Hidden Profits Blog

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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Information Technology in M&A – Understanding the Strategic Value

Filed under: Information Technology Strategy,IT Strategy,M&A transaction,Role of CIO,Uncategorized — Lynda Roth at 2:41 pm on Monday, January 10, 2011

M&A transactions were in the news this week with the article in the McKinsey Quarterly entitled ‘Understanding the Strategic Value of IT in M&A’.  I of course was thrilled to see this article as the authors Hugo Sarrazin and Andy West echoed the key issues I have discussed in earlier posts. 

Their opening statement states what I have experienced with several clients, ‘Many mergers don’t live up to expectations, because they stumble on the integration of technology and operations.  But a well planned strategy for IT integration can help mergers succeed’.  Sarrazin and West stated that in their work with post merger management ,they have found that 50 to 60% of the initiatives intended to capture synergies are strongly related to IT, but most IT issues are not fully addressed during due diligence or the early states of postmerger planning.  Simply stated, the more thorough the IT Due Diligence during the evaluation phase the greater the chance to realize expected synergies and cost reductions.

Sarrazin and West highlighted the 3 major tasks that acquiring companies perform that enable them to reap the greatest benefits from the merger.  These are:

1.  The acquiring firm  must get their own IT house in the best possible shape before initiating any deals.  I call this ‘Know Yourself First’.  The authors provide several suggestions on what should be done to get the IT house in order.  What is required to get the acquiring firms IT house in order is dependent on the company, the current status of the IT systems and infrastructure, and the types of acquisitions that are planned.  I strongly suggest an complete IT assessment and development of an IT roadmap based on managements strategic plans.  

2.  As companies begin merger talks, executive management must include IT in the due diligence process to evaluate the target company’s technology, to determine how it complements their own IT strategy and operations.  In my opinion this is an absolutely critical step that should be performed by IT professionals experienced in M&A issues.  This can be internal IT professionals or an external team that specializes in IT due diligence.

3. Prior to completion of the deal the postmerger integration must be carefully planned, including the systems and processes that will be merged, and the IT resources required. 

I will discuss each of these tasks in detail in subsequent posts on this topic.

Per the article, when these tasks are done, the acquirer can rapidly integrate the target company’s platform into a carefully considered architecture, enabling data from the acquired company to be migrated in less than 6 months.  I would also add that more importantly it enables synergies such as

  • Merger of customers and cross selling of products/services,
  • Realization of staff reductions
  • Rapid penetration of new markets
  • Rapid consolidation of products/services
  • Rapid consolidation of vendors and potential favorable pricing due to increased volume

Serrazin and West also stressed the importance of the role of the CIO as a strategic partner in identifying acquisition targets and that the earlier the CIO is involved the more value can be added.  This requires the CIO to be not just technology focused but also business focused.  They also discuss the importance of evaluating the IT talent in both companies and determining who will be retained and implementing strategies to ensure continuity during the transition, maintenance of crucial talent within the organization.  In order for this to be accomplished, IT must be involved early in the merger discussions and due diligence phase.

Their summary states ‘As organizations depend increasingly on the information systems that coordinate transactions, manage operations and aid the pursuit of new market opportunities, the role fo technology in mergers becomes more critical.  Companies with a keen understanding of IT’s essential role in M&A can gain an edge in completing successful mergers.’  I concur wholeheartedly.  I would also add that it is important for executive management to understand the strategic role of IT in successfully meeting all the business goals including cost reduction, productivity improvements, market share growth, customer satisfaction, revenue growth.  In the 21st century, Information Technology is the heart of every successful company.  

Here is the link to the McKinsey Quarterly article.  www.mckinseyquarterly.com/Corporate_Finance/M_A/Understanding_the_strategic_value_of_IT_in_MA_2709

Here is the link to my previous post about IT Due Diligence

www.hiddenprofitsblog.com/it-due-diligence-what-and-why

5 Reasons Why Every Mid-Market Company Should Utilize a CIO

Filed under: Information Technology,Role of CIO,Uncategorized — Lynda Roth at 7:17 pm on Sunday, July 25, 2010

The position of a CIO has traditionally been thought of as only for larger companies.  Indeed when the position first became popular in the 90’s only companies with fairly significant data centers and IT staffs hired a CIO.  In recent years more companies with revenues of less than $1 billion have been hiring CIOs.  However, in many of those situations the position becomes more of a title given to the person at the company that is responsible for IT, regardless of what their actual function.  In many cases the CFO also carries the title of CIO. 

A CIO is no longer just a title to be given as a reward or just to give to another executive as a place holder.  As information technology (IT) has become ubiquitous and ever more important within companies of all sizes, the role of the CIO has become more critical and includes more expanded functionality.  The following are 5 key functions a CIO should perform in all organizations.

1. CIO should be responsible for both the technical components of information technology and business process.  As a company grows the systems it should use include more and more functionality and the company should use more of that functionality to improve the productivity in the company.  Unfortunately, what generally happens is that the company invests in technology that has the capability to significantly improve productivity and controls.  Or the company does not purchase the technology available to them because they do not understand the benefits of the available functionality.  The result is that as the company grows of the ratio of expense to revenue increases and the company becomes less profitable as a percentage of revenue that translates into net income.  A good CIO should understand the technology, the business and lean business processes.  The CIO becomes the key person that guides the company to utilize information technology to the fullest extent and implementing lean business practices to maximize profitability.

2. IT is no longer just about processing accounting transactions and providing management reports.  It is also no longer just about building and maintaining an internal data center at a single location.  IT encompasses customer interface, product/service delivery, marketing and sales and ultimately can be the key to an important competitive advantage or major cost savings.  A savvy CIO who is involved at the C-level executive ranks can help guide the company through technology decisions, educate management and employees regarding different technology options. 

3. CIO should be part of strategic planning process.  Often executive management plans are hampered and information systems are purchased in a crisis mode because no one with a technology background has been involved in the strategic planning process.  I have worked with companies that are struggling with growth because they do not have the systems and processes needed to remain competitive and profitable as they grow.  Having an experienced CIO involved with executive management at that strategic level will not only improve the chances that the company’s information systems and processes will be able to support their growth; they may also be able to provide solutions to competitive pressures.  In addition, if a company is struggling and needs to reduce cost, an experienced CIO will be able to identify opportunities where information systems coupled with revised business process will enable staff reductions.

4.  Information Technology today is much more complex and specialized than ever before. Also, new technology is coming on the market faster than ever. Traditionally, mid-market companies rely on vendors or non-technology executive’s previous experience to keep them informed on what enhancements they need.  This is dangerous for 2 reasons – 1.  vendors are primarily interested in making sure that their clients purchase products/services that fit in their experience. 2. Vendors are not involved in planning so are often unaware of all the factors that should impact a decision.

5.  CIO should be involved in M&A transactions.  Many companies grow by acquisition and as the economy recovers M&A activity will increase.  The CIO needs to ensure that the parent company has the infrastructure and systems to support the acquisitions, perform due diligence on the acquisition targets and plan the transition of systems, infrastructure and processes.  I have worked with several businesses that have grown by acquisition without addressing these areas and after a few years they have a major issue to address.  They are supporting multiple systems and infrastructures, the companies cannot work together, customers are confused and they have not realized the expected ROI. 

Hiring an experienced CIO is expensive and many mid-market companies do not have a need for a full time CIO.  In these situations I recommend using an experienced CIO on a part-time consulting basis and/or adding an experienced CIO to the Board of Directors.  Also, many CIOs are primarily experienced in managing the IT environment and have limited business knowledge.  Utilizing an experienced CIO as a coach/mentor to the corporate CIO or on the Board will provide the needed support for the company CIO. 

Links to additional articles.

Role of CIO in M&A

New Role of CIO

Role of Strategic CIO

Contact LJR Consulting Services for experienced CIOs 818-227-5025 or info@ljrconsultingservices.com