Mergers and Acquisitions (M&A) continues to be the choice growth strategy around the globe, despite its low success rates. A Harvard Business Review article puts the M&A failure rate in the range of 70 - 90 %. Failed M&A results in significant capital erosion, operational disruption and lower shareholder value for both companies in the deal. Of the many reasons for a failed M&A, poorly executed post-merger IT integration (PMI) is the most frequent and predominant.
Criticality of Post-Merger IT Integration: In today’s enterprise, information technology (IT) is ubiquitous - the backbone for an organization’s business model to function. Typical value capture from IT integration synergies is projected to be around 20 - 30 %, depending on the nature of the M&A, and is usually part of the deal rationale. Thus IT integration is the most critical success factor for a successful M&A.
As discussed in my previous blog “Data Lakes Can Transform Mergers & Acquisitions”, PMI is complex, with hundreds of moving parts in a fluid, fast paced and highly visible environment. Post-merger IT integration often has the largest scope/budget and balances two critical M&A imperatives: (1) Short term value capture (2) Long term enterprise transformation for competitive advantage.
In this blog I would like to list a few key constructs that helped mitigate risk and improved success on my PMI programs:
Application Portfolio Rationalization and Transformation (APR&T) Strategy: APR&T strategy should lay out the foundational blueprint of how IT synergies can be realized to meet M&A goals in the face of aggressive and sometimes unrealistic time frames. At a minimum it should cover the integration approach, techniques, methodology and a tentative road map for the program. APR&T strategy is a living document and should be continuously refined throughout the PMI progress as more accurate information becomes available.
Business Capability Maps and Enterprise Reference Architecture: As early as possible in the M&A lifecycle, both companies should update their business capability maps, enterprise reference architecture and inventory lists of IT assets (hardware and software) to reflect their current IT eco-systems. The accuracy of these artifacts is key to PMI planning, execution and realizing synergies.
Impassive IT APR Disposition: Application and infrastructure disposition is at the heart of successful APR&T. It is critical that subject matter experts from both companies work together, impartially and transparently, to disposition the combined IT portfolio in order to achieve synergies. Well-defined and mutually agreed criteria to score/disposition IT assets can significantly influence the end state IT eco-system. Typical scoring criteria include business criticality, functionality and geographic scope, user base, Transition Service Agreements (TSA) exit deadlines, usability, Software as a Service (SaaS) alternatives, etc.
Test out APR&T with Day 1 and Optimize 100 Days Integration Plan: Limited Day 1 integration scope offers a good opportunity to test soundness of the APR approach and refine as required to execute the 100 Days plan. APR of 100 Days integration clusters yields significant short term value capture from IT integration. I would recommend a cloud first strategy where possible and leveraging the migration paths provided by the PaaS / IaaS / SaaS vendors, to mitigate risk and accelerate rationalization. Depending on the portfolio and roadmap, other rationalization strategies that work well in this phase include Lift & Shift, Clone & Clean and Infrastructure Consolidation & Modernization, to name a few.
Transformation into Day 2 and Beyond: Companies in an M&A transaction aim to achieve and realize the benefits of digital and business process transformation by Day 2 (usually 12 months from Day 1). On large deals which involve rationalizing large back office systems such as ERP, PLM, MES, SCM, and in-flight projects, it is difficult to achieve robust transformation by Day 2. Often, good transformation opportunities get lost to integration cost and TSA exit pressures. A longer transformation journey beyond Day 2 will yield meaningful transformation and competitive advantage to the combined entity in the long run.
I hope Integration Management Office (IMO) and project leaders will find my pointers useful , to corroborate their own observations or to spark new ideas. Having said that, each M&A is unique, and the post-merger integration play book should reflect the unique character of the deal.