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Finding the Gold in Your Business

Hidden Profits Author:

Lynda J. Roth

As the president and founding partner of Woodland Hills-based LJR Consulting Services, Lynda advises clients on ways to improve profitability and productivity through both technology and business processes. She also works with companies and private equity firms on the role of information technology in mergers and acquisitions.



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M&A Understanding Strategic Value of IT Part 4

Filed under: IT in M&A Transaction, Information Technology, Information Technology Strategy, M&A transaction — Lynda Roth at 10:14 pm on Sunday, January 23, 2011

This is the fourth in the series on Understanding the Strategic Value of IT in M&A based on the McKinsey & Co article of the same name by Hugo Sarrazin and Andy West.

The topic for this post is ‘Creating the IT transition and merger plan’.

Most of the time in an M&A transaction the acquiring organization has made the purchase for specific reasons such as increasing market share, expansion into new geographic locations, adding products/services that compliment core products/services, consolidating functions to increase profitability in the combined organization.  In order to support their goals for the acquisition, they usually create plans to consolidate common functions within the merged organization such as sales, accounting, customer service, HR, potentially manufacturing, logistics, etc.  However, the consolidation of most of these functions require consolidation of IT systems and infrastructure.  As a result IT usually needs to be the first organization to the table.

If the acquiring company has followed the first 2 steps, IT will have already completed a due diligence on the acquisition’s systems, architecture and IT personnel.  This provides a natural platform to create a transition plan.  As the author’s noted in the article, building the transition plan in advance of the transaction completion, the IT team can move quickly to consolidate IT and enable a quicker consolidation of other functions and as a result quicker realization of ROI. 

The first component of the transition plan needs to be the personnel.  In the 1st phase, which was the analysis of the acquiring organization’s IT, a skills inventory should have been created.  So, the CIO will know the staff required to build the IT organization.  Also, as part of the due diligence the CIO will know the skills of the acquisition IT team and be able to make the decision quickly of the team members that are retained post merger.  In addition the CIO must identify the personnel in the acquisition that must be retained during the transition and create incentive plans for those team members. 

The second component of the transition plan is the network, hardware, mobile devices and communication infrastructure.  How will those be combined and what equipment, outsource arrangements and communication will be required.  This plan will include how to consolidate infrastructure prior to the consolidation of systems and processes.  I also include office productivity software such as email, spreadsheet, word processer software, etc..

The third component of the transition plan is the business systems and processes.  Decisions are required on which systems will be maintained, which will be eliminated and what new systems will be required.  This portion of the transition plan requires collaboration with business functions affected by the business systems being addressed.  Ideally the acquiring company will consider the age, functionality and support of the systems in their decision of which systems to eliminate.  Years ago I consulted with a bank to upgrade all of their legacy applications to new systems. The upgrade included not only their financial and back office applications but also their ATM, automated teller system and telephone systems.  The upgrade had been part of a strategy to re-insource their systems after an unsuccessful outsourcing arrangement.  Shortly after the upgrades had been completed the bank was merged with another bank that still had mainframe legacy applications.  Management decided to convert the acquired bank to the legacy applications.  Had the combined bank not been acquired again a couple of years later, it would have proved to be a very costly decision as ultimately all the legacy applications would have been replaced.  When the acquired company has newer and more effective systems it is in the combined company’s best interest to evaluate the systems to be maintained objectively. 

In addition to systems it is very important to evaluate business processes at this time.  Often in order to consolidate business functions, business processes need to be redesigned in order to enable the consolidation.  For example, I had a client that had grown by acquisition to greatly expanded geographical regions.  Because they had not modified their business processes and added additional technology such as document imaging, they were required to maintain back office functions in each of their geographic locations.  When we redesigned their processes and selected new systems they were able to consolidate to a single back office location and realize significant savings and productivity improvements.

It is the final phase of system consolidation that really enables the company to combine business functions and bring to fruition the goals of the merger.

M&A Understanding Strategic Value of IT Part 3

Filed under: IT in M&A Transaction, M&A transaction — Lynda Roth at 9:00 am on Wednesday, January 19, 2011

This is the third post in the series based on the McKinsey Quarterly article - ‘Understanding the Strategic Value of IT in M&A’  The authors list 3 IT components as critical in an M&A transaction.

  • Getting your own IT house in order
  • Performing IT Due Diligence on the aquisition target
  • Creating an IT transition and consolidation plan prior to completion of the transaction

In this post I will discuss IT Due Diligence in the review of the acquisition target.  Why is it important for you to evaluate the Information Techonology of the acquisition.  First, if you are a financial buyer it is critically important because you are going to rely on the IT infrastructure, systems and processes to support the planned growth of the company after your purchase. You need to know what investments are needed in IT and how quickly the investments need to be made.   If you are a strategic buyer you need to evaluate their infrastructure and applications to determine the accuracy of the data and the ability to merge the data in their systems into your systems.  The IT Due Diligence will provide the basis for your transition plan. 

So what should you include in IT Due Diligence process for an acquisition?  It is very much like the evaluation you made on your own IT on getting your house in order. 

First, you want to know details of the infrastructure.  What servers, mainframes, printers etc.  do they have, how old are they, how much life do they have and are they compatible with your environment and usable in your environment.  What PCs, laptops, mobile devices do they have and are they compatible with your environment, how old are they, how much life and when will they need to be replaced.  If you are a PC shop and the acquisition is primarily a MAC shop will you convert them to PC or integrate the environments. Are they hosting all or part of their infrastructure and if so what are the agreements in case of an acquisition. 

Next, you need to know what software and systems they are using.  First, are they using the same desktop software and versions.  For example, are both companies using MS Office and if so are they compatible versions or are you using different office applications software.  What investment will be required to make the environments compatible.  What ERP, CRM, reporting, operational systems are they using.  What are the liscensing agreements in case of an acquistion. Are key systems custom developed or highly customized products and if so who supports them.   What will be required to convert their systems to your systems. 

Third you need to evaluate who supports their IT infrastructure and software systems.  Do they have an in-house department that provides all the support, do they have outsource agreements and consultants that provide the primary support for systems.  What packages will you need to offer tp ensure that support is continued during the transition.  Who from their support team will you transfer to your team and who will not. 

Finally you need to review the hardware, software and support agreements and intellectual property issues.  Are the licenses for their software transferrable to you and is their a cost associated with that transfer. Do they have licenses for all their software.  Will you need to purchase additional licenses.  If they are using SaaS systems what is the agreement for continuing the service after an acquisition and what is required to convert the data to your system.  Often in a conversion, historical data is not converted, what are the requirements to maintain history on the systems they currently have.  Who owns the IP rights to the software they use especially if it has been custom developed. 

All of these areas can have a major impact on investment requirements in addition to purchase price not mention your ability to consolidate operational areas of the 2 companies and achieve expected savings and synergies from the merger.  While all of the components of IT are important to the success of an M&A transaction, I believe this is the single most important for 2 reasons.  First, if you are financial buyer the IT infrastructure, systems and personnel will need to support and grow your investment.  If this area is weak, which it is in many mid-market companies, you may have a potentially significant investment required in IT.  If you are strategic buyer, the current IT environment will greatly impact the cost, time and effort required to consolidate the companies.  Converting an acquisition to your systems and processes is often much easier said than done and without IT consolidation, consolidation of the rest of the company is much more difficult if not impossible.

M&A - Putting Your IT House in Order

Filed under: IT Strategy, IT in M&A Transaction, Information Technology Strategy, M&A transaction — Lynda Roth at 9:48 pm on Sunday, January 16, 2011

Growing your business by acquisition seems like a fabulous idea but it can be fraught with problems especially when Information Technology is ignored!

In my last post I discussed the article in the McKinsey Quarterly "Understanding the Strategic Value of IT in M&A’.  The article listed 3 key components of IT in an M&A transaction.  The first component is ‘Getting Your IT House in Order’ or as I call it Know Yourself First.  This applies primarily to the acquiring company but it also has application to the selling company.

What happens when executive management prepares a growth strategy based on acquisition, spends the time and resources to find businesses that fit in that strategy, and develop plans to merge the companies only to have those plans not meet expectations because the information technology structure is not sufficient to support the combined company.  I have seen this in far too many clients.  After years of attempting to consolidate, functioning on multiple technology platforms they have failed projects, wasted capital and lack of synergies of the combined companies. 

So what should be done to prevent this outcome and  ’Get Your IT House in Order’?

The areas that should be evaluated and upgraded include  IT  infrastructure, business systems, business processes and IT personnel (within the company and outsourced).  

Infrastructure

Many companies operate on hardware and communication infrastructure that does not have any room for expansion. Many companies, especially those in the mid-market, tend to not invest in IT infrastructure until it is falling apart.  So if the company is barely supporting it’s current systems on the infrastructure, how will it support the instant growth from an acquisition?  This affects simple functions such as email, website and server and network capacity  for additional personnel, in addition to major applications.   So first the infrastructure must be evaluated and upgraded as necessary to support the acquired company or companies.

Business Systems

In this area also, many companies frequently have core systems such as ERP, CRM, industry specific operational applications, that are unable to support additional users or companies.  The situation may be as serious as the core systems cannot support another company or the number of transactions from another company.  One of my clients had acquired several companies over a 5 year period and the ERP system they were using was no longer supported and had been so heavily customized that they could not put the acquired companies on it.  As a result they were using multiple ERP systems and one of their acquisitions was using Excel spreadsheets for manufacturing and inventory control because it had been a corporate spinoff and did not have an ERP system.  In another client who had acquired 4 companies over a 2 year period, now had 5 ERP systems and could not get any consolidated reporting because the ERP systems were different and all operating on their own servers.  This is probably the biggest problem that companies experience after making one or more acquisitions.  By evaluating the capacity for their existing systems and upgrading or selecting and implementing new systems prior to acquisitions, the company will be prepared to add the new acquisition(s).

Business Processes

Inefficient business processes in conjunction with limited use of technology hamper the growth of many mid-market companies.  In many mergers the additional workload from the acquired business can have a significant impact on the performance of employees.  This has an impact on customers and vendors and frequently sales.  As part of the review of core systems, core business processes should also be evaluated.  The goal is to be able to absorb the acquisition with limited if any growth in personnel while maintaining customer service.  As part of the business process review and redesign, implementation of additional technology such as document management systems, bank and vendor integration applications, customer self-service applications, mobile applications can significantly improve productivity.

IT Personnel

This is the final area of evaluation in which the company needs to identify the IT team that will be required to support the combined companies.  Often the consolidated organization and the technology needed to support it, requires different skill sets in IT personnel. 

In summary, when a company decides to grow by acquisition, it is critically important to ensure they have systems and processes to support the new company and ensure the success of the merger.  This is true for strategic acquirers and for financial buyers that are planning an industry roll-up.

In addition to the acquiring organization ensuring their ability to support the new company, executives that are planning to sell their company, especially to a financial buyer, need to get their IT house in order also.  Having antiquated IT infrastructure and systems can greatly impact corporate value and suitors. I have had clients that are unable to complete a sale because their systems are weak and ineffective.  We strongly recommend an IT and business assessment for any company planning either a purchase or sale.

Link to the McKinsey article   https://www.mckinseyquarterly.com/Corporate_Finance/M_A/Understanding_the_strategic_value_of_IT_in_MA_2709