Meeting the Pressures to Accelerate IT Integration

Studies and experiences have shown that a major reason why many mergers and acquisitions fail is because of problems that occur during the implementation stage of the transaction. Infor-mation technology (IT) has emerged as one of the most critical aspects of integration and successful implementations. This article identifies IT critical success factors (CSFs) that have the greatest impact on the success or failure of deals. These factors are assembled into an IT M&A Critical Success Factor Model, which serves a number of purposes. It enables information systems organizations to benchmark m&a implementation performance, learn from other organizations’ best practices, and serve as a tool to enhance performance. In 1998, Leibs stated that in the majority of m&a transactions that he studied, IT was one of the most critical aspects of integration. Davis found that in chemical mergers, the combined companies typically gained 80% of their operational integration value in areas that leverage IT. Across the organization, IT is involved in supporting accurate assessment of payroll, financial status, purchasing, marketing, manufacturing, and distribution. How well these functions perform in the new entity is dependent on how well integrated the IT function is. There are many documented cases in which IT integration problems have wounded ill-prepared organizations. The merger between Union Pacific Corp. and Southern Pacific Rail Corp. in 1996 was supposed to deliver a seamless rail service and $800 million in annual savings. But rail traffic soon came to a halt in Texas and California, causing operating profits and share prices to fall. In 1996, when Wells Fargo & Co. bought First Interstate Bancorp, thousands of customers left because of missing records, long lines at branches, and administrative snarls. In 1997, Wells Fargo announced a $150 million write-off to cover lost deposits due to its faulty IT integration. In 1998, First Union Corp. and CoreStates Financial Corp. merged to form one of the largest U.S. banks. In 1999, First Union saw its stock price tumble on news of lower-than-expected earnings resulting from customer attrition. The problems arose from First Union’s ill-fated attempt at rapidly moving customers to a new branch-banking system. Early IT involvement in the deal IT personnel need to understand the general philosophy of the merger, the goals of the new organization, and the expectations for integration so that implementation activities are properly aligned. By being involved early, IT people can begin learning about their new partner, identify cost-saving opportunities, and organize and plan for the implementation. From an IT perspective, integrating an acquisition has three broad stages. In the first stage – due diligence – information is gathered on benefits packages of IT people, the structure of the IT organization, and the technology portfolio. The second phase – staging and planning – focuses on four key items: * Establishing an IT merger leadership team; * Assessing the technology portfolio; * Opening lines of controlled communications; and * Developing an integrated implementation plan based on business strategies, work process and system needs, and synergy targets. In the third stage – implementation – the focus is on maintaining operations and achieving stated synergies. This is achieved by quickly integrating the IT organization, retaining key people, completing knowledge capture, and consolidating IT operations. Achieving stated synergies Davis stated that IT has the potential to contribute more than 25% of the synergies in a merger. IT people need to identify the synergies that they can extract from the merger while also being involved in supporting business and function synergies. An obvious way for IT to contribute to synergies is through the consolidation of systems and operations. Consolidating and retiring IT systems is typically the longest lead-time implementation activity and one of the most costly components of a merger. Because of high costs, care must be taken to ensure that IT is involved in only those activities that deliver the greatest “net” synergies. In 1998, Spinner stated that companies save vast sums of money by simply removing one company’s entire information system. Not only did that save money but it eliminated the need for time-consuming systems integrations. Consolidation works well in cases in which one company buys another in the same business and industry. System architecture and standards In order to promote integration and support synergies, IT personnel must decide which organizational, application, and infrastructure pieces will be used in the combined organization. There are four basic strategies for combining organizations and technology: consolidation, combination, transformation, and preservation. Along with business and function managers, IT professionals must select an integration approach that fits the combined company’s business strategies and synergy targets. Through use of business objectives, system architecture, standards, and industry best practices as a guide, a postmerger IT integration design is created to illustrate the desirable end-state of applications and infrastructure while outlining key phases of implementation. The architectural challenge is to create an application portfolio and supporting infrastructure that meets business requirements, handles demands of the combined organization, and minimizes the difficulty in reconfiguring or tying systems together. Do not overanalyze and over-integrate best-of-breed technologies. Stick with the acquirer’s architecture and standards and use the target’s strengths as examples for improvement. Goodwin stated that if it is a business priority to quickly remove costs, one way to do that is to have a single technology base. Fournier stated that a well-crafted enterprise architecture (target environment), based on business strategy, standards, and best practices, can reduce time-to-market and increase return on investment. A framework for creating designs based on a well-defined architecture includes: * Clear identification and definition of the target environment; * Identification of gaps between the current state of affairs and the target environment; and * Production of a postmerger transition plan that details major steps required to implement the target environment. According to Hoffman, many IT savings targets are off by at least 50%. First, merged organizations cannot reach their savings targets because they continue to run multiple systems that are cost-prohibitive to support. Second, it is only after the deal is closed that it is realized that data structures are incompatible and will require investments far beyond what was originally estimated. Hoffman also stated that integrating different computing environments took longer and required up to 40% more labor than it would have taken to standardize platforms. Although First Union had integration problems with CoreStates, it has used a standardized platform approach in its 80-plus acquisitions since 1985. With this strategy, First Union is able to reduce technology costs in the acquired organization by 30% to 70%. Organizations should prepare for future acquisitions by standardizing system interfaces and standing ready to quickly deal with infrastructure capacity constraints. Such readiness can shorten integration time and reduce the risk of failure. Teach stated that scalability issues cannot be stressed too much. Care must be taken to ensure that computing infrastructure will have enough capacity to handle combined operations. Structure and methodology Tetenbaum said that companies such as General Electric Capital Corp., Hewlett-Packard Co., Johnson & Johnson, Cisco Systems Inc., and Emerson Electric Co. have developed and implemented standard methods and techniques to deal with acquisitions. After successive mergers, team members hold reviews that capture key learnings, which serve as the basis for revisions, if warranted. A systematic approach to integration includes a set of guidelines, rules, action plans, checklists, interview guides, questionnaires, tool kits, and monitoring and control devices for the implementation process. Tool kits include a high-level IT systems proposal, “ready-built” application suites, or specific software and infrastructure components. Stein discussed three things that help make a deal go more smoothly: * People on staff who have been through the process before; * A proven methodology for integrating systems, people, and processes; and * A contingency plan for things that go wrong. Teach stated that companies that regularly make acquisitions view systems integration as a strategic competency. Companies like First Union, UnitedHealth Group, Tyco International Inc., and Cisco Systems have developed in-house SWAT teams for IT. The faster they can merge IT in an acquisition, the sooner they can reap benefits from the deal. Speed The faster the cost reductions and efficiencies are achieved, the more they are worth. The best companies integrate acquisitions rapidly. Getting everyone connected on Day One, the day after the deal closes, is an excellent baseline going forward. Transition should occur within 45 days, with full integration and synergies realized within 12 months. Cope discussed the merger between Honeywell International Inc. and AlliedSignal Inc., which when combined had 126,000 employees worldwide, including more than 3,000 in the combined IT departments. Speed was one of the prime drivers in integrating the IT organizations because integration leaders were convinced that speed would provide intense focus on the tasks at hand and help minimize the natural anxiety that comes with change. Twenty integration teams were formed to focus on infrastructure, global operations, finance, applications, e-commerce, and organizational strategy. The timeline consisted of three months for planning and another three months for transition. After the merger was finalized on December 1, 1999, Honeywell Chairman and CEO Michael Bonsignore said that the company was well positioned to realize $250 million in merger-related savings in 2000 against its three-year target of $750 million. When First Union acquired CoreStates, IT planning was underway within 10 days of the announcement. Within 45 days, decisionmakers were identified and which systems to use were targeted. First Union’s IT strategy is simple: The company gives preference to its own systems over those of the companies it acquires. Culture Keeping key IT staff to support critical business systems is a top issue in the first six to 12 months after a merger closes. To combat the exodus of people that results from uncertainty, quickly meet with IT staffers. Start the communication process quickly. Communicate what plans can be shared and create an environment in which tough questions can be asked. Be visible and approachable and minimize “remote” control. Communication Reena identified communication as a key to implementation success. Stress, uncertainty, and adjustment to a new company’s culture and processes puts employees in a very uncomfortable situation. Employees may lose confidence in the stability of the organization, which may result in mistrust. Employees need information and time to adapt. To help people cope, both sides should engage in multiple and frequent forms of basic communication on how the merger is affecting them. E-mail is good but in-person is even more effective, since the exchange is more two-way. Acknowledge that the transition is tough. Do not make promises that you cannot keep and keep the ones you make. Use communication sessions as opportunities to gather input on issues and concerns and show IT people that their expertise and input is wanted and valued. Have a communication plan that identifies those responsible for communications and tells people what is going to happen and how they will be impacted. The messages should be timely and consistent. Finally, present the vision for the future and restate it as often as possible. Perrin stated that listening is more than half of the communication process. Telling people what is going on is important, but asking people about communication gaps that prevent them from being the best they can be is just as important, especially when you respond quickly and appropriately. Implementation quality Organizations cannot risk losing sight of day-to-day operations during implementation. It is very important to balance merger transition and integration with day-to-day operations and other key projects that move the business forward. If you do not, you may become overwhelmed by operational incidents or later find that you have completed a successful merger but are two years behind the competition. Key objectives in managing a merger are avoiding operational incidents, loss of orders, and loss of customers. Brunsman and Sanderson stated that it is likely that the two companies do not have sufficient resources to pursue implementation and integration efforts while making sure that operations are maintained. If this is the case, prioritization of implementation initiatives should focus on the Day One and operational requirements of the new company. Stop all projects at the target and refocus resources on organizational transition, knowledge capture, and system consolidation. The importance of connecting companies on Day One cannot be overemphasized. Establishing seamless e-mail, intranet, and file transfer is vital for smooth initial operations. Other items that require early and close attention are security, help desk, and legal and contractual issues. Table 1 lists the IT critical success factors and summarizes the best practices attributes for each factor. The IT critical success factors model for mergers and acquisitions is shown in Figure 1. The model integrates the eight critical success factors and links them to illustrate the keys to best-in-class performance in the m&a process. Figure 1 shows IT contributing to the due diligence and implementation stages of the m&a process. With a well-integrated m&a structure, proper organization, and the right methodologies in place, IT staff are ready to participate when deals are being contemplated. The IT organization has knowledgeable and experienced personnel that have been through the process before. Processes, structure, methods, and tools are continually being improved with learning and experience from past deals. The model depicts that IT personnel are ready to get down to business by having systems architecture, standards, and capacity in place to handle the complex requirements of integrating organizations. It also shows that the IT team should be involved early in the process to gather and assess critical information on the goals of the merger, its business intent, the IT portfolio, and systems risk. With input from business and functions personnel, synergies are identified and prioritized based on value, productivity, and cost to achieve. A postmerger design is created to describe the target environment. Armed with due diligence information, a synergy plan, and a postmerger design, the IT implementation team can create an implementation plan that is aligned and focused. A high-quality implementation is characterized by meeting all Day One requirements, maintaining smooth operations, and quickly guiding replacement and conversion of systems without incident. Best-in-class performance requires that the transition be completed in 90 days and that full integration, with all synergies realized, be completed within one year. The CSFs that drive best-in-class implementations are speed, culture, communications, and implementation quality. The IT organization must have an effective communications program that is focused on the future and builds trust, while a well-organized human resources program targets retention of key people. This article identified eight IT critical success factors that directly impact the success or failure of m&a integrations. The critical success factors and best practices attributes enable an IT organization to learn from other companies’ successes and can be used as a benchmarking tool to increase performance. Performance results can be used as a guide to set direction and priorities for change. The intent of the critical success factors model is to provide organizations that set their sights on best-in-class performance with a tool to achieve it. No set of best practices is right for all organizations or is right under all conditions. Organizations operate according to different business methodologies and are exposed to different environmental conditions. The keys are to view the critical success factors model with flexibility in mind and to adjust it to suit particular circumstances. In an age in which corporate growth strategies include aggressively pursuing acquisitions, IT must be an instrument of executing the strategy. Table 1: Critical Success Factors and Best Practices Attributes Structure & Methodology *IT ready to execute when deal is closed (building organizational capability) *Prior experience *Systematic approach *”Ready-built” application suites or software and infrastructure components *Tools, checklists, models, and aids System Architecture & Standards *Avoid time-consuming assessments of best-of-breed systems, move to common processes and standard systems (eliminate dual systems) *Survey and collect data on what IT assets are involved *Define target environment *A postmerger transition plan that details the major steps required to implement the target environment *IT capacity/system scalability Early IT Involvement in the Deal *IT involved in due diligence *IT clearly understands business intent of the deal *Clear IT scope and objectives set *Project organization and team in place (governance) *An integrated IT organizational and systems transition plan completed before deal closes Achieve Stated Synergies *IT and businesses and functions work together to identify synergies *IT synergy-enabling projects identified *IT identifies economies of scale and cost reduction projects *Projects prioritized *Avoid scope creep and control costs Speed *45-day planning *Meet Day One needs *45-day transition *Within one year, full integration and synergies are realized Culture *Get to know the group *Keep key people *Identify those that are to leave *Communication plan, workshops, and communication sessions *Human resources management programs in place *Training and employee development Communication *Communications plan *Increase communication *Communication sessions, workshops, town meetings, and tours *Gather input on issues and concerns Implementation Quality *Risk identification and mitigation *Day One readiness *Financial, core business system, and customer database integration/consolidation (six months) *Maintain operations *Organization alignment and knowledge transfer Steven G. Popovich is a member of the Information Systems Program Office at Dow Chemical Co., Midland, Mich., and is involved with the planning, design, and implementation of IT merger and acquisition programs. End Notes: Brunsman, B., and Sanderson, S., “How to Achieve Value Behind the Deal During Merger Integration. The Oil and Gas Journal,” September 14, 1998, pgs. 19-23. Cope, J., “One Plus One Equals One.” Computerworld, May 8, 2000, 34 (19), pgs. 42-43. Davis, D., “Andersen Sees Integration Costs as Critical to Successful M&As. Chemical Market Reporter,” May 24, 1999, 255, 4. Fournier, R., “Build for Business Innovation – Flexible, Standardized Enterprise Architectures Will Produce Several IT Benefits.” Information Week, November 1, 1999, pgs. 127-138. Goodwin, C., “Merging IT.” Accountancy, July 1999, 124 (1271), pgs. 37-38. Hoffman, T., “Fleet Aims to Dodge Merger Potholes; Analysts Believe Bank Will Avoid Missteps That Have Plagued BANK ONE, First Union.” Computerworld, December 13, 1999, 4, pgs. 22-24. Leibs, S., “Putting IT Together.” Industry Week, October 5, 1998, 247, pgs. 26-33. Perrin, T., “Mergers and Acquisitions Foster Cool Hand Luke Syndrome; What We Have Here Is a Failure to Communicate.” M&A Source News, November 8, 2000 (online), available at: http://www.masource.org/manews.asp?artid=1. Reena, J., “Merge Right.” InfoWorld, August 2000, 22 (33), pgs. 73-74. Spinner, K., “Merging IT Systems.” Global Finance, 1998, 12 (2), pgs. 56-58. Stein, T., “Shake On It.” Informationweek, July 27, 1998, (693), pgs. 42-58. Teach, E., “Deal Breaker: If the Computer Systems Don’t Fit, the Merger May Slip.” CFO, August 1, 1999, pgs. 31-40. Tetenbaum, T., “Beating the Odds of Merger and Acquisition Failure: Seven Key Practices That Improve the Chances for Expected Integration and Synergies.” Organization Dynamics, August 1, 1999, 28 (2), pgs. 22-36.