Business systems strategy following merger or acquisition

Posted on 26 Aug 2014 by The Manufacturer

John Donagher, principal consultant at Lumenia, discusses business systems strategies for manufacturers to consider in the event of a merger or acquisition.

Merger & Acquisition Business Challenges

John Donagher, Principal Consultant, Lumenia
John Donagher, Principal Consultant, Lumenia

Merging two businesses presents an array of business challenges which must be addressed, quite apart from the challenge of changing business systems to cater for the requirements of the newly combined entity.

At a basic level, it’s likely that each business will have different business processes, different management structures and different cultures. Post-merger integration activities will focus on creating a new business; that generally means reusing elements from the separate businesses, where appropriate, and defining new processes, structures and cultures where required.

The initial imperative in a merger is to keep the business running. This task in itself can have significant business system implications; changes are often unavoidable and must happen within very aggressive timeframes. Once the initial “bedding-in” phase is over, attention will turn to figuring out where the synergies are between the businesses and deciding how best to exploit them. Again, the changes required to deliver the benefits that have been identified are likely to have major business system implications.

In practice, that means addressing a whole range of possible issues, addressing questions such as “How do we do business in the future?” and “What’s the impact on our people?” These are significant challenges to take on from a change management perspective, never mind adding the potential need for business process re-engineering and changes to business applications.

Merger & Acquisition Business Opportunities

Every merger presents a number of possible opportunities. Many of these opportunities will require changes to the supporting business systems if they are to be realised. In effect, the business systems are the enabler of these opportunities.

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Shared services, standardisation of business processes and exploitation of synergy opportunities are all examples of business opportunities that can be underpinned and enabled by the correct deployment of supporting business systems. Each of these opportunities can either deliver on the potential to grow the business without adding to headcount, or to gain from economies of scale.

Business Systems Issues and Opportunities

Most of the business challenges described above have direct implications on the way business systems are used to support the activities of the combined entity and, importantly, on the change management issues that need to be addressed in implementing those systems across the organisation.

So what type of business systems issues are posed as part of a merger and what are the downsides of inaction?

Lack of business systems integration is one of the biggest issues faced by a newly combined entity. Operating a business with disconnected systems leads to process inefficiencies, especially where different parts of the combined business need to interact with each other. Sometimes the inefficiencies are operational, but the negative impact is often felt in the Finance department and other administrative functions. Disconnected systems tend to lead to a reliance on “off the system” processes, supported by manually generated paperwork and spreadsheets.

Users typically encounter issues in accessing the data they need to do their jobs. Senior managers find that visibility of activity across the whole combined business requires additional effort in terms of collecting, collating, reconciling and verifying data. Different versions of processes in different parts of the business can lead to difficulties in measuring performance against KPIs. Master data management is another area where problems are likely to arise, possibly with the same data being maintained in multiple systems.

From the IT department’s perspective, the business is incurring additional and unnecessary costs through supporting multiple systems that provide the same functionality.

How to lose money

The whole point of acquiring and merging a business is, ultimately, to make more money. However anecdotal evidence suggests that even relatively straightforward mergers still carry a significant risk of failure. Furthermore, it’s clear that understanding the risks involved in a merger and planning accordingly greatly enhances the chance of success.

The operation of virtually every part of a modern business is underpinned by IT systems and applications. The uncomfortable truth is that merging businesses while mismanaging the business systems element of the post-merger integration will cost money, whatever the business objectives in terms of growth, expansion and diversification. While synergies may be identified and well-understood, mistakes made in integrating the two businesses can easily wipe out some of the potential benefits.

It’s usually easy to find evidence that all is not well in a poorly-merged organisation. Reporting on business performance across the merged entity will tend to be hugely problematic and inefficient. Users will struggle to obtain the data they need to do their jobs and may be forced to devise manual or spreadsheet-supported processes to bridge functionality gaps and lack of system integration. Duplication of effort will be widespread, with users in both parts of the business carrying out exactly the same tasks. In some cases obvious opportunities to run the business as a single entity will be lost, possibly resulting in lost revenue or increased operating costs.

Developing a business systems strategy

Devising a coherent business systems strategy that addresses the various issues and opportunities – while supporting business vision and objectives – is vital to the ultimate success of a post-merger integration.

Some businesses’ default option is to roll in the corporate standard. There can be a lot of merit in that, but what if the new business is fundamentally different to the acquiring business? A system that works well for one business model or sector may be a recipe for disaster in another.

If retention of any of the existing applications is under consideration, then the formulation of a systems strategy needs to start with the status quo. Are the existing systems adequate for the current and future functional needs of the newly combined organisation? Will they be appropriate for the scale (and potential future scale) of the newly combined organisation? Are they at or near their end of life and due to be upgraded or replaced?

Two-tier ERP (where a Tier 1 solution is used at group/corporate level and lower cost solutions are used to support local/regional or business unit specific requirements) may be appropriate in some scenarios. For example, local sales, purchasing, shop floor control and inventory management could be managed in the second tier, with financials, planning, consolidation and reporting taking place in the top tier. It’s important to recognise that there are cases where one size does not fit all, especially where there are locally unique functional requirements. In certain circumstances it may be wise to go with best of breed solutions to provide specific functionality in a business unit.

Another option worth considering is keeping legacy systems in both parts of the business while adding a reporting and consolidation layer on top of the existing systems. This solution is fine where there’s little interaction between the new and old entities – where in effect they act as independent business units – but it’s likely to be a very poor solution where a single integrated business is the objective.