Mergers & Acquisition: Don’t Underestimate Importance of IT Assessment
After a few difficult years where the recession dampened merger and acquisition (M&A) activity, the market posted a strong rebound in 2011. In an aggressive deal-making environment, speed is often a key to success. However, RSM Managing Director Jim Cashin warns prospective buyers that inadequate due diligence and post-close planning for IT systems can be a critical—and expensive—mistake. In the following Q&A piece, Cashin focuses on how executive leadership can optimize technology assets in a post-close environment.
Q) What is the optimal time frame for leadership to design and implement an IT post-close assessment?
A) Our experience suggests that the groundwork for a high quality IT post-close assessment should actually begin in the early phases of a prospective deal. In fact, according to a 2009 Merrill Corporation survey of international M&A executives, two-thirds of respondents said they started scripting a post-close assessment and integration process during the due diligence phase. Just as compelling, the majority of survey participants said delays past that point raised the potential failure risk for a given M&A transaction. So, plan ahead and stay focused.
Q) If other parts of due diligence have been done well, why does IT pose such a significant risk to the overall deal?
A) There is a direct correlation between high-quality companies and good information systems, and late surprises on outdated, undersized, or non-scalable IT systems can be costly. In the RSM® 2011 Managing Portfolio Investments survey, the two greatest post-close surprises reported by private equity operators were limitations in management reporting systems (47 percent) and unforeseen capital expenditures (44 percent). Both areas clearly relate to IT issues inherited as part of the deal.
Q) In terms of systems, what are some of the key components of a post-close assessment?
A) A good place to begin is a full-scale assessment of the current technology situation. This includes a close look at existing or pending IT contracts, service agreements and vendor relationships. The best way to approach this is with an audit of all third parties, which measures two key elements. First, it assesses the tangible benefits, which may include responsiveness, cost-effectiveness and overall value. Then, it measures how the services offered by each specific vendor fit the strategic imperatives of the merged IT enterprise. If a third-party provider is a stellar performer, but does not add value in the new organization, it's wise to sunset the agreement when contractually possible. In addition to the external assessment, IT leaders should also take a hard look at the functionality and value of existing technology and applications. For instance, security tests should be performed on critical business applications to ensure they protect vital internal data. While initial scalability reviews should have been done during due diligence, a more extensive process should take place in the post-close environment. This deep dive is very important, because it will illustrate how existing technology can be built upon to support the company's future direction.
Q) What is the best way for leadership to optimize reporting and analytical systems in a post-close environment?
A) As part of that "deep dive" noted above, business leaders should evaluate how existing post-close technologies deliver information in a way that clearly enhances revenue, reduces costs and shortens decision-making time. This evaluation may include a look at existing dashboards, scorecards and analytics; business intelligence software; planning, forecasting and budgeting tools; and knowledge management portals or collaboration systems. Assuming information systems are capturing the right information, the goal of this exercise is to determine if existing tools are optimized, allowing users to easily manage key reporting and analytic data in the merged organization.
Q) How does post-close IT planning integrate with overall future state planning?
A) When new leadership takes the reins of a newly-merged or acquired business, they typically inherit an exit strategy. For IT, this strategy may encompass preliminary choices of a core operating platform and business applications, decisions on acquired businesses operating as stand-alone or absorbed entities, and insights on how to efficiently leverage knowledge resources across the new company. When assessing the need for crucial future state IT changes, business leaders should take at least a three-year view, assessing what system improvements and capital investment will be required to deliver optimal service levels. In addition, a future state work plan must also contain appropriate benchmarks, allowing business leaders to easily see the projected return on investment.
Q) How can a post-close assessment help compare IT capabilities with industry standards?
A) A benchmarking review can show how an organization measures up with top players in a given market niche and determine if a merged company's business technology exceeds—or lags behind—industry best practices. When considering a benchmarking review, it's important to consider the end goal. For example, benchmarking of core business functions will evaluate a company's costs, cycle-time, productivity or quality. On the other hand, benchmarking for trend analysis or target setting is best done as part of an annual strategic planning process, or to measure very specific issues. Longer-term, companies can use a continuous benchmarking process to optimize annual progress and fine-tune areas where increased efficiency, effectiveness and cost reductions could have the biggest impact.
Q) What are key signals that may indicate the need for a third-party IT service provider or consulting resource?
A) In some acquisitions, the existing IT infrastructure and systems may not be up to the challenges of the merged entity. This leads to a series of complex decisions. For instance, if system integration will not yield needed outcomes, the cost of a complete overhaul of IT systems, processes and infrastructure may be time and cost-prohibitive. Under this scenario, it may be wise to temporarily outsource all systems to a qualified external provider. Alternatively, companies may consider outsourcing only those systems and applications that serve customers and other external stakeholders. This allows the business to optimize service levels to these key groups while questions of internal capacity are considered and addressed. If systems integration issues continue to linger in the post-close environment, it may be a signal for the company to consider a third-party assessment. This objective, external review should include an analysis of IT performance relative to industry best practices, as well as the creation of actionable "quick win" opportunities. The assessment should also deliver a longer-term plan for performance enhancements and strategic cost reductions.
Q) What is a reasonable timeline to assess the success of post-close IT activity?
A) The final verdict on any M&A deal comes with time. According to the 2009 Merrill Corporation survey, nearly half of dealmakers said they would wait two years or longer to evaluate the results of a merger or acquisition. However, during that period, leadership would be wise to hold monthly meetings to assess post-close IT integration. This allows for short-term course corrections, and ensures overall progress remains aligned with the deal's key strategic objectives.
For more information, please contact RSM Managing Director James Cashin at 617.241.4694.