business

There has to be an extremely compelling business case to transform an internal business unit into an external business. On the financial side, there must be sufficient commercial opportunity to at least produce breakeven results in a very short time. Most likely, this means that outside customer commitments are already lined up. The new spinoff organization will likely be drawn from internal personnel, and the impacts of such a move need to be weighed so that they don't present any risk to corporate service levels.

2. Decide who is going to staff this business unit

The individual heading the startup must have a combination of business savvy and technical knowledge in the set of services being sold. He or she should have the skills bandwidth to work with both innovators and administrators. This is a difficult hybrid set of leadership skills to find, but it's almost always required, or the startup will be in jeopardy. Second, the internal staff that is identified to work in the startup should be fully assigned there--and not function with a split of responsibilities between the startup and the enterprise. This can best be affected (and afforded) when the organization has solid bench strength behind these key individuals. Finally, the startup must have a very service-oriented staff with business acumen and an ability to empathize with their customers' needs. If the startup can't provide excellent service, it will have difficulty getting (and retaining) customers.

3. Determine the legal framework that the new company will operate under

Will the startup be a subsidiary, a new line of business unit within the enterprise, or a totally independent company with an independent board? How will the enterprise be represented on the board, and who will fill any board positions that are not occupied by the enterprise? There are pros and cons to each approach, and it is important for startup promoters, legal counsel, the CFO, the CEO and others to review all of these scenarios and to determine "best fit."

4. Sell the idea to the CEO, the CFO, other C-level management and the board

Startups are fraught with risk, even with customer commitments and the ability to leverage enterprise resources and personnel that already exist. Whether it is the CIO, a line of business managers, or any other manager in the enterprise, business viability due diligence, customer commitments, projected staffing and operational expenses of the organization, the services the startup will offer and how they will be priced, the potential opportunity risks, etc., should all be thoroughly discussed with C-level managers, the board, attorneys and any other stakeholders in the process. These discussions should begin as informal what if meetings that graduate into more serious discussions--until they reach the level of a board meeting, when the proposal comes up for approval. A consensus-building process like this can take months, but it is well worth it because those promoting the startup must get everyone on board.

5. Focus the startup on service and innovation

Customers coming to the startup, especially if it is an IT endeavor, are looking for technology solutions, excellent service and a fair price. The startup must be equipped with a compelling solution that immediately meets pressing customer needs. The startup must possess the skills and talents to continuously innovate and build on this solution. Pricing must also be competitive. More than anything, however, startups can move toward the head of the class if they can provide consistently excellent service. Good service is the Achilles heel of many vendors in the IT marketplace, but an area of concern that customers never overlook.

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By Mary Shacklett

Mary E. Shacklett is president of Transworld Data, a technology research and market development firm. Prior to founding the company, Mary was Senior Vice President of Marketing and Technology at TCCU, Inc., a financial services firm; Vice President o...