Structuring the “Plug-and-Play” Business Portfolio

Conventional wisdom holds that megamergers are highly risky propositions. In fact, even a cursory look at past transactions shows that most deals destroy value for stockholders within a matter of a few years. That hasn’t stopped corporate management teams from taking the plunge – which begs the question: Is there a need for a new model for integration that might increase the probability of success? For years, the virtue in creating tightly integrated businesses has been the Holy Grail of management thinking. Break down those silos, and one can create cross-enterprise business processes and a common technical infrastructure and IT platform that maximize synergy capture and minimize costs. So goes the thinking. However, the more tightly the business lines have been integrated, the more difficult it is to break them apart in the event of a decision to carve out and divest these lines. A new model may be evolving. For example, there are currently talks between two large telecom companies. They are not about merging, or even about one company divesting a line of business. What’s unique is that one company is negotiating to sell a business line to the other while the latter simultaneously is negotiating to buy another business from the former. They are trading lines of business in order to gain a specific competitive advantage in each area. In this context, lines of business could be seen as modules within the whole – virtual Lego blocks that could be quickly reconfigured to generate new competitive advantages. The goal, then, would be to have the lines of business operate in an integrated fashion, but to retain the ability to easily unplug an individual business at the appropriate time. This can allow for rapid divestiture and/or acquisition that will enable management to “plug and play” business modules in line with its corporate strategy. Here are five steps a company may consider to help get closer to a modular structure: Step 1: Create a profile of your business Talk to anyone who has recently carved out a line of business and they will tell you that one of the most difficult tasks is understanding the original boundaries of that operation. In many cases, resources, facilities, and IT applications are being shared across many lines of business. And in most instances, a divesting company cannot sell a portion of a person, a section of a building, or a piece of a software code. To create this profile, extract business processes, physical facilities, people, business applications, IT infrastructure, customers, products, third-party relationships, and intellectual property. Most likely you will create a profile that shows that some portion of the business line is shared with the parent business. It could be very low, say 10% for a business that maintains very autonomous operating structures, or very high, more than 70% for very tightly integrated lines of business with shared services organizations. Creating this profile is not a trivial task, and it requires some degree of detail to be meaningful. However, the profile ultimately will become a model that will allow managers to make key decisions along the way. Some may argue that line-of-business profiling could be an expensive proposition. Indeed, this may be true. However, the company housing a multiple-business organization should have an understanding of its internal structure to ensure that it is serving its customer base in a profitable manner. This approach allows management to be strategically flexible. It supports decisionmaking on behalf of the management of the existing business while providing it with the ability to trade across other businesses. Step 2: Tag the assets Now that the separate lines of business have been assessed and profiled, it is necessary to physically tag the assets of each. Follow up with these actions: * Create a unique identifier in your data structures that identifies the existing customer, inventory, part number, supplier, or asset as being part of a specific business. * Going forward, use this convention to identify new assets that have relationships to the specific business. Step 3: Consider the tradeoffs Once management understands the existing degree of integration between operations, it will have to create a balance between tightly integrating a business line and keeping it as a stand-alone entity. Businesses need to enjoy the advantages of integration without the disadvantages. Companies that want to move closer to the option of divesting a business must consider the cost of separating the assets in anticipation of a transaction versus keeping the assets tightly linked until a transaction occurs. When adding new facilities, processes, or infrastructure as a part of the normal growth of the business unit, the company should consider how the additions affect the profile of the model that was built in Step 1. Do these investments create a tighter link and more areas that are shared? Does the company have an option to add this capacity in a more modular fashion? For existing infrastructure, consider ways to either simplify or consolidate what the organization already has. Through the course of normal restructuring, are there ways to create more modular or divisible structures without incurring large costs? As the business evolves, these questions related to modular organization should be considered: * If there are hundreds of legacy applications that are supporting the business line, is there a way to simplify the legacy environment? * If you use multiple outsource providers, is there a way to combine the support functions of the line of business with a smaller number or even a single outsider? Step 4: Use technology to enable modular structures Technology can be a key enabler of this modular concept, but use of technology involves highly complex considerations. Many large organizations have implemented global enterprise resource protocol (ERP) systems. They may be structured as either a single instance, or a common configuration across the world, or with multiple instances, which include many unique configurations in the network. There is an argument that a more modular structure would be a unique example of an ERP implementation for a particular line of business. This would allow a firm that is carving out the business to simply “unplug” it, and theoretically allow the buyer to use the configuration that had been set up to run that business, either for a transitional period or for the long haul. The counterargument is that any buyer with an existing ERP system would most likely roll the new business into the existing configuration, instead of keeping it as a stand-alone entity. The use of middleware – software that connects two separate applications and passes data between them – is another tool that can facilitate a more modular use of technology. Middleware can be very powerful, but it is not the only way to allow a divested line of business to tie into the parent company’s business applications. From a hardware perspective, and at a very tactical level, servers, storage devices, and network communication platforms are very rarely dedicated to a single line of business. This makes the carve-out or modular configuration more difficult. Additionally, it may be very uneconomical to have dedicated hardware for each line of business. What is more viable is to make sure there is a detail map or identifier of what hardware is used and where it is physically located for each of the businesses. Step 5: Create the plan, continue to refine After a profile of the business is created and steps to create more modular units have been taken, the organization now has all the elements it may need to create a detailed divestiture plan. Even though one may not foresee divesting the business in the next 12 months, the plan forces the organization to think through how it would actually do it, and what other issues need to be addressed. If a particularly difficult issue is hit during a divestiture planning exercise, this process identifies a potential opportunity that the organization can work on to either simplify the company’s structure or build more modular structures through repetition of Steps 1 through 4. The issues involved are complex, but companies that are successful in configuring business lines in a modular arrangement can find themselves in the proverbial best of both worlds. Care must be taken to ensure that the lines of business are, if not fully integrated, connected to the degree that makes sense, and that necessary linkages are in place to allow the component elements to work as a seamless enterprise. But if corporate strategy should dictate a divestiture of one or more of those parts, the company may be spared some of the difficulties that a more tightly integrated organization would experience in a spin-off situation. These advantages help explain why, in the future, “plug and play” may become the model of choice among business structures. Douglas Tuttle is a Senior Partner, M&A Services, at Deloitte Consulting LLP Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com