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Business Driven M&A for IT

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Mergers and acquisitions greatly impact companies, especially the IT organization. With the merger failure rate at 70%, an effective framework to handle change more effectively is required. WGroup has assisted many firms through successful integrations by aligning technology with the new core business objectives.

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Business Driven M&A for IT

  1. 1. Drive Your Business Business-driven Mergers and Acquisitions for IT Better strategies for managing technology integrations
  2. 2. 2 ©2015 WGroup. ThinkWGroup.com The integration of two companies into one functional unit inevitably involves great change. Employees must adapt to culture shifts, and power structures evolve. The IT department is one of the areas in which these changes are most significantly felt. Mergers and acquisitions can create new needs and goals and result in numerous projects for which IT doesn’t have the time or resources. IT requires careful planning and prioritization to avoid integration problems. Introduction Mergers and acquisitions can be challenging Many mergers fail or lead to an inefficient, poorly run IT organization that doesn’t meet the needs of the business. Combining the people, processes, and technology of two separate companies is hard. In order to do it successfully, companies must have fully formed target metrics for integration and have comprehensive plans to meet those goals. The importance of a business-driven approach Given the intense pressure and uncertainty present during mergers and acquisitions, it is important to remember the end goal of IT: driving business goals. By aligning technology integrations with core business objectives, enumerating priorities, and basing decisions on data, companies can have more successful integrations and emerge from the transitions stronger and better able to face new challenges. This paper will discuss some of the major challenges faced by IT during mergers and acquisitions (M&A), and present an effective framework to handle this change more effectively.
  3. 3. 3 ©2015 WGroup. ThinkWGroup.com The challenges of M&A When companies merge or acquire other companies they must make considerable changes to integrate and become a functioning whole. Culture, business strategies, and many other variables must be adapted to fit new environments, people, and goals. This can create numerous problems, leading to unhappy employees, inefficiency, and abandoned projects.
  4. 4. 4 ©2015 WGroup. ThinkWGroup.com Poorly defined goals Many companies undertake a merger or acquisition without fully defining the goals of the process. Without pre-established metrics, there is no way to know what success looks like and no way to formulate actionable strategies to get there. Establishing what the goals of integration are and what integration model the merger or acquisition will follow helps establish priorities and facilitate a smooth transition. Numerous studies show that the failure rate of mergers and acquisitions ranges from 70% to 90%.1 These numbers should serve as a warning to those who enter into the integration process lightly. Companies must have effective, tested strategies in place that can reduce risks and lead to positive outcomes. Thorough planning with insight from M&A experts is critical to success. The high failure rate of M&A Mergers and acquisitions fail for many reasons. In some cases the companies were not a good fit or business leaders could not decide on how best to take advantage of their combined strengths. In others, IT organizations became too bloated and could not fill their role efficiently. Too many M&A failures are simply the result of a lack of planning and foresight. Some of the major reasons M&As fail include: Why is M&A the source of so much failure?
  5. 5. 5 ©2015 WGroup. ThinkWGroup.com Ignoring cultural differences Every company has a unique identity with unique ways of doing things. When another company is added to the equation, everything can change. New superiors, different rules, and shifted values can create culture shock for employees and lead to resignations, inefficiency, and other problems. A lack of focus The CIO has a particularly important role in ensuring that the transition is a success, but many CIOs face an overwhelming number of projects and goals during a merger or acquisition. This can lead to a lack of focus that in turn leads to abandoned projects and inefficiency. Clear leadership with consistent methodology toward achieving overarching business goals is an important component of any successful transition.
  6. 6. 6 ©2015 WGroup. ThinkWGroup.com A wide range of factors must be accounted for in order to complete a successful merger or acquisition.  Technology is one of the most challenging aspects of integration In a recent survey, only half of respondents said that they had a favorable view of how well their company integrated IT following a merger or acquisition, the lowest of any department except for research and development.2 The reasons for the particular difficulty of integrating IT are numerous. Companies often have implemented technologies in vastly different ways. For example, one company might focus largely on cloud and other third-party services to meet their needs, while another may use primarily in-house technology. Software licenses, service agreements, equipment, policies, and a wide range of other factors must all be accounted for in order to complete a successful merger or acquisition. This involves a number of varied projects that must be undertaken to consolidate technologies and form a cohesive foundation for the future.
  7. 7. 7 ©2015 WGroup. ThinkWGroup.com Understanding integration models Holding In this model, the target company is owned by the parent company, but remains a separate entity. In many ways, this is the simplest of all integration models and will involve minimal transition efforts on the part of either the parent or target company. It will be necessary to engage in efforts to assure workers that the merger or acquisition will not result in significant changes for them. Preservation The preservation model is similar to the holding model in that the target remains largely autonomous. However, this scenario does involve a certain amount of integration and requires greater planning on the part of the IT department. This model usually only involves integration of back-office technologies. Examples of this include the parent company adopting the target company’s proprietary software, or some service contracts being merged to produce greater value. The target integration model for any given merger or acquisition will dictate the strategies used to achieve success. Companies must have a solid understanding of how and to what extent they want to combine resources and efforts. Integration models can run the gamut between holding models, which essentially keep each individual company completely intact, and absorption, in which the parent company fully integrates the target company. Deciding on an integration model will form the basis for how the integration will proceed and help CIOs prioritize their efforts.
  8. 8. 8 ©2015 WGroup. ThinkWGroup.com Symbiosis Symbiosis is an intermediate model between full integration and full autonomy. In this scenario, companies will integrate wherever there is an advantage to doing so, but nowhere else. This can be best thought of as a partnership between two separate companies sharing resources and working closely together toward common goals. Technologies will likely be merged in many areas, and many processes and policies will be shared, but there will still be some degree of separation between the target and parent. Absorption This model represents full integration between the parent and target companies. It involves the greatest amount of work to ensure that all elements of the new company that can provide value are put to use and that all unnecessary elements are terminated. Often creating significant turmoil and work for the IT department, this process must be carefully managed if it is to be successful. However, it also provides the opportunity to form a more robust IT organization that benefits from the strengths of both companies and potentially reduces the long-term friction that might occur in other integration models. Absorption involves the greatest amount of work, but it also provides the opportunity to form a more robust IT organization. 
  9. 9. 9 ©2015 WGroup. ThinkWGroup.com Determining the right level of IT integration What are the overarching goals of the merger or acquisition? Ultimately, any merger or acquisition is undertaken to drive some larger business goal. IT leaders must consider these goals when choosing a target integration model. If the objective was to acquire people and technology to meet the core business needs of the parent company, substantial integration may be necessary. If the target company is profitable in its own right and can simply be another source of revenue, less integration may be necessary. The first step in any M&A strategy is deciding the right level of IT integration. The choice will largely determine the course of the acquisition and have great implications for the success of the IT organization. Leaders must make a structured analysis of the situation and ask themselves several questions before making a decision. What value can integration add? In many cases, technology integration may add significant value through synergy, lower costs, and improved time to market. It is important to carefully consider every potential impact of integration and evaluate based on models and data. One of the most important components of integration is examining areas in which target company technologies, people, processes, and service contracts can be combined with those of the parent company to reduce costs, increase efficiency, or drive innovation.
  10. 10. 10 ©2015 WGroup. ThinkWGroup.com What are the downsides to integration? Although there may be many benefits to integration, there can also be many pitfalls and downsides. Culture clashes, incompatible policies, and overlapping systems can all create problems and additional work for the IT team. In the case of a full absorption, there will inevitably be a major increase in the number of projects the IT team must contend with, likely for a significant period of time. The added costs and potential for risk that this brings must be considered when weighing the value of integration.
  11. 11. 11 ©2015 WGroup. ThinkWGroup.com More successful integration planning One of the most common sources for failure in M&A is ineffective planning and execution. Many companies fail to understand or properly prepare for the immense change that the transition will bring. This inevitably leads to significant problems when the reality of the merger or acquisition demands action from business leaders. Proper planning is key to achieving the desired outcome. IT and business leaders should work together In many companies, IT is not treated as a core department and often does not align its own goals with those of the business.  At the heart of successful M&A planning is a close collaboration between IT and business leaders. In many companies, IT is not treated as a core department and often does not align its own goals with those of the business. This is an ineffective model during normal operations and can be disastrous during times of transition. For effective integration another company, IT and business leaders must work closely together.
  12. 12. 12 ©2015 WGroup. ThinkWGroup.com IT should be involved from the beginning Given the importance of IT to modern business, and the very real risk that technology integration can fail, it is absolutely critical that IT leaders be a major contributor to all M&A decisions. Many business leaders are apt to ignore the real implications of systems integration and service contracts when the deal is being made, leading to potential problems in the aftermath. By considering how the merger or acquisition will impact IT from day one, plans can be made and the deal can be structured in such a way as to avoid issues. IT must consider business goals Of course, this collaboration must go both ways. IT should align its approach to integration with the broader goals of the business. Every decision should be made considering factors such as how it will affect the efficiency of employees, the company’s service, its ability to generate revenue, its effect on the company’s brand, its risks, and its costs. By examining each element using these metrics, technology executives can assess what will have a positive or negative impact on the business as a whole.
  13. 13. 13 ©2015 WGroup. ThinkWGroup.com Key considerations for technology integration Several elements should be considered when planning for a technology integration following a merger or acquisition. This framework will help form the foundations of an integration effort that builds on the strengths of both companies to drive the business goals of the unified whole. Synergy The integration should combine pieces of each company to form a more complete, more effective whole. This involves the maximization of revenue streams through embedding key products from the target company into the parent company, or vice versa. It also involves recognizing that some elements should be left segregated in order to achieve maximum cost effectiveness or efficiency. Elements that should be considered include people, operational elements, applications and services, and enabling technology. Time to market As a combined entity, a variety of factors will change the time to market for products and services. Leveraging skills and resources from both companies can help expedite development, testing, and production, allowing products to be created faster and less expensively. In some cases, this can also work in the opposite direction, as integration problems can cause inefficiency and other problems. Cost The costs of any integration efforts will be a major component of developing effective strategies. Companies must examine the expenses of a chosen integration roadmap, as well as the savings it will allow, in order to make better decisions about what to keep segregated and what to combine. Innovation Bringing together the varied talent and resources of two companies can lead to a dramatic increase in innovation. Companies may have the ability to develop new products faster, combine technologies to create more effective solutions, and benefit from an influx of ideas. However, it is also important to take steps to make sure that innovation is not stifled by incompatible culture changes or processes that aren’t effective in a new environment.
  14. 14. 14 ©2015 WGroup. ThinkWGroup.com Creating an integration plan In order to agree upon an integration model and ensure that the IT organization is ready to carry out the necessary changes demanded by that model, careful evaluation and planning is necessary. Start with a baseline assesment Designing an effective plan for technology integration that meets broader business goals should involve careful assessment of both companies. This assessment should identify any redundancies in people, systems, infrastructure, applications, vendors, capabilities, and costs. It should also identify opportunities to add value through integration or collaboration and look for areas in which there are gaps that need to be addressed. This process should be broken down into the examination of several distinct components for each company: People and organization Assessments must evaluate the skills, capabilities, and overall organizational structure of both companies. Look for overlaps in employee capabilities, potential power- structure problems, and any issues that could arise from cultural mismatches. Processes Each company has processes in place of particular maturity levels and other characteristics. Learning how to mesh the way both companies accomplish goals is a critical step in achieving a successful union.
  15. 15. 15 ©2015 WGroup. ThinkWGroup.com Infrastructure and applications A careful inventory of each company’s applications, systems, and infrastructure must be made to look for areas of overlap and to allocate resources in the most effective way. Other issues to address include relative scalability of infrastructure, the suitability of adopting resources to new tasks, and adherence to industry best practices. Strategic alignment and governance During a merger or acquisition, there should be mechanisms in place to ensure each company is aligned in terms of its goals and accountability. This will help avoid conflicts of interest and problems in the power structure of the new organization. Financials There should be a careful analysis of IT costs by function and activity for each company. This allows the company to identify items that do not provide a positive value and to integrate in the most cost effective way.
  16. 16. 16 ©2015 WGroup. ThinkWGroup.com Create a timeline and project portfolio After making an assessment and deciding on an integration model, companies must begin creating a plan that includes a structured timeline with milestones and metrics to judge progress. This allows IT to prioritize projects according to the needs of the business and allows for a more organized approach to integration. Address risk mitigation Technology integration inherently involves risk. IT leaders should look at every decision in terms of the potential costs and pitfalls compared to its benefits. This allows for planning that is based on logical analysis of the facts and reduces the chances that the integration will fail due to unforeseen outcomes Develop a structure for execution Planning is only half the battle. Companies must also put solid structures in place to ensure follow through on any projects that have been delegated. This involves ongoing dedication to the integration process and requires substantial commitment on the part of IT management to ensure that early work is not undone by later mistakes or lack of will.
  17. 17. 17 ©2015 WGroup. ThinkWGroup.com In summary Integrating IT after a merger or acquisition is a delicate process that must be handled with great care. In order to ensure that both companies thrive after the transition, it is important to understand overarching business goals, what the best integration model is for the situation, and how to effectively implement the model. This takes thorough planning, assessment, and strong executive will to ensure a smooth transition. • Most mergers and acquisitions fail. • IT integration is challenging. • Avoiding failure requires a commitment to creating a viable integration plan and the means to follow through on it. • IT transition efforts must be aligned with business goals. Business leaders should involve IT leaders in M&A decisions from the beginning. • The integration plan is dependent on the integration model. Every company must carefully choose what to integrate and what to keep separate. • Each IT organization must be thoroughly assessed prior to integration to look for opportunities, redundancies, and potential gaps • Companies must work across organizations and departments to drive productive change. Key takeaways:
  18. 18. 18 ©2015 WGroup. ThinkWGroup.com References [1] Harvard Business Review, March 2011. “The Big Idea: The New M&A Playbook” by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck. [2] PwC’s 2014 M&A Integration Survey Report
  19. 19. Drive Your Business Founded in 1995, WGroup is a boutique management consulting firm that provides Strategy, Management and Execution Services to optimize business performance, minimize cost and create value. Our consultants have years of experience both as industry executives and trusted advisors to help clients think through complicated and pressing challenges to drive their business forward. Visit us at www.thinkwgroup.com or give us a call at (610) 854-2700 to learn how we can help you. 301 Lindenwood Drive, Suite 301 Malvern, PA 19355 610-854-2700 ThinkWGroup.com

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