With technology seeping into all aspects of companies’ operations it has never been more important to ensure that IT and operational integration are at the fore when planning and executing mergers and acquisitions.
History is littered with instances where mergers have failed to live up to expectations and while there can be many reasons for deals failing to deliver, the critical impact of a well-planned strategy for IT integration in helping them succeed tends to be overlooked.
Indeed, the failure to consider IT and operational integration from the outset can often explain why, despite much fanfare about complementary strategies and finances ahead of an M&A deal, promised synergies fail to materialise. Rapid corporate digitalisation in recent years, and the proliferation of cloud-based services, has transformed the way IT is being used and delivered. Businesses are now much more IT dependent than they were ten to 15 years ago, and will become more so in the future. And with the outlook for M&A remaining buoyant after strong activity over 2018, consideration of technology and operations integration has never been more critical to a successful M&A outcome.
Jeff Cherrington, VP of Product Management at IT management solutions provider ASG Technologies, says M&As nowadays often result in highly-complex IT platforms and multiple technology stacks. These stacks can create disjointed technology silos that make it difficult for enterprises to optimise end-to-end business processes that generate value for customers. They can also hamper individual departments within an organisation from executing the work they need to do efficiently.
However, Cherrington says there is one department in particular where poor IT integration will result in a particularly high degree of risk: treasury. “There are a number of key issues that directly impact treasury that every organisation undergoing a merger or acquisition needs to be mindful of. Typically, these include differences in observations of best practices and interpretation of fiduciary responsibilities and regulations. These areas have to be normalised – and that can be difficult, depending how an organisation has interpreted the generally acceptable accounting practices compared to the organisation they are acquiring.
“Equally, there is likely to be some reduction in staff in this area. Acquiring organisations may already have individuals in place doing treasury work and may not require another employee from the acquired organisation to perform the same role. In such an already complex situation, enterprises then need to consider the inevitable issues around systems integration. There are multiple paths that can be taken.”
The first, he says, is maintaining in situ all the systems that each of the merging or acquiring entities had. The other option is to do a “cold cutover” – the switching over from the legacy control system to the new control system while the process is not running – from the existing system of the acquired company to that of the acquiring business.
Sitting on siloes
Cherrington cautions, however, that both options introduce significant risk into a critical function of the enterprise: “Since treasury does cash management, taking the wrong option could leave the organisation with an unexpected cash shortfall, requiring emergency third-party funding at higher than normal rates. That in itself is a significant risk. Forecasting is another major concern, especially as the department will have the added challenge of forecasting the performance of a new entity or entities following the acquisition.”
Organisations need to examine such risks early in the due diligence for the merger or acquisition. They should start, Cherrington says, with foundational questions about the packages being used for the various elements of treasury, focusing in particular on cash forecasting; working capital management; cash management; and investment management, and then consider what operating systems those packages require.
“It is not unusual to see a scenario where the acquiring organisation has placed some or all of their automation for these areas on a mainframe package, perhaps processing in an ERP such as SAP, whereas the acquired entity may be using another third-party package that was on a Windows or Unix server. It can get even more complicated in those cases where one entity is using a cloud package for their treasury management.”
Poor IT integration will lead to ongoing operational silos and the impacts of that can be very significant. There will be increased costs, for instance, because if departments remain in siloed situations, they will likely have to establish processes to bring the relevant data together and reconcile them. He adds: “There will also be increased chances for error coming from those processes, since they are likely to be manual at the beginning. Even if they become automated later, the chances of institutionalising an incorrect or biased formula into technology is a risk that has to be recognised.”
Finding a solution
So how can organisations address these issues? On the basis of his firm’s experience, Cherrington believes there is an urgent requirement across enterprises globally to look at how they manage end-to-end business processes that generate value for customers and for the enterprise. “Clearly the different large-scale activities for treasury – cash management, investment management and forecasting – are examples. In any enterprise from mid-market up, these value streams will invariably span multiple packages, products, custom processes or applications, and invariably multiple technology stacks.
“Spanning those stacks to get a global view of the value stream in terms of its organisation and dependencies is key for enterprises today, as is managing the underlying technology even as it crosses multiple technology stacks.”
So how would this work in the context of treasury? Here, a typical value stream might include some induction from a Windows web server that then converts the data and passes it to a relational database on the mainframe where analysis and post-processing is done before it is passed to a treasury package that is operating on a Unix server or a cloud. That process is difficult to manage currently because there is no single centralised view of the different pieces; their current workloading and their ability to take on additional load.
“In order to break down these barriers, cross-technology stack organisation and performance management is key. Without timely usage information, IT managers have no insight into organisational needs,” Cherrington says. “But by leveraging proactive analysis tools for high-visibility monitoring and capacity planning, IT managers can improve reliability and productivity in their IT environment. This result can only be achieved with a solution that allows for IT resources to be fully utilised for automated analysis, reporting, modelling and, of course, capacity planning across technology stacks. IT managers can then make informed decisions about how to most effectively leverage their resources and understand where there are opportunities to improve the way they are using their current systems.
There are spinoff benefits too from actioning such a process: it enables better planning for peak loads; helps organisations recognise if they are paying for unneeded capacity and makes it easier for them to better understand their scalability needs.
Armed with this information, Cherrington says organisations can maintain productivity and deliver visibility for IT throughout their business, empowering them to forecast the impact of business growth across IT platforms, set realistic expectations for the merged business and deliver enhanced value streams: “Such an outcome is not only of benefit to the whole enterprise. For treasury it will be key in enabling departments to cut costs, ensure business continuity, and reduce risks.