ACCESS TO THE EXPERTS The Journal of Information Technology Management October 2005 Vol. 18, No. 10 M&As: Can IT Make the Difference Between Success and Failure? It’s About Reducing Risk Failure to include IT in M&A due diligence activity puts unneces- sary pressure not only on the IT organization, but also on the busi- ness. Technology due diligence defines business issues and needs that require IT support. It’s About Increasing Value Business operations that plan to leverage components of an M&A require IT support to achieve their objectives. Early IT due diligence positions IT to facilitate the projects that are needed to leverage the new company’s operations. “Companies that include a technology transition plan in their due diligence process are more likely to operate effectively and manage the technology resources of their new company successfully than those that do not.” — Mike Sisco, Guest Editor Opening Statement by Mike Sisco 2 M&A Technology Due Diligence: A Framework for Assessing the Good, the Bad, and the Ugly by Steve Andriole 5 Finding Method in the MADness: Case Studies of IT’s Role in Mergers, Acquisitions, and Divestitures by Claude R. Baudoin and Stephen Price 12 Minimizing the Risk of an M&A by Dan Tankersley 20 Adventures in M&A Wonderland by Charles Butler and Gary Richardson 24 Why Due Diligence Should Include IT: A Case Study by Reagan George 32 The Importance of Human Needs Analysis in the Due Diligence Process by Tom Carpenter 38
Transcript
ACCESS TO THE EXPERTS
The Journal of Information Technology Management
October 2005 Vol. 18, No. 10
M&As: Can IT Make the Difference BetweenSuccess and Failure?It’s AboutReducing RiskFailure to include IT in M&A duediligence activity puts unneces-sary pressure not only on the ITorganization, but also on the busi-ness. Technology due diligencedefines business issues andneeds that require IT support.
It’s AboutIncreasing ValueBusiness operations that planto leverage components of anM&A require IT support toachieve their objectives. EarlyIT due diligence positions IT tofacilitate the projects that areneeded to leverage the newcompany’s operations.
“Companies that include a technology transitionplan in their due diligence process are morelikely to operate effectively and manage thetechnology resources of their new companysuccessfully than those that do not.”
— Mike Sisco, Guest Editor
Opening Statementby Mike Sisco 2
M&A Technology Due Diligence: A Framework forAssessing the Good, the Bad, and the Ugly
by Steve Andriole 5
Finding Method in the MADness: Case Studies ofIT’s Role in Mergers, Acquisitions, and Divestitures
by Claude R. Baudoin and Stephen Price 12
Minimizing the Risk of an M&Aby Dan Tankersley 20
Adventures in M&A Wonderlandby Charles Butler and Gary Richardson 24
Why Due Diligence Should Include IT:A Case Study
by Reagan George 32
The Importance of Human Needs Analysis in the Due Diligence Processby Tom Carpenter 38
With the economy improving,corporate merger and acquisition(M&A) activity is heating up onceagain. The 1990s witnessed arecord number of company acqui-sitions across virtually all industries— with the number of failures rival-ing the number of successes. Overthe years, I have witnessed thegood and the bad when it comesto company acquisition. On theone hand, I’ve seen mergers thatresulted in significant leverageopportunities for both companies.On the other hand, I’ve watchedlarge companies suffer terriblelosses and even go out of businessas they failed to absorb their newlyacquired companies effectively.
What is driving these successesand failures? Many would arguethat the approach used in the duediligence process has a significanteffect on the outcome of an M&A.
Companies planning to acquireother companies have differentphilosophies regarding the duediligence process. Some conductonly legal and financial due dili-gence and take the chance thattheir operations will continueto function seamlessly after themerger. Other companies chooseto minimize their merger risks byconducting a more comprehensivedue diligence process that willidentify key areas that have
technology implications and willrequire IT support to resume nor-mal operations. In my experience,companies that include a technol-ogy transition plan in their due dili-gence process are more likely tooperate effectively and manage thetechnology resources of their newcompany successfully than thosethat do not.
Let’s break this down a bit. I havepersonally managed the technol-ogy due diligence and IT transitionplanning for more then 40 com-pany acquisitions. In most of thesesituations, the business executivesunderstood the importance ofincluding IT (and other departmentmanagers) in the process of eval-uating the company in order todevelop a smooth transition plan.
Let’s face it; merging two organiza-tions together is difficult business.It’s even more complicated whenthe organizations have entirelydistinct cultures, use dissimilartechnologies, and go about theirday-to-day operations in vastly dif-ferent ways. Anytime you introducechange to an organization, yourisk upsetting the apple cart. Inother words, there is a good chanceyou will see an overall decline inproductivity and effectiveness untilyou complete the transformationwhereby the two companiesbecome one.
The Model-Netics managementtraining and development programhas a great management modelcalled the Change Curve. Theessence of this managementprinciple is that when you try toimprove something, most of thetime you go through a period ofdecline before the improvementis actually achieved. Figure 1illustrates the Change Curve,which represents what happensin virtually all M&As, even thesuccessful ones.
When I’ve been involved in com-pany acquisition projects whereIT was called in after the fact, italways seemed to be an uphillbattle in which “catch up” becamethe common theme. Introducingtechnology change in a companyrequires planning and time to exe-cute properly. Otherwise, we allknow the disastrous results thatcan take place when technologychanges are implemented withoutsufficient planning. Furthermore,determining what the technologystrategy should be and prioritizing
technical initiatives are not simplypoint-and-click processes. Devel-oping an appropriate strategy thatwill leverage the M&A takes timeand a commitment to understand-ing many aspects of the businessenvironments of both companies.
When you throw in the emotionsand issues that people of differentorganizations bring with them,you end up with quite a challenge.The people in the two companiesare what will make or break amerger. Getting them to buy in tothe rationale and objectives of themerger can be a daunting task,and that goes for employees of theacquiring company as well as theacquired company.
Transitions of any type go moresmoothly when an organizationengages in proper planning andthought. An M&A is no differentfrom any other project in that, to besuccessful, we need to establishobjectives, conduct a proper andthorough assessment, and developan achievable plan — in this case,to transition the various compo-nents of the entities to be merged.
The six articles in this issue of CutterIT Journal provide useful insightsconcerning the technology, process,and people issues we face whenwe get involved with an M&A froman IT perspective. There are casestudies that bring out the positivesof effective planning and the nega-tives that arise when companiesbypass IT during due diligence andplanning. In addition, there aremany excellent points and tech-niques to consider that will helpmake your next M&A a real success.
We begin with Cutter ConsortiumSenior Consultant Steve Andriole,who provides a framework for con-ducting an M&A technology duediligence, including many pertinentquestions to ask yourself in 12 keyframework categories. These ques-tions will be beneficial for expertsin due diligence as well as thosewho are learning about due dili-gence for the first time. Anotherinteresting feature of Andriole’sarticle is a due diligence “calcula-tor” that will help you assess thelikelihood of a successful merger.I think you will find his article andthe tools he provides to be veryhelpful.
Our second article is one you don’twant to miss. Claude Baudoin andStephen Price share several casestudies of the many mergers andacquisitions the oilfield servicesgiant, Schlumberger, has workedthrough over the years. As youmight expect, there have beensome great successes and othersthat we all like to call “learningexperiences.” These learning expe-riences have led Schlumberger’s IToperations group “to design andimplement a number of best prac-tices aimed at increasing the effi-ciency and reducing the cost of theIT activities caused by changes inthe corporate structure.” Honedthrough years of M&A activity, thesepractices have yielded impressiveresults. The authors also include ashort IT due diligence checklist thatis a good takeaway from the article.
Next, Dan Tankersley discusses per-sonal experiences on both sides ofcompany acquisitions. To minimizethe risk of an M&A, Tankersley
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argues, companies must focus onretaining key employees, assimilat-ing infrastructure support systemsas swiftly as possible, and servingcustomers, some of whom mayalso be compelled to transition tonew technology as a result of themerger. Honest communicationwith employees and customersis critical to a successful M&A.Tankersley advises: “Keep theminformed even if the news is bad.”
In our fourth article, Charles Butlerand Gary Richardson tell us whatCIOs must do to be proactive andinformed about the company’sM&A initiatives. They make a solidpoint that IT considerations maynot make or break a deal, but com-pany executives who understandthe importance of IT in planning thetransition efforts have better oddsof leveraging a merger or acquisi-tion. They note that the rush tofind a competitive advantage oftendrives M&A activity, but failure toinclude IT in the early stages canreduce the resulting value of amerger.
Next, Reagan George tells the taleof a merger gone awry. The trouble
began when the acquirer failed toperform IT due diligence before theacquisition. By the time George’scompany (Paragon BusinessSolutions) was asked to recom-mend which of two different soft-ware applications the acquirershould implement company-wide,the hidden agendas were already inplace. George emphasizes the needfor an objective, multidimensionalIT assessment to ensure that man-agement makes the best-informedtechnology choices for a newlymerged company. But objectiveinformation is not enough —politics and “predetermined con-clusions” can often dictate thedirection of M&A transition actionitems. George recommends con-ducting the assessment in the duediligence phase, “when the man-agement team is usually muchmore motivated to take an objec-tive view” of both companies’ ITstrengths and weaknesses.
Finally, Tom Carpenter examinesthe human factors that can signifi-cantly impact the merger of twoorganizations. He argues that manyM&A failures can be attributed to
three causes: ignoring the IT cul-ture, overlooking the in-place tech-nology, and underestimating theimpact of the project. Accordingto Carpenter, better requirementsanalysis and, especially, humanneeds analysis are the solution.“To be successful,” he suggests,“your solution must help the ITprofessionals involved to achieveresults, build relationships, havesecurity, and receive recognition.”By tending to these four corehuman needs, organizations canbetter overcome their IT profes-sionals’ resistance to change and“assist in a smooth transition tothe future.”
The six articles in this issue ofCutter IT Journal provide a varietyof insights into the importance ofconducting IT due diligence whencompanies embark on M&A initia-tives. Early involvement of the ITorganization boosts a company’sodds of a successful merger bypositioning IT to plan an orderlytechnology transition that supportsbusiness objectives and leveragestechnical resources.
IT-Related Litigation: Likely Trends and Recommended PracticesGuest Editor: Ed Yourdon
From projects that are behind schedule and overbudget to ever increasing outsourcing, it’s more importantthan ever for IT organizations to formulate a proactive strategy to protect their IP and ensure that theiroutsourcing contracts won’t degenerate into a litigious confrontation. Next month, we’ll explore thelitigation-related trends we are likely to face over the next several years and offer proven strategies fordealing with litigation both before and after a lawsuit is filed. You’ll get real-world case studies and lessonslearned, best practices for minimizing risk, a checklist for acquisitions, and more! n
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It should come as no surprise thatmany mergers and acquisitions failto deliver improved shareholdervalue. Perhaps the most famousrecent example is the Compaqand HP merger and the turmoilthat ensued when promised mile-stones failed to materialize.
There are all kinds of business crite-ria that should be evaluated prior toa merger or acquisition. Some ofthe more obvious ones include syn-ergism among the business mod-els, cultures, and processes. Butthere are also many technologycriteria that speak directly to howeasy or difficult it will be to inte-grate and optimize the technologyof the companies in question. If thetechnology infrastructure, architec-ture, and applications are incom-patible, there will be serious — andexpensive — problems with inte-gration and optimization. There arealso philosophical issues to assess.How is technology acquired? Whatsourcing deals are in place? How istechnology organized? To whom dothe technology leaders report?
The problems — as always — arepart technical, part organizational,and part human. For years ourindustry has distinguished among“people,” “process,” and “technol-ogy” criteria; M&A due diligenceshould include these — andadditional — factors.
Formal M&A due diligence effortsrequire a framework for organizingand assessing the due diligence cri-teria that matter. The frameworkshould include criteria that addressall aspects of the technology envi-ronment, and it should also accom-modate criteria weighting, amongother methodological capabilities.
AN M&A TECHNOLOGY DUEDILIGENCE FRAMEWORK
Figure 1 presents a framework thatcan be used to conduct formalM&A technology due diligence. Theframework identifies the broadlydefined criteria that members ofthe due diligence team will haveto consider as they assess the
strengths, weaknesses, opportuni-ties, and threats (SWOT) that theM&A opportunity presents.
The framework also supports amethodology for assessing the cri-teria and the overall likelihood ofM&A success. Frameworks can beused to assess the “current state” inboth companies as well as the “endstate,” or what happens after themerger or acquisition.
DefinitionsThe first step is to define each of thecriteria with special reference tothe merger or acquisition at hand.Let’s look at the criteria and listsome of the questions that thetechnology due diligence processshould pose.
Vol. 18, No. 10
M&A Technology Due Diligence: A Framework forAssessing the Good, the Bad, and the Ugly
by Steve Andriole
M&A Technology Due
Diligence Framework
Organization
Acquisition
People
Businessmodel
Communications
Applications
Data
Security
Support
Standards
Funding
Measurement
Figure 1 — M&A technology due diligence framework.
How does the attrition ratecompare with the industry’s?
How are technology profes-sionals incentivized?
These definitions and questionsare, of course, flexible. Each busi-ness will have a different set of defi-nitions and questions that speakdirectly to the vertical space thatthe company occupies as well asregulations that govern the industryin question.
CalculationsThe calculations for assessing thelikelihood of a merger’s or acquisi-tion’s success are straightforward.The easiest approach assumes thateach of the 12 technology criteria isas important as any other, and thusall the due diligence criteria shouldbe weighted equally. Obviously,another approach involves weight-ing the criteria according to theirrelative importance. For example,you might determine that the mostimportant criteria are applicationsand data synergy. Or you mightdecide that standardization ofthe computing and communi-cations environment is the mostimportant criterion. Regardless ofthe approach you take, you willneed to convert judgments abouteach of the criteria into a quantita-tive value, usually on a scale of 1-10.
Figure 2 presents an unweighteddue diligence calculator. Figure 3presents a slightly more compli-cated calculator that includes crite-ria weighting. Note that there areassessments for “us,” “them,” and“together.” These distinctions areextremely important.
Why assess yourself? Context is crit-ical. A merger or acquisition cre-ates a good opportunity to assesshow well (or poorly) you’re doingin the 12 areas. It also obviouslyrequires an assessment of themerger or acquisition target. Butperhaps most important is the“together” assessment: if the com-bined technology assessment islow, then a red flag should appear.It may be that the combined effectin a specific area is negative. Forexample, imagine a situation whereyour technology environment isnonstandardized and the merger oracquisition target is even more var-ied. The combined effect is chaos.Similarly, while you might sourcemost of your technology expertiseinhouse, your merger or acquisitionpartner might outsource every-thing. How do you reconcilethese approaches to technologyacquisition?
The outcome of the calculations —as we’ll see in the example below— is a quantitative expression ofthe “flavor” of the current state andexpected end state of the merger oracquisition. Flavor? Not a definitiveanswer? The framework and calcu-lators help managers understandthe M&A issues that they will haveto address immediately, in the shortterm, and in the longer term.Because the weights and scoresare based upon empirical data andsubjective judgments, there willalways be some room for interpre-tation. At the same time, therewill be some clear issues andchallenges that result from, forexample, major differences inareas such as standardization,
sourcing, security, and/ororganization.
A Real-World ExampleLet’s look at an example to demon-strate how this approach can beimplemented. Aspects of this exer-cise are derived from some actualacquisitions conducted while I wasat CIGNA Corporation in the 1990s.During that time, several acquisi-tions occurred, and the technologyorganization conducted due dili-gence regarding the “fit” betweenthe acquirers and the acquirees.This example draws from the due
diligence conducted around theacquisition of a healthcare com-pany, which was designed toincrease revenue and — of course— reduce expenses, improve mar-ket share, increase earnings, and soon and so forth.
Figure 4 demonstrates how themethodology can be applied whenweights are not used. Figure 5demonstrates how weighting caninfluence the outcome of a due dili-gence assessment.1
The most interesting thing aboutthe exercise is how much worse
Vol. 18, No. 10 9
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Figure 4 — Illustrative (unweighted) technology due diligence exercise.
1Note that the overall results of the unweighted and weighted exercises are the same.This is because the weights in Figure 5 are pretty evenly distributed, meaning the rel-ative importance of the due diligence criteria was fairly equal. If the weights hadbeen more widely distributed, the results would have been different.
the acquiree was than CIGNA inmany areas. The business modelof the acquiree was synergistic butnot perfectly so. For example, thecompany was still committed tomultiline insurance offerings, whilewe were not. The net effect was aloss of some of our businessmodel’s focus.
On the other hand, their communi-cations technology was better thanours. We would actually upgradeour communications technologythrough the acquisition, principallybecause of the acquiree’s use ofthe Web to communicate with theircustomers. Unfortunately, theirapplications were woefully old; itwould be expensive to maintainthese legacy systems and even
more expensive to integrate theminto our applications portfolio.
The overall database environmentwas pretty much a wash: we hadsolid database technology andplatforms and so did they. Theywere slightly better than we werebecause they had successfullydeployed a data warehouse thatintegrated a lot of their disparatecustomer data. However, theirsecurity architecture was weak,while ours was solid. The net effectof the integration would reduce theoverall security effectiveness sub-stantially — which would requirean additional investment to get itback to where it was prior to theacquisition. The same was true ofsupport.
Both organizations were quitestandardized and measured thetechnology environment in mean-ingful ways. Funding, acquisition,and people skills were similar aswell. But we found major differ-ences in the way the two compa-nies acquired technology productsand services. We were far lessinclined to outsource than theacquiree, which had some long-term outsourcing contracts in place— contracts that we would inherit.It would cost a considerableamount of money to dispensewith these.
Given the scores, you might won-der why the acquisition took placeat all! Remember that this due dili-gence process focused exclusivelyon technology issues. Clearly, thebusiness issues overshadowed thetechnology ones.
ROOM FOR INTERPRETATION
Due diligence is part art and partscience. The discussion here hasfocused mostly on the science —the methodology you can use toorganize an M&A due diligenceexercise. There are, however, otherconsiderations. Some of the longer-term strategic considerations arehard to quantify, as are judgmentsabout management expertise andspecific technology skill sets. Doesthis mean that dartboards are asuseful as calculators? Of course not,but there’s room for interpretationand judgment in the due diligenceprocess.
Above all else, the discussion hereabout frameworks, calculators, and
Figure 5 — Illustrative (weighted) technology due diligence exercise.
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methodology suggests that it’s pos-sible to organize and structure thedue diligence process and that, farfrom being definitive, the processshould be seen as directional.While numbers don’t lie, their realvalue lies in the trends they expose.The “us,” “them,” and “together”assessments focus discussionaround where you are today, wherethe M&A partner is, and what thecombined effect of a merger oracquisition will be.
Perhaps surprisingly, there will beinstances where the combinedentity is worse than each of thecompanies independently. Doesthis mean that the merger or acqui-sition should not occur? Not neces-sarily, although it does indicatewhere extra effort will be requiredto make the event successful. Italso highlights major philosophicaldifferences between the compa-nies. Some of the major onesinclude how companies approachsourcing, organization, and themanagement of people. It’s muchbetter to understand these differ-ences before a merger or acquisi-tion takes place than after one iswell down the road.
Finally, it’s important to note onceagain that technology due diligenceis but one part of the overall M&Adue diligence process. Thereare business criteria that often
overshadow technology ones. Keepin mind that once all the technol-ogy, business, marketing, financial,and other criteria are identifiedand defined, they too should beweighted according to their relativeimportance. The results of all thedue diligence exercises can then beintegrated into one overall score todetermine if the merger or acquisi-tion is a “go” or a “no-go.”
Stephen J. Andriole is a Senior Consultantwith Cutter Consortium’s Business-ITStrategies Practice and a contributor toits Advisory Service. He is also theThomas G. Labrecque Professor ofBusiness Technology at VillanovaUniversity, where he conducts appliedresearch in business technology conver-gence. Dr. Andriole is also the founderand CTO of TechVestCo, a new economyconsortium that focuses on optimizinginvestments in information technology.He was formerly the Senior VP andCTO of Safeguard Scientifics, Inc. andthe CTO and Senior VP for TechnologyStrategy at CIGNA Corporation, where hewas responsible for enterprise architec-ture, computing standards, the technol-ogy R&D program, and data security, aswell as the overall alignment of enter-prise IT investments with CIGNA’s mul-tiple lines of business. He has directedlarge R&D programs in government,industry, and academia. Dr. Andriole’scareer began at the US Defense AdvancedResearch Projects Agency, where he wasthe Director of Cybernetics Technology. Heis the author or coauthor of more than 25books on IT, technology management,and command and control.
During “MAD” (mergers, acquisi-tions, and divestitures) preparation,senior management always thinksof involving Finance, HumanResources (HR), and Legal, butrarely IT. In our combined 45 yearsof experience at Schlumberger, wehave documented successes andproblems that arose in severalacquisitions and divestitures ofdivisions of this large multinationalcompany. These experiences con-sistently point to unnecessary diffi-culties, including financial andsecurity risks, that arise when IT isnot involved in MAD efforts early on.Conversely, we have seen casesin which early involvement of ITresulted in a smooth integrationprocess and direct, tangible savings.
Based on this experience, we havedeveloped some general principlesabout the role IT should play inMAD activity and have taken orga-nizational steps to institutionalizethese principles. The key manage-ment principle is to include ITin the due diligence process.Moreover, at a technical level, ourIT operations group has codifiedthree best practices:
1. Early integration of acquisitionsin the corporate directory
2. Phased introduction ofnetwork connectivity
3. Secure practices for continuedaccess to Schlumberger enter-prise applications by a divestedentity during a transition period
In the future, we believe that thetechnology aspects will becomeeasier to handle, thanks to virtualprivate networks (VPNs) andservice-oriented architecture(SOA). The process and organiza-tion issues therefore will becomethe key challenges, even morethan they are today.
CORPORATE CONTEXT
Schlumberger (www.slb.com) isthe world’s premier oilfield servicescompany, with over 52,000 employ-ees and annual revenues of approxi-mately US $14 billion. We operate inapproximately 100 countries, withpersonnel of as many nationalities.
Like most multinational or largecompanies, we have conducteda significant number of mergers,acquisitions, and divestitures overour 75-year history. We can discernthree phases:
1. The company expanded fromits initial focus on the “wirelinelogging” business (makingmeasurements in oil wells bylowering strings of sensors atthe end of a measurementcable) to become a provider ofdiverse services supporting the
entire lifecycle of a well.This was largely done byacquiring other companies thatperformed seismic surveys,drilling, “logging while drilling,”well testing, completion andproduction, and so on.
2. Starting in the 1960s,Schlumberger also launcheda diversification into sensors,metering, semiconductors andchip testing, CAD/CAM sys-tems, smart cards, and so forth— technologies in which wehad developed expertise basedon our oilfield work and whichwe believed we could prof-itably apply elsewhere. Thismove to diversify culminatedin the acquisition of a 26,000-employee IT services com-pany in 2001 but ended whenSchlumberger focused backon its core business. By 2004,through a series of divestitures,we had become a pure oilfieldservices company again.
3. Subsequently, we havecontinued to perform smalleracquisitions to add specificcapabilities to our oilfieldservices portfolio.
We should note that these phasesare not sequential. For example, in2000-2001, we were almost simulta-neously divesting a drilling business(Sedco Forex), acquiring a non-oilfield division (SEMA), andexpanding into seismic studies
A company would never omitconsideration of financial or legalissues before embarking on anacquisition, a partnership, or adivestiture. The buyer alwaysexamines the “books” of the sellerin fine detail in order to make surethat there are no hidden liabilitiesand that the acquisition will providea good ROI. The lawyers not onlyexamine any history of lawsuits andthe content of contracts that mightrepresent hidden liabilities, but theyalso review the intellectual propertyportfolio to detect opportunitiesand threats. HR is often called into gather data and review localrequirements on staff transfers,compensation, pensions, andthe like. Facilities management isasked to look at the buildings occu-pied by the acquired company: age,safety, length of leases, opportuni-ties to consolidate with other facili-ties of the acquirer close by, andso on.
A company’s information tech-nology and information systemsrepresent similar levels of risk andopportunity, yet these are rarelyconsidered during the early stagesof MAD activity. The prevalent atti-tude has been “Let’s decide on theacquisition or divestiture, then we’lltell IT to ‘make it so.’ They shouldbe able to plug or unplug the cableseasily enough.”
Of course, the reality is much morecomplicated. Some of the issues ITfaces during MAD include:
The cost and technical difficul-ties of merging and separatingcomputer networks
Software licenses, includingthe ability to audit the legalityof all the acquiree’s licensesor the costs of renegotiatinglicenses with suppliers aftera split
Migration to a commonstandard, whether it be aPC platform or a back-officeapplication
Security issues
Training the users to a new setof policies and procedures
Understanding not onlywhat needs to change inan acquiree’s infrastructure,systems, or enterprise archi-tecture, but also what capabili-ties the company may offerin the areas where they havebetter practices, equipment,or software
Dealing with an imposedtimetable that may not be real-istic from an IT perspective
In the stories that follow, we willencounter “the good, the bad,and the ugly” with respect to IT’sinvolvement in MAD.
Case A: Always the Last to KnowIn June 1988, Schlumbergerannounced its intent to sell adivision making retail gasolinepump systems to a US-based com-pany. The IT organization of theSchlumberger group containingthat division learned about the salethe same day as the general public.We rapidly found several seriousissues:
Other divisions from the samegroup had sales and servicepersonnel colocated in branchoffices belonging to the divi-sion we were selling. Movingthem immediately was impos-sible for reasons of cost andnetwork connections.
The acquiring company wasmostly in the US, and its fewEuropean offices had no com-puter network. By contrast, thedivision we were selling wasmostly based in France, andits various locations neededto remain connected to eachother after being separatedfrom the Schlumberger net-work. However, the acquirerhad no experience with theEuropean network providersand technology choices.
The planned sale date wasonly two months after theannouncement, because theparties expected no seriousregulatory issues. These twomonths were essentially Julyand August — not the besttime to call for “everyone ondeck,” especially in Europe,where most of the action wasto take place.
The sale contract assuredthe acquirer that there wereno Y2K issues in the systemsmade by the division inquestion, but IT had notbeen consulted in makingthis statement.
In order to maintain businesscontinuity, the contract offeredcontinued access to theSchlumberger InformationNetwork (SINet) for six months— but at a rate that was well
below the cost of providing theinfrastructure and the service.
As a result of these problems, the ITorganization (in both companies,but especially at Schlumberger)spent a rather stressful summer try-ing to put everything in place for asuccessful separation that wouldnot hamper the new entity’s opera-tions. By the end of August, thingswere looking grim; then, fortu-nately, the sale date was pushedback by one month due to otherlate tasks. By early October, theseparation was essentially com-plete,1 but two security risksremained: ex-employees sharedwith us offices in which there werenetwork connections to SINet, andsome of them required continuedaccess to Schlumberger businesssystems that had not yet been repli-cated. It would take several moremonths (well into 1999) to clean upthese remaining issues.
Case B: Not InvitedIn early December 1999, theIT director for a division ofSchlumberger heard a rumorabout the impending acquisitionof a small startup company inCanada. He requested informationand “a seat at the table” but wasturned down. The acquisition wasannounced at the end of January2000 and was effective immedi-ately; the first IT visit to the newlocation took place in March. By
August 2000, the new entity was stillnot connected to the Schlumbergernetwork.
While a three-month delay in the ITdue diligence process cannot fullyexplain a seven-month delay inconnecting the new division to thenetwork, it certainly contributedto it. Another factor was thatSchlumberger had just created aseparate group in charge of itsglobal network infrastructure, andits processes for network provision-ing were not yet well established.
Case C: Trial by FireIn March 2001, Schlumbergeracquired a large international ITservices company with approxi-mately 26,000 employees operatingfrom 223 sites in 30 countriesworldwide.
As the IT due diligence informationwas limited (which is somewhatironic, considering the nature of thecompany being acquired), an initialdiscovery project was run fromMarch to June 2001. Its objectivewas to determine the scopeand current status of the newlyacquired infrastructure, leadingto a complete integration plan. Itquickly became apparent thatthere were significant differencesin culture and policies between thetwo companies:
The acquired company wasrun as a federation of largelyindependent national entities,each of which organized andmanaged its internal infrastruc-ture as it saw fit. Consequently,infrastructure models, hard-ware, software, and supportorganizations varied enor-mously among the different
countries. Moreover, therewas no central IT managementteam able to provide compre-hensive information aboutthe whole organization —our approach had to be coun-try by country.
Although the overall groupoperated in many countries,the culture was far from inter-national, leading many coun-tries to question the valueof being connected to theSchlumberger global network.“Why would we want to com-municate with anyone outsideour own country?” was theprevailing attitude.
The acquired businesses hadindependently connected alarge number of external cus-tomers to their sites for jointdevelopment projects, soft-ware support, and the like. Onthe Schlumberger network, bycontrast, customer connectivitywas limited to a small numberof Secure Connectivity Centersin key locations worldwide,following strict design andoperations rules.
This mismatch of practices andcultures raised a number of seriouschallenges before we could inte-grate the new IT services businessinto the highly secured and cen-trally managed SchlumbergerOilfield network. Further con-straints surfaced when seniormanagement made it clear thatthe integration could not impactthe day-to-day business of eithergroup, so a drastic redesign ofeither SINet or the acquired net-works was not a possibility.
Eventually, a team of 60Schlumberger IT consultants
1Peter Watkins, the Europe ITManager for the Schlumberger Test& Transactions group at the time,deserves much credit for this result,which under the circumstances wasa remarkable accomplishment.
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from all over the world workedfor 18 months to complete theinfrastructure integration. Thechallenges they faced during thisparticular acquisition — and thesubsequent divestitures three yearslater — really laid the foundationsfor the Schlumberger IT team tolook at all the issues around MADactivity and to develop permanenttechnical solutions for managingthese activities in a professionalmanner.
Case D: Lucky BreakWe turn to a case that couldeasily have turned out like Case Bbut ended up being a successstory … by accident! In mid-1997,Schlumberger decided to acquirea small Massachusetts, USA, com-pany that made chip inspection sys-tems. Once again, there was nointent to involve IT in the due dili-gence phase, but an indiscretionleaked the information to the ITdirector, who went to the generalmanager of the acquiring divisionand explained, successfully thistime, the importance of his beinginvolved. As a result, he was ableto join a due diligence visit inOctober 1997. While it was legallyforbidden to interfere in any waywith the functioning of the acquisi-tion target at that time, the discus-sions still yielded two importantresults:
1. We learned that there wasa plan to spend $450,000 toreplace an obsolete PC-basedaccounting system with aminicomputer-based enter-prise resource planning (ERP)package. We explained to ourfuture colleagues that we had
an ERP system with sparecapacity in place in our factoryin southern California and thatit was already used remotelyby another location in Ohio,similar in size and complexityto the Massachusetts opera-tion. As a result, the manage-ment of the target companypostponed their decision, andthe company was later suc-cessfully added to the existingjoint system.
2. A team of two people tookcare of local IT support. Wewere able to share with themenough general, nonconfiden-tial information about our ITpractices and facilities to gen-erate their enthusiasm and fullcooperation with the integra-tion project. With them onboard, we were able, after theacquisition was completed, to“remote control” most of theactions that needed to be per-formed with respect to con-nectivity, security, and usertraining.
Case E: Best-Case ScenarioOur final case study illustrates howquickly integration can be achievedwhen best practices are followed.In May 2005, Schlumberger OilfieldServices acquired a specializedmanufacturing company in the UK:
Within three days of the acqui-sition, all the new employeeswere added to the corporatedirectory. As a result, theywere able to securely accessthe Schlumberger network.
Within 10 days of signature,the site was connected usingan authenticated proxysolution.
Less than one month later,the site was fully integratedonto the network, with allemployees having new e-mailaccounts. Integration into theinternal manufacturing, qualitymanagement, and safety sys-tems was well advanced.
With the key infrastructure andmandatory business systems inplace early on, executives aremuch better positioned to focuson business synergies and opti-mizing the benefits that the newacquisition brings. Unnecessarilyprolonged activity on the basicissues only hinders achieving theseobjectives.
BEST PRACTICES
Our experiences with MAD, includ-ing the above cases, have led us todesign and implement a number ofbest practices aimed at increasingthe efficiency and reducing thecost of the IT activities caused bychanges in the corporate structure.These best practices can be dividedinto three categories: infrastructure,processes, and organization. Butfirst, it is important to clarify therequirements.
Acquisitions. The key for acqui-sitions is to enable the newlyacquired employees to accesscorporate systems, tap into ourknowledge repositories and tech-nical communities, familiarizethemselves with their new businessenvironment, and feel part of theirnew parent company. Conversely,Schlumberger personnel need toeffectively collaborate with theirnew colleagues. This enables the
planned business synergies tomaterialize in the shortest timeframe.
Joint ventures (JVs). JVs requirethe ability to grant access to arestricted set of corporate services,often for only a selected group ofstaff. As this requirement variesfrom JV to JV, both the access con-trols and the accessible servicesneed to be easily managed. As JVagreements can change rapidly,the integration may be very limited(compared to an acquisition),resulting in an “arm’s length”relationship.
Divestitures. In the case of divesti-tures, the divested entity must havedecreasing access to Schlumbergerservices over an agreed time frame,in order to maintain business conti-nuity until it is fully integrated withits new owner. The gradual transi-tion of the divested entity is man-aged under a Transition ServicesAgreement.
InfrastructureGiven our high level of acquisitions,divestitures, and JV formation, wehave found it more practical to putin place specific permanent infra-structures that can handle the differ-ent requirements of each of theseevents, rather than trying to handleeach event on an ad hoc basis.
Identity and access managementis key. Specific fields in theemployee entries in the corporatedirectory control all IT rights ofusers. Uploading the necessarydata for all the new employees istherefore a key first step after anacquisition. Once new employeeshave directory records, they must
pass an online IT security test,which qualifies them for full accessto the network and familiarizesthem with the strong IT securityculture of Schlumberger.
We are using a three-phasemodel of IT integration for newacquisitions:
Phase 1: secure remote connec-tivity. Secure, controlled remoteaccess to the Schlumbergerintranet and applications can beprovided through a Secure SocketsLayer VPN gateway — the samefacility that allows Schlumbergeremployees to connect from homePCs, airport kiosks, and so forth.The focus is on ensuring that evena contaminated PC cannot easilyinfect the Schlumberger intranet.
Phase 2: authorized proxysolution. The newly acquired com-pany connects via a Schlumbergermanaged router and their own ISPconnection to the network. Priorto this, the new site is auditedand must meet a minimum levelof IT security requirements. Onsiteemployees use their network as theydid before. However, when they tryto connect to the Schlumbergerintranet, they must authenticateusing their Schlumberger directoryID and password. Once Phase 2 isimplemented, the IT focus canshift to any outstanding IT securityconcerns.
Phase 3: full connectivity. Oncethe new acquisition meets all therequirements of the IT securityaudit, by which time it will usuallyhave its permanent Schlumbergernetwork connection in place, thenthe additional authentication step
can be removed and employeescan fully access the network. Oncefull connectivity is in place, thefocus of the IT integration tasks canshift to other matters such as har-monization of the hardware andsoftware installed base, incorporat-ing the site into the corporate ITsupport model, and so on.
For divestitures, we have alsodeveloped a model to address therequirement of divested divisionsto maintain access to designatedSchlumberger services as theygradually transfer to a new owneror become independent. Prior tosale, we write a Transition ServicesAgreement that specifies whichservices are required and for howlong. We then use a separateWeb interface designated for non-employees — the TransitionServices Gateway — to controlaccess to these services. This gate-way can be configured to accom-modate multiple simultaneousdivestitures — users from eachcompany see a different “menu”of services once they authenticatethemselves. This same gatewaycan also be used to providerestricted access to JV personnel.
ProcessesWith the appropriate architecturein place, the real key to effectiveintegration of acquisitions andseparation of divestitures is notso much the technology as theprocesses behind it. The IT functionis often the first working contact anacquired company has with theirnew parent, especially as ITincreasingly acts as the facilitator ofthe integration of all the other func-tions. The professionalism of the IT
staff and the handling of the IT inte-gration process are therefore idealopportunities to make importantfirst impressions.
Our experience shows that the effi-ciency of the eventual integrationdirectly depends on the level andcompleteness of the due diligencedone. A large amount of informa-tion affects more than one corpo-rate function: for example, detailsabout the target acquisition’s facili-ties will be required by Facilities,IT, and perhaps Finance. In an effi-cient due diligence process, thisinformation should be collectedonce and securely shared by allfunctions that require it (see side-bar). In order to achieve this, theM&A team at Schlumberger hasdeveloped a secure Web-basedshared workspace to which bothmembers of this team and externaladvisors can be given selectedaccess to participate in particulartransactions.
Once armed with all the necessaryinformation, it should be possibleto estimate the cost of the entireintegration effort, which is oftenoverlooked or grossly underesti-mated. We have developed amethodology to estimate this cost,which is then provided to the M&Amanagement team. In some cases,these costs could even cause anacquisition to be reconsidered ifthe ROI was marginal in the firstplace. We often say that IT is the“canary in the coal mine”: if ITfinds the air of the acquisitiontarget hard to breathe, this couldbe a warning flag that all otheraspects of the buyout may well bedoomed, too.
Integration activities are oftenslowed down by delays in obtainingdecisions that could have beentaken prior to closing. Holding pre-closure meetings where these deci-sions can be made greatly speedsup the integration. In the particularcase of Schlumberger, where thecorporate directory records controlthe access employees have to allsystems, it is critical to acquire allthe necessary personnel data(as allowed by applicable dataprotection laws) and map it tothe Schlumberger organizational
structure, verifying it and approvingit even before the closing signature.This data can then be immediatelyuploaded into the HR informationsystem upon closure and the newdirectory records generated withinhours. Using the phased accessdescribed above, new personnelcan have access to the corporatenetwork very rapidly, with all theensuing benefits — not to mentiongetting a positive impression oftheir new owner’s capabilities.
Software license ownership, status,and contractual obligations should
Vol. 18, No. 10 17
IT DUE DILIGENCE: A CHECKLIST FOR ACQUISITIONS
IT governance. See what the organization chart and reporting line of the ITorganization look like. Who are the people in charge of policies, standards, security,sourcing, and support? Are any of the functions outsourced, and if so, to whomand at what cost? What are the business model and requirements going forward?
Security. Find out about policies and standards, employee training, auditing andenforcement practices, authentication and access control methods and tools,physical security of computer rooms and network access points, remote accesssecurity, strength of passwords, antivirus measures, antispam measures, personalfirewalls on PCs, home PC usage, laptop theft prevention, and so on.
Business systems. Make a list of systems used for ERP, HR, Finance, CRM, andthe like. Should these systems be kept or eliminated, and if kept, what connectionsare needed to properly integrate the business processes they support?
PC/workstation standards. Take an inventory of hardware and software, theoperating system mix, existence of a “standard image” and its deployment process,proof of ownership of software licenses, and so on.
WAN connectivity. Document the existing network architecture, connections tothe Internet, Web presence (domain names), and connections to customers andpartners, among other things. From this information, determine the best interim andpermanent options for connecting the acquired entity to the SINet.
LAN connectivity. Find out whether LANs conform to Schlumberger standards forservers, cabling, network switches, and the like.
Telephony. Inventory private branch exchange and voice-mail solutions, carriercontracts, and cell phone policies and plans. What savings can be realized bymoving the facilities and employees to the contracts already in place atSchlumberger?
Training. Immediately after the acquisition closes, determine who will need to betrained on what, when, and where.
be established very quickly toensure a smooth transfer of owner-ship and maintain compliance. Anearly and accurate inventory allowsfaster integration of the acquisitionunder corporate software purchas-ing agreements, thus reducing therisk of unnecessary expenditure onnew licenses as well as the risk ofnoncompliance with vendor con-tracts and regulations. In the caseof divestitures, it is important todecide which licenses will beretained by the parent companyand which licenses will be trans-ferred to the spinoff or acquirer(and at what cost). This will, at min-imum, avoid creating complianceissues for the divested entity andprevent subsequent legal claims.
Figure 1 charts the phases in theoverall process for an acquisition.(Divestitures are slightly simplerbut similar.)
OrganizationAs the earlier case studies indicate,good communication between theM&A team and the IT function isvital. At Schlumberger we haveaddressed this by creating a dedi-cated position on the IT staff tohandle all matters relating to MADprojects, with reporting lines shownin Figure 2. This role acts as the sin-gle point of contact for all IT matters(and often many others!), from thestart of an acquisition or divestitureuntil the successful integration orcompleted separation. A key aspectof this role is regular contact withour M&A team, which provides con-fidential advance warning of newprojects. This avoids some of thesurprises and ensuing difficultiesdescribed above in Cases A and B.
LOOKING AHEAD
As we look at the future of our com-pany and the general trends in how
businesses evolve, it seems thatMAD activity is here to stay or willeven increase. Startups form andoften get acquired by larger corpo-rations, while specialized divisionsget spun off when their parent com-pany has grown too much anddecides to refocus. As a matter offact, we see a trend toward whatwe call “enterprise deconstruc-tion”: a loose federation of clients,suppliers, partners, and our owndivisions pursuing commongoals — in our case, ensuring theoptimal discovery and recoveryof oil and gas.
It turns out that from an ITperspective, two trends haveaccompanied this more dynamicbusiness situation:
1. At the enterprise applicationlevel, SOA (and its essentialtechnical component, Webservices) is allowing compa-nies and divisions to connect
Rest of technical integration,employee training, etc.
Figure 1 — Integration workflow.
CEO
CIO CFO
Manager,IT Infrastructure
Director,Acquisitions and
Divestitures
IT Manager,Acquisitions and
Divestitures
Figure 2 — MAD organization chart.
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their business processeswithout necessarily havingto change applications oruse proprietary integrationtechniques.
2. At the infrastructure level,VPNs and networking tech-niques such as MultiprotocolLabel Switching allow moreflexible network architecturesthan was the case just a fewyears ago.
The “just in time” appearance ofthese new technologies and archi-tectures is probably not accidental.Cumbersome integration processescreated frustration with the oldtechniques and a need for moreflexible integration architectures,and the industry responded byinventing these new ways to inte-grate the network and applicationlayers. Figure 3 compares the tradi-tional “rip and replace” process ofintegrating two companies with amore flexible one based on thesemore recent capabilities. An inter-esting benefit of new approachessuch as SOA and VPN is that if anacquired company is spun off orsold several years later, there isagain much less disruption, sinceits original applications and net-work have largely been left intact.
Adopting new, more flexible ITarchitectures will ease the pain,but success or failure of acquisi-tions and divestitures, from an ITpoint of view, will continue todepend above all on good planningand execution.
Claude R. Baudoin is an InformationTechnology Advisor for Schlumberger.He has 30 years’ experience in IT andsoftware engineering, 20 of which hehas spent working in different R&Dpositions for Schlumberger in France,California, and Texas. He is now basedat the Schlumberger research centerin Cambridge, Massachusetts, USA.Mr. Baudoin holds an engineeringdegree from École Polytechnique inParis and a master’s degree in computerscience from Stanford University. He isthe author of two books on softwareengineering, two patents related tonetworking and security, and a numberof published papers.
Stephen Price is IT Manager – Acquisitionsand Divestitures at Schlumberger. Hestarted his career in 1980 in the field oper-ations of Schlumberger in the Middle East.From 1987 to 2001, Mr. Price held a suc-cession of field operations managementand personnel management positions inFrance, Italy, Nigeria, Saudi Arabia, andthe UK. While Schlumberger owned SEMA(2001-2003), he was responsible for itsintegration into the company, and he isnow generalizing this experience into aset of repeatable IT processes for acquisi-tions and divestitures. Mr. Price holds abachelor’s degree in engineering and amaster’s degree in civil engineering, bothfrom Cambridge University, UK. He is acertified PRINCE2 (project management)practitioner.
How does one minimize risk, reachstability, and leverage the acquisi-tion of new assets? Whether youhave a new leadership team, haveacquired the assets of a company,or have merged with another com-pany, you must have a plan foremployees and customers and forhow the acquisition will make thenew company stronger. Properassessment, planning, communi-cation, and execution of your planare the four keys to success (seeFigure 1).
Technology can, and often does,play a key role in allowing a com-pany to achieve the ultimate goalsof being a market leader, enabling
employees to contribute more, anddelivering higher profit margins.Not having a technology plan inplace when merging companiescan lead to delays in meeting goalsand even to a complete failure ofthe business.
I have worked in five companiesthat were acquired and was amanager in four of the acquiredcompanies. In three of the fiveacquisitions, the acquiring com-pany conducted due diligence onthe technology. In the other two,the acquiring company focused onadding market share to its businesswithout regard for the technologycurrently in place. I have also beenon the acquiring side in numerous
company acquisitions and man-aged the assimilation process ofthe technology for many of these.
As Figure 1 shows, due diligenceultimately touches all four successfactors and is integral to mergingtwo companies. Failure to executeon any of these four elements jeop-ardizes a merger.
Minimizing risk in a merger focuseson three areas: employees, infra-structure support systems, andcustomers. Unless key employeesare there to provide services,you will have unhappy customers,which can lead to withholding ofpayments, additional cost, andreduction in profit.
PREVENTING BRAIN DRAIN:THE EMPLOYEES
Each time management changes,either through a merger and acqui-sition or when new leadershiptakes over, employees begin seek-ing assurance that they will have afuture with the company. Theywill ask themselves the followingquestions:
Can they assess, plan, com-municate, and execute ontheir plan?
What’s in it for me if I stay?
The better employees are usuallythe first to leave. They are indemand and can find jobs faster;they will take a bird in the handversus two in the bush. Fear,uncertainty, and doubt can be verystressful for them, especially if theyare kept out of the communicationsloop. Most technology peopleare detail oriented and need infor-mation. Keeping key technologyemployees in place requires properplanning and communications.Keep them informed even if thenews is bad.
The Voice of ExperienceOf the five situations in which Iworked for an acquired company,I only knew where I personallystood three times. The first acquisi-tion was an asset purchase. I wasa software developer and was toldthe acquiring company did notneed additional developers. Theacquiring company made someefforts to help find jobs for the dis-placed people, but it was not a pri-ority for them. I needed to find a jobin a matter of weeks. I received noseverance, I had no assurance ofanother job — it was very intimidat-ing for me at the time. Fortunately,one of the customers we serviceddecided to hire me to start theirown software development staff.In the end, everyone found a job,but it was a time of immenseuncertainty.
In the second acquisition I wastold that my position was secure,and it was. I was left guessing inthe third and fourth acquisitions,although I was fairly certain that Iwould be retained, since I held amanagement position that I feltwould still be needed after theacquisition. However, the positionswere not high enough to warrant anemployment agreement, so therewere no guarantees. Neither com-pany did any due diligence on thetechnology or communicateda plan. It was obvious after each ofthe acquisitions that they had notconsidered how the technologywould be handled, since they werefocused primarily on growing theircustomer base.
In the last acquisition I was toldmy position was not needed. I wasalso told my division would be shutdown since our unit was not strate-gically aligned with the plans of theacquiring company. However, therewas a major difference betweenthis acquisition and all of the oth-ers. After delivering the bad news,they also told me if I stayed andmanaged the transition that I wouldbe compensated and that everyeffort would be made to ensure Iwould have ongoing employmentwith the acquiring company oranother company. Could I believewhat I heard? I did, because thisparticular company had a historyof doing this with the other compa-nies they had acquired. They had atechnology plan, and they effec-tively communicated the plan.
Because there was a technologyplan in place, risk was minimized
for each of my employees and ourcustomers. Since I was the generalmanager of the division, I wasasked who the key employeeswere and what was needed toensure that we could continueserving our customers until wewere ready to close the division.The acquiring company got meinvolved, and we openly discussedissues and needs for communicat-ing the plan and providing sever-ance pay, employment options,and outplacement assistance asemployees began to search fornew jobs. Because the acquiringcompany got me involved, my trustand confidence in them grewquickly, and I’m sure that my ownemployees perceived this as webegan implementing the transitioninitiatives.
When we met with the employees,we communicated the bad newsthat the division was going to close,but we were also able to provideeach of them with answers to thequestion “What does this mean tome?” There is no way to eliminateall the fear and uncertainty, but wewere able to eliminate most of itbecause we had a well-thought-outtransition plan, could elaborate onthe severance options, and assuredemployees that we would commu-nicate any changes well in advanceso they could plan appropriately.
What was the outcome? No one leftearlier than expected, and every-one ended up with a good positionin another company. Minimizingthe employee risk paid dividendsin goodwill for the acquiring com-pany, the employees, and thecustomers.
I was so impressed with theintegrity, planning, communica-tions style, and approach of theacquiring company that, when theyoffered, I took the position of man-aging newly acquired companiesand assimilating them into themainstream of the company. It wasone of the most rewarding posi-tions I have held because we wereable to assure people that we weretrustworthy, we cared about them,we had a plan, and we communi-cated with them both the badand the good news from the begin-ning. Because I had been in theacquirees’ shoes, I could also relateto the emotions and uncertaintythat come with being acquired. Itwas also rewarding in that we didnot lose a single key employeefrom more than 20 technologygroups as we acquired newcompanies.
See Things from Their Point of ViewIf you are an employee of a com-pany that’s being acquired, try tostep outside of your position andtake an objective view of how youwould organize the company ifyou were a senior manager in theacquiring company. Whatevercourse the acquiring companytakes, help them achieve the goaleven if it means your position willbe eliminated. Your maturity inworking with the acquiring com-pany may help you find a betterposition. When I was offered theposition of managing newlyacquired companies, I was toldthat one of the main reasons Igot the job was the maturity Idemonstrated when told that myposition would be eliminatedand my division would be closed.I have observed several individualswho have tried to fight the neworganization and preserve theirpower base. I have not seen anyof them succeed.
UP AND RUNNING: THE INFRASTRUCTURESUPPORT SYSTEMS
One of the early challenges in anyacquisition, once the employeerisks are minimized, is to beginassimilating or transitioning infra-structure support systems suchas personnel systems, accountsreceivable, accounts payable,and financial reporting systems.Employees must continue to dotheir jobs and serve customers,but they must also be able to enterexpense reports and time-sheetdata and request needed supplies.
Management needs to incorporatefinancial information from the newcompany into standard reportingapplications as soon as possible inorder to get a clear financial pictureand monitor the financial progress.Failure to assess, plan, communi-cate, and execute on these infra-structure tasks can lead to chaos.
Attention to these issues is evenmore important if the acquiringcompany is public and the acquiredcompany is private. Having properfinancial tracking and reportingin place is key to complying withthe US Sarbanes-Oxley Act.Implementing well-definedprocesses and software applica-tions that can guide users in theirproper use will enhance the adop-tion of new processes and enableemployees to contribute sooner.
One key to faster employee contri-bution is to establish a trainingprogram that outlines the com-pany mission, defines core values,describes the various divisions andhow they contribute to the com-pany mission, and trains employeeson the mechanics of using the infra-structure systems. Most employeeswant to know how they will addvalue to the company. Their report-ing manager should spend timewith them explaining how they willcontribute to the new company’ssuccess. Understanding this willenable them to quickly assimilate.
A technology plan for combininginfrastructure support systemscannot be overlooked. One largecarpet distribution and retailsales company learned this
lesson the hard way when theyacquired another major carpetcompany without first having atechnology plan for merging thetwo companies’ infrastructuresupport systems. The acquiringcompany had no good strategy foroperating the business units suc-cessfully once they were merged,and ultimately the diversity andissues they inherited overwhelmedthem. They were not able to getcontrol of their costs fast enough,and the situation spiraled out ofcontrol. What was the end result?They filed for bankruptcy becausethey were not able to manage themerged businesses.
KEEPING THEM HAPPY:THE CUSTOMERS
Once an assimilation plan is inplace for infrastructure supportsystems, you must also have a tech-nology plan for serving customers.This is critical if the acquired com-pany uses proprietary software todeliver services to their customers.In many cases the customers willneed to migrate to the technologyof the acquiring company, unlessthe acquired company has a tech-nology the acquirer does not havethat is necessary to maintainingcustomer service. Even then, therewill be probably be some overlap,and a technology plan must bedeveloped to transition the cus-tomer base unless the decision isto operate the newly acquired com-pany as a wholly owned subsidiaryand let it run “as is.”
The first step in developing a cus-tomer transition plan is to assess
the differences in the overlappingtechnologies and identify whatupdates must be completed beforethe customer base can be transi-tioned. The second step is todevelop a customer communica-tions plan and outline the need andbenefits — from the customer’sperspective — for migrating to thenew technology. Remember, justbecause this migration is goodfor your company doesn’t meanthe client views it the same way.Change is difficult, so expect someresistance. The third step is to exe-cute the transition, and the finalstep is to follow up and providesupport as needed.
Using these principles, one com-pany I worked for was able tosuccessfully transition more than40 customers to new technologyin a few months. We successfullymigrated the customers and main-tained a strong client relationshipthrough proper planning, commu-nication, training, and supportonce the migration was complete.Customers did not face unduehardship related to the migration,and more importantly, they wereable to continue business as usualin serving their customers.
PLAN TO REDUCE RISK
A merger or acquisition is a riskyproposition. A technology planto reduce overlap in software forinfrastructure or business applica-tions is necessary to achieve costsavings as quickly as possiblewithout impacting service toemployees and customers.Completing appropriate due
diligence and developing a technol-ogy plan prior to completing theacquisition helps eliminate finan-cial surprises and outlines howthe assimilation of the technologyfor the merged company willimpact employees, customers,and profitability.
Failing to include technology in duediligence increases the risk and canlead to a business interruption ordiscontinuation, as the carpet com-pany discovered. Had the companyperformed a technical due dili-gence, they may have recognizedthe additional investment needed tointegrate the infrastructure systemsof the newly merged company.
Minimizing risk requires duediligence to assess what will beacquired, to achieve stability, and toplan for assimilating the new com-pany’s technology and support sys-tems. Proper communication andexecution of the plan will help com-panies achieve leverage and prof-itability goals. As with any businessstrategy, organizations must be flex-ible and make adjustments as dis-coveries are made. However, duediligence and planning help elimi-nate major surprises, minimize risk,and achieve targeted rewards.
Dan Tankersley has more than 20 years’experience in information systems man-agement in multiple industries, includinghealthcare, manufacturing, local govern-ment, utilities, distribution, and retail. Hehas extensive experience in developingIT software and services that are alignedwith business needs and implementingsolutions that bring value to businessgrowth and profitability.
The rapidly changing domesticand international business environ-ment has produced numerousmergers and acquisitions. Compa-nies acquire or merge with othercompanies for specific businessreasons, anticipating savings fromthe economies of scale associatedwith eliminating or integratingredundant systems. Since the pre-vailing business strategy is to growboth market share and global pres-ence, M&As are often incubatedand given life in a very short timeframe. Thus, the challenge fortoday’s CIO is how to proceedrapidly through the associated sys-tem integration. In order to accom-plish this challenge, the CIO must:
Manage existing standalonesystems
Select standards from thecompanies’ total softwareinventory
Integrate, modify, or eliminatesimilar systems
Build new systems
In an M&A, all of these activitiescome in rapid fire, and the CIOmust be proactive in order tonavigate a successful journey.
OBJECTIVES
What does it mean for the CIO tobe a proactive, informed partici-pant and navigator? In this article,we will investigate M&As fromthe IT business and CIO perspec-tives. This investigation begins byreviewing IT business opportunitiesassociated with an M&A. This back-ground knowledge is an essentialelement for enabling the CIO tocustom-develop a successfulroadmap that specifically takesinto account:
Stage-by-stage strategies andtactics for business and ITmanagers
Likely roadblocks that threatenthe ultimate destination
A CIO must provide clear directionto the IT staff throughout thisprocess. In doing so, the CIO detailswhat business management shouldexpect from IT management whenevaluating related constraints andopportunities.
THE IT BUSINESS PERSPECTIVE
During an M&A, there are four areasthat offer unique opportunities forIT business review and assessment.Our professional experience withthis process suggests that mostorganizations do not always seize
these opportunities effectively.Therefore, many organizationsachieve suboptimal results.
Global IT ReviewWhen two or more organizationsare considering integrating witheach other, it is possible to evaluatea broad spectrum of IT options forbusiness alignment, organization,and operation. The transitionprocess will require some elementof change, and employees are oftenconcerned that these changes willaffect their jobs (which may well bethe case). Senior leadership mustmanage this uncertainty to avoidexcessive turnover during thechange process.
Regardless of the underlying per-sonnel fears, this window in timeoffers a unique opportunity to exe-cute a global IT review, whichwould encounter even greaterresistance during steady-state peri-ods. The result of such a review canhelp formalize the goals of the neworganization, improve businessalignment, and implement neededstructural changes for a more effec-tive future IT organization.
GovernanceAccording to the IT GovernanceInstitute, “IT governance is theresponsibility of the board of
Adventures in M&A Wonderland
by Charles Butler and Gary Richardson
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directors and executive manage-ment. It is an integral part of corpo-rate governance and consists of theleadership and organizational struc-tures and processes that ensure thatthe organization’s IT sustains andextends the organization’s strategiesand objectives” [4]. During an M&A,existing weaknesses in global ITgovernance are highlighted whendecisions are fragmented amongvarious stakeholders. In order for thegovernance process to work, indi-viduals, roles, and decision-makingprocesses need to be clearly speci-fied so that the myriad decisionareas are governed effectively andefficiently. Among these decisionareas are application portfolio inte-gration, infrastructure determina-tion, data organization, organizationstructure, and personnel changes.
In many cases, decisions are gen-erated using a senior governanceboard to oversee the entire ITprocess during a merger and toorchestrate delegation of responsi-bilities. The net result can be ofstrategic value to the organizationin that senior managementbecomes actively involved in theIT evolution during the merger.
Process RefinementThe IT organization is designed todeliver and maintain critical infor-mation for the organization. Froman abstract viewpoint, this designinvolves a delivery infrastructure,data processing and storagecapability, applications support,and other supporting activities.Within each of these functional
areas, it is important to recognizethat any organizational restructur-ing should first involve a reviewof new, underlying support proc-esses. In some cases, the existingprocesses will be ineffective andwill need to be changed. In othercases, the existing processes maybe overkill, too expensive for thenew organization’s needs. In bothsituations, the goal should be tomatch the desired process to theproper service level for the neworganization.
The practical limitation to processrefinement is the time horizonthat is dictated by altered andexpanded business functions.Frequently, new processes will beimplemented before the officialmerger or acquisition is complete.In any case, the business often dic-tates shorter time horizons than theIT department can manage. Someobservers have characterized thisstate as changing the pistons inthe engine while it is running.Regardless of the approved timeframe, there will generally be arequirement for the phasing ofselected process changes due toresource limitations or other busi-ness constraints.
In today’s organizations, the biastoward outsourcing often entersinto this phase. The decisionmight be to go from two discreteprocesses into one external out-sourced equivalent. As an example,a process decision for two organi-zations, A and B, could be outlinedby one of the following fouroptions:
1. A and B processes aremerged into A when A isjudged to be better.
2. A and B processes aremerged into B when B isjudged to be better.
3. A and B processes areredesigned into a newlydefined C (internal orexternal).
4. A and B processes are leftessentially as is with someBand-Aid interface.
These types of process decisionsmust be explicitly made for eachunderlying IT activity.
Infrastructure and ApplicationsStandardization and ConsolidationOnce the broad principles of migra-tion are defined and approvedthrough the governance process, itis an easier task to define the newIT infrastructure and applicationsoperational requirements. From abest practice viewpoint, the basicidea should be to standardize andhomogenize the new organization’sinfrastructure and applicationsportfolio. If feasible from a timingand resource perspective, the valuein standardization is to decreasethe total cost of ownership. More
specifically, the new organizationshould pursue the following designprinciples:
Homogenize internal andexternal networks into asingle entity (vendors andtechnology).
Consolidate and standardizeservers and desktops into asingle technology and vendor.
Consolidate and standardizedata sources into a minimalcollection of technologies andvendors.
Consolidate and standardizepurchased applications, includ-ing financials, HR, and logisticssoftware.
Create a single, integratedhelp-desk environment.
Consolidate and standardizeutility licenses using neweconomies of scale for pricenegotiation.
Certainly, the goals listed above aredesirable, but accomplishing themwill challenge the resources andskills of the new organization. It isimportant to recognize that therewill be user resistance to thesechanges. So effective managementand communications techniquessuch as negotiation, retraining, anduser groups should be utilized tominimize user resistance.
Compass Publishing B.V. in the UKhas performed several analysis,standardization, and consolidationprojects across various industries.Its results provide an empiricalbasis for quantifying the possibleoutcomes of effectively pursuingthe opportunities identified above.In its findings, Compass reportedthe following cost reductions [2]:
33% reduction from an overallconsolidation of infrastructure
8% reduction from server,license, and WAN consolidation
17% reduction from a rigorousreview in matching service lev-els to business requirements
4% reduction from procure-ment standardization forhardware and software
The gaming industry providesanother example of how theseopportunities can be exploited.Two 2004 mergers, Harrah’sEntertainment with CaesarsEntertainment and MGM Miragewith Mandalay Resort Group,yielded the two largest consol-idated gaming businessesin the world. By standardizingarchitectures for infrastructure,applications, and data, Harrah’sIT business perspective wasenhanced by [5]:
Lowering costs by adoptingnew platforms that offerpower at cheaper prices
Improving operationalefficiencies by generating
more revenues with leanerIT operations
Collecting more customerinformation
Bringing in flexible IT architec-tures to replace aging legacytechnology
In similar fashion, Mirage used itsbusiness technology organizationand IT staff to reconstitute severalkey IT resources that fell within theabove opportunity areas [5]:
Combining the back-officeaccounting and humanresources systems
Integrating the property-management systems
Porting legacy applicationsfrom IBM AS/400s to Windows-on-Intel platforms
These successes demonstrate theimportance of recognizing and act-ing upon the IT business opportuni-ties offered during an M&A. Whatstrategies do companies utilize torealize these gains? There are nohard-and-fast rules, but as we willsee, there are several importantmanagement strategies to accom-pany the technical goals outlinedearlier.
SUCCESSFUL IT STRATEGIES,STAGE BY STAGE
In order to achieve the anticipatedgains, collaboration between busi-ness and IT management is critical.Generally, IT management mustrecognize that an M&A is drivenmainly by a prevailing corporatemandate to grow market share andgeographic presence. Companies
The gaming industry provides
another example of how
these opportunities can
be exploited.
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that choose to proceed quicklythrough integration are far morelikely to realize merger objectivesand less likely to experiencedifficulties.
IT is often negatively impacted bythe merger process, at least in thetactical operational period of thefirst two years [7]. Once a mergerprocess is initiated, swift action isrequired in terms of vision, money,people, and technology. When pos-sible, IT management should avoidpicking and choosing best-of-breedtechnologies from the various play-ers. IT management should addressthe feelings and emotions of theprofessional staff while selling thenew company vision [1].
In a study of IT’s role in M&As, itwas found that most mergers gothrough three major stages: strat-egy, valuation, and transition [3].In each of these stages, IT expertisesupport is critical.
The Strategy StageIn the strategy stage, one companyis targeting an acquisition. Duringtargeting, the would-be acquirerconducts a discreet organizationalinvestigation and analysis. If the ini-tial merger intent is revealed, thenthe intellectual property of the tar-get company is at risk. IT technicalknowledge within both organiza-tional groups is a vital componentof a successful merger. These criti-cal skills and operational knowl-edge need to be kept in place usingappropriate incentives. Failure todo so will negatively impact theoverall process and create addi-tional merger costs.
An acquisition requires consolida-tion of not only communicationschannels but also the technologythat supports business operations.No matter how appealing thefinancials are, a target candidate’ssystems can hinder acquisition suc-cess if modification and integrationtake too long. A premature massexodus of intellectual capital willnegatively impact post-acquisitionintegration, which is why IT man-agement must be involved earlyin the evaluation stage in order toidentify the intellectual propertyrisk associated with technical staffand business operations. Duringthe evaluation stage, IT manage-ment can evaluate:
The quality and reliabilityof the targeted company’sinfrastructure
The process importance ofits application portfolio
The skills and knowledge ofits IT staff
Historical details that areessential to understandingtoday’s operations
The Valuation StageDuring the valuation stage, thefinancial statements of both com-panies are analyzed. From thisanalysis, a new projected budgetis constructed and new financialgoals are established. The newlymerged organization will requireIT support to achieve the financialgoals associated with its new busi-ness model. While the businessanalysis should focus on customerand supplier bases in order to yield
a stronger company, IT manage-ment must assess the following:
The ease or difficulty of integration
Opportunities for growth
Potential savings
Potential liabilities
The IT labor situation
The financial implications of thesefactors should be integrated intothe projected business financialstructure. For example, high or lowintegration cost will affect the pro-jected revenue and cost streams. ITstaff mobility is also an importantfactor. If there is a hot market forIT labor, massive defections canimpact the financial incentive pack-age for key personnel or increaseintegration costs.
The Transition StageTransition is the period of actuallycombining the business processesof two companies into a newmerged entity. During this stage,IT management and practice mustbe flexible. Interrupting ongoing ITmaintenance and developmentprojects can result in opportunitylosses and morale problems.
An acquisition might be legallydeclared at a specific calendartime, but if you turn out the IT lights,then the business processes maygo dark. Speed is critical andchanges must be swift. Havingrepresentatives from each ITapplications team meet frequentlywith key business unit clients isimperative for a smooth transition.At these meetings, participants can
identify issues and analyze sched-uled implementation activities fordependencies and risks. Decisionsregarding transition issues are oftenmade through the governanceprocess, as it acts as the arbitratoramong conflicting organizationalinterests.
POTENTIAL ROADBLOCKS
If the two businesses are to mergetogether and reap the efficiencyof combined processes, thenone or both organizations mustbe prepared for massive changes.Furthermore, if the companies tryto accomplish a consolidation with-out first understanding all IT impli-cations, then the merger is headedfor trouble. There are several basicIT-related organizational issues tobe considered [6]:
Operating systems compatibil-ity and future standards
Data consolidationrequirements
User training requirements fornew or evolving systems
Renegotiation of commitmentsto vendors
Reevaluation of commitmentsto existing projects
Review of current outsourcingcontracts
Assessment of electronic linksto customers and suppliers
Alignment of existing ITstrategic goals within thenew company
Resolution of nationallanguages in data andapplications
Processes for currencyconversion
Harmonization of culturaldifferences
While merger-related technologyinfrastructure changes are beingmade, the market climate may wellrequire an IT response to externalmarket factors. Therefore, IT man-agement must implement planningand operational processes thataccount for planned merger activi-ties in parallel with dynamic busi-ness model changes. Often, thismultitasking is implemented underthe auspices of IT governance.
A CIO PERSPECTIVE
Before he re-entered academia,Gary was managing director ofinformation technology at aFortune 500 company. During histenure, the company completed anumber of multinational mergers.Charles has consulted with compa-nies that also completed mergers.In order to provide a real-world per-spective, we will answer five keymanagerial questions based on ourown experiences:
1. From a business perspective,when executive managementbegins to formulate the eco-nomics of the merger, whatmajor factors with regard toinfrastructure and applicationsshould be considered?
2. From an IT operational per-spective, what should execu-tive management understandin order to be better informedabout the constraints andopportunities that IT willpresent to the merger?
3. How should the CIO beinvolved in the initial mergerevaluation so that executivemanagement can be ade-quately informed of constraintsand opportunities?
4. From an operational perspec-tive, what should executivemanagement do to enableIT management to absorb amerger and position the tech-nology to meet the new busi-ness objectives?
5. From a planning perspective,what should the CIO do toformulate a transition plandesigned to move from twoinfrastructure and applicationportfolios to one infrastructureand application portfolio?
What Should ExecutiveManagement Know About ITInfrastructure and Applications?Infrastructure and applicationshave both positive and negativepotential for the merger, and theirvalue is a critical factor in mergerdecisions. Thus, the CIO mustknow — and communicate toexecutive management — thevalue of infrastructure andapplications.
Clearly, all high-quality infrastruc-ture and applications should beevaluated for their potential positivevalue if they can be retained andserve as a single architecturalsolution for the new company.Likewise, the professional staff thatoperates them should be evaluatedin similar fashion. Conversely, apoor application or infrastructureenvironment will detract from thetarget firm’s value. A best-of-breedstrategy might be required, and the
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resulting analysis of individual tech-nologies and adoption of selectedones can be complex, abstract, andtime-consuming.
Let’s consider an example of appli-cation value. Gary’s company onceacquired a firm whose legacy port-folio was given a business valuebased upon the fact that it includedstate-of-the-art process controlsoftware with a high businessvalue to the merged organization.Unfortunately, the business repre-sentatives did not understand thatthe acquired firm had valued thecode in object format. In this situa-tion, access to only object codewould mean that the selling organi-zation’s representative would belegally responsible for maintainingfuture code changes. This restric-tion was clearly not intended in themerger and would have been apoor business decision.
Unfortunately, this valuationescaped the business and legalstaff review and eventually costUS $10 million to correct. Subtletiessuch as this object code exampleexemplify why IT managementneeds to be involved in the valua-tion discussion. Clear understand-ing of the IT environment and itstechnical configuration can be legalelements of a merger agreement.
What Should ExecutiveManagement Understand About ITConstraints and Opportunities?Executive management mustunderstand the balancebetween technical constraintsand opportunities inherent in themerged organization. One thing IT
management can provide is anassessment of the technical andprocess compatibility of the twoenvironments. Executives need toknow that IT consists of a plethoraof skills, tools, and capabilities.The probability that two organiza-tions have selected the same port-folio of products and services isextremely low.
Any decisions regarding the selec-tion of tools, applications, proto-cols, database software, andprogramming languages mustalso take into account associatedhuman skills. The cost of humanskill transfer can be high, as canthe severance packages for releas-ing professionals with the wrongskill sets. IT executives must beknowledgeable about both tech-nical selection of products andservices and the human supportequation for the targeted opera-tional environment so they canexplain the implications to execu-tive management.
How Should the CIO Be Involved inthe Initial Merger Evaluation?The keyword here is “involved.”Too often, IT involvement is anafterthought. In one acquisitionduring Gary’s tenure as managingdirector, an executive managerapproached him and said, “We justbought XYZ Company, and I needyou to take a look at it and see whatneeds to be done.” Obviously, thedie was cast, and all that was leftwas to figure out how to Band-Aidthe two entities together.
Gary’s company typically acquiredsmaller companies in which the
model was to incorporate theminto the larger mother company.However, in this case, the acquisi-tion was for a much larger, dissimi-lar organization. The two sets ofinformation systems did not match,and massive amounts of data hadto be integrated. Earlier IT involve-ment would have revealed thatthe two companies did not matchwell and that the merger wouldthus entail much higher-than-anticipated costs. In this case, thetwo organizations truly operateddifferent business models, and theacquired company had long-termIT environment challenges becauseof its diverse application suite anddisparate infrastructure strategy.
This merger highlights the impor-tance of involving the CIO in M&Adue diligence. In regard to dataarchitecture, format, and content,executive managers are ofteninsensitive to the problems ofcompatibility. They know that datacan be fed from one computer toanother, but they often do not knowat what cost or what other conse-quences can result. So, by provid-ing executive management with areview of the business data archi-tecture, the CIO can offer vitalinsight into the extent of theintegration task.
What Should ExecutiveManagement Do to Enable IT?The biggest problem IT faces in anM&A is the requirement to absorbthe new entity in the time periodthe business units desire. Businessmanagers do not always under-stand why a complete infrastruc-ture and applications merger takesmore than a couple of months. Inlarge mergers, the likely time frameto complete IT integration resolu-tion is measured in years. However,the importance of immediate busi-ness operation dictates an associ-ated, short-term IT integrationapproach.
Minimizing these expectation gapsrequires working together to definewhat is needed to operate the newentity and then to define ways todeliver the solution in a timelymanner. IT solutions tend to betechnically elegant; however, thebusiness operational groups aremore inclined to value a solutionthat is “good enough.” Both partiescould be wrong in their assess-ment, but both need to understandthe implications of alternate views.Thus, executive managementshould support a multidimensional
integration approach, one thatmeets short-run business require-ments and longer-term tacticalintegration.
What Should Be IT’s Role in theTransition?We have written in this article aboutvarious factors to be consideredwhen merging the IT environmentsof two organizations. The first stepin this process is to identify theinfrastructure and applicationportfolios involved and assess theattributes of each major compo-nent. When one organization hasall of the best IT resources, thenadoption of this superior architec-ture is desirable. Otherwise, a best-of-breed approach will be required.A second step is to develop a stag-ing plan for migration to a desiredfuture state. The future stateimplies that key decisions havebeen made and communicated toall concerned. Finally, an infrastruc-ture design is formulated to supportthe application requirements.
As simple as these statementsmake it sound, merging two orga-nizations is far from easy in the realworld. People become territorialabout “their” systems, and choos-ing one system over another meansthat one group loses. Selectiondecisions are a natural breedingground for conflict, and IT mustassist business units in an objectivereview of their technology choiceswith an eye toward business goals.In order to minimize conflict, it isimportant that the users becomeinvolved in system reviews as part
of the decision-making process.Consequently, IT managementmust couch decisions in businessand IT terms, using appropriateinput from both sides. Choicesthat are viewed as arbitrary andthat are not properly communi-cated cause long-term ill will.
As an example, both of us wereinvolved in the selection of a best-of-breed choice between anancient nightly polled DOS systemwith major data integrity problemsand a state-of-the-art satellite-basedWeb system with a single database.Clearly, the newer system was tech-nically better and instantly deliv-ered higher-quality data into thecorporate financial system. Thenew system was not liked as wellin the business units, however,because the response time wasslower — a failing that could havebeen resolved if the business casehad supported higher expenditures.Taking more time to explain themerits of the online system mighthave aligned the business andtechnical interest.
CONCLUSION
In our experience, it is common tofind limited due diligence on the ITfront prior to a merger agreement.A rush to find a competitive advan-tage or an attractive market posi-tion has driven mergers since thelate 1990s. This rush, coupled withthe fact that IT is often ignored, willfrequently reduce the resultingvalue of the subsequent merger.We feel that many business leaders
People become territorial
about “their” systems, and
choosing one system over
another means that one
group loses.
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do not understand the value thatexists within the technologydomain of their organizations.
IT considerations do not usuallymake or break an M&A. Funda-mental business logic shouldalways come before systems con-sideration. Given sufficient timeand money, the IT infrastructure,applications, data, and organiza-tions are generally integrated intoa new merged business. Nonethe-less, any executive who goes for-ward with M&A strategic planswithout an adequate understandingof the IT issues is acting on insuffi-cient knowledge. This can com-promise the overall merger value,resulting in a business model orIT operation that might not success-fully meet the goals and financialposition sought for the newbusiness.
Evaluation of the IT component is acritical success factor for mergerstrategy, valuation, and transition.For every type of merger, theremust be a distinct strategy forrestructuring the IT organization,infrastructures, and applications.Each strategy must address thedegree to which managers shouldplan to merge personnel and archi-tectures. If the post-merger synergyis to produce a stronger new com-pany, then plans for IT personnel,technologies, and managementstyle must be formulated as part ofthe planned future company.
REFERENCES
1. Chatham, Bob. “Mergers,Acquisitions and Saving IT Dollars.”CIO magazine, 15 March 1998(www.cio.com/archive/031598/forrester.html).
2. Compass Publishing B.V.“Mergers and Consolidations”(www.compassmc.com/services/destinations/mergers_and_consolidations.htm).
3. Glasser, Perry. “Secrets of theMerger Monsters.” CIO magazine,15 April 1999 (www.cio.com/archive/enterprise/041599_merge.html).
4. IT Governance Institute (ITGI).“Board Briefing on IT Governance.”2nd edition. ITGI, 2003(www.itgi.org).
6. LaPlante, Alice. “When GiantsCOLLIDE.” Computerworld,28 September 1998 (www.computerworld.com/news/1998/story/0,11280,43280,00.html).
7. Working Council for ChiefInformation Officers. A More PerfectUnion — Lessons for IT in Mergers& Acquisitions. Corporate AdvisoryBoard, August 1998.
Charles W. Butler is a Professor in theDepartment of Computer InformationSystems at Colorado State University,Fort Collins, Colorado, USA. Dr. Butlerteaches and conducts research in infor-mation technology and collaborates withIT managers in developing improved IT
management strategies and processes,software development methodologies,and metrics and quality assurance fortraditional and object software. He alsohas worked with numerous Fortune 500companies and has served in the role ofChief Software Scientist for McCabe &Associates in Columbia, Maryland, USA.
Dr. Butler can be reached at ColoradoState University, Department of ComputerInformation Systems, 032 Rockwell Hall,Fort Collins, CO 80523, USA. Tel: +1 970491 6437; Fax: +1 970 491 5205; E-mail:[email protected].
Gary L. Richardson currently serves asthe coordinator for the graduate-levelUniversity of Houston project manage-ment certificate program. Dr. Richardsonhas worked in a wide variety of organi-zations over his more than 30-year pro-fessional career.
In the early part of his career,Dr. Richardson worked for TexasInstruments as a manufacturing engi-neer, as well as for the US DefenseCommunications Agency, the USDepartment of Labor, and the US AirForce in Washington, DC. During thisperiod, he was an active ProfessionalEngineer (PE). Interspersed through theseassignments, he worked as a consultant,technologist, and professor associatedwith various organizations. His academicstints were at Texas A&M the Universityof North Texas, and the University ofSouth Florida. Dr Richardson has pub-lished four computer-related textbooksand numerous technical articles relatedto the IT arena.
During the latter half of his career,Dr. Richardson worked for Texaco andService Corporation International in CIO-level positions. His current research inter-ests outside of the project managementrealm are on governmental controls(e.g., Sarbanes-Oxley) and contemporarydevelopment techniques.
Dr. Richardson can be reached at theCollege of Technology, University ofHouston, 326 Technology, Houston, TX77204-40181, USA. Tel: +1 713 743 4018;E-mail: [email protected].
In early 2004, my company, ParagonBusiness Solutions, Inc. (PBS), wasengaged to help a large biotech firmwith several management issuesthat stemmed from their acquisitionof a competitor that was exitingthe blood products industry. Thecompany did not perform an ITdue diligence during the due dili-gence phase of the acquisition.Consequently, after the deal wasconsummated, the company wasfaced with integration issues thatwere not addressed either during orimmediately after due diligence.
The acquisition resulted in theclient’s owning a second centraltesting laboratory facility; an inte-grated distribution center includinga fleet of refrigerated trailers, trac-tors, and drivers; and approxi-mately 60 donor centers. PBSsuccessfully evaluated the twocentral testing laboratories, recom-mended closing the least efficientone and spinning off the truck lineto a national delivery service; wethen negotiated an outsourcedproduct shipping solution. In addi-tion, PBS was asked to evaluate theintegration of the acquired donorcenters. That work effort andprocess form the subject of thiscase study.
CLIENT SITUATION
The acquisition I’ll be discussingdoubled the number of donorcenters for one of the US’s larg-est blood products companies.Unfortunately, the newly acquireddonor centers utilized a softwaresuite that was 180 degrees differentfrom the one the existing donorcenters used.
The existing donor centers usedSoftware Package 1 (SP1), a suiteof donor management system soft-ware products for the blood prod-ucts industry that was essentiallya distributed system. Each remotedonor center operated indepen-dently. The central data center wasused as a centralized backup andconsolidation point for data thatoriginated in each remote location,and this consolidated data wasused in financials and data ware-house applications. As with mostdistributed systems, the total costof ownership (TCO) was relativelyhigh. One key assumption in SP1was that each remote donor centerwas required to ship productdirectly to customers. As a result,each donor center maintained alarge freezer for storing productuntil shipments were tested, pack-aged, and shipped.
The acquired donor centers, onthe other hand, used Software
Package 2 (SP2), a suite of softwareproducts that was essentially a cen-tralized system. The data centerhoused both the application anddatabase servers, meaning thedonor center location had limitedfunctionality if either the data cen-ter or network was down. As withmost centralized systems, muchlike the hosted model today, theTCO was relatively low. SP2 wasdesigned with the assumption thatdonor centers would ship productdaily to a centralized distributioncenter. Consequently, each donorcenter maintained a small, lessexpensive freezer that held, at themost, several days’ storage.
THE PROJECT
Given the vast difference betweenSP1 and SP2, PBS was engaged todetermine which software platformthe client should adopt company-wide. When we asked whether theclient had already made a decision
and was simply looking for a third-party confirmation, we were toldthat this was an up-front, objectiveevaluation and that our recommen-dations would influence the client’sdecision.
Covering All the Bases:Our MethodologyThe PBS team wanted to utilize avariety of techniques to evaluatethe various facets of the softwareenvironment presented to us. Wefelt that this approach wouldensure objectivity and allow forthe most robust evaluation for theclient. Where possible, the teamused internal resources (subjectmatter experts [SMEs]), as donorcenter support staff from bothgroups were very knowledgeable.
The SYMLOG SurveyIn order to get a feel for each ven-dor’s organizational dynamics,the PBS team surveyed each ven-dor’s organization using SYMLOG(www.symlog.com), a well-respected values-based tool devel-oped by Frederick Bales of HarvardUniversity. The main thrust ofSYMLOG is to determine how theorganization measures up to previ-ously identified norms called theMost Effective Profile (MEP). Thetool has been used successfullyto evaluate more than two millionorganizations worldwide.
The results of the analysis showedthat both vendor organizationstended to group around the MEP,leading the team to determine that— at least according to SYMLOG —Software Vendor 1 (SV1) andSoftware Vendor 2 (SV2) wereboth fairly effective organizations,probably owing to their small size.
The RFPThe team then created a detailedrequest for proposal (RFP) and sub-mitted it to both vendors. The clientwas going to enter into a strategicrelationship with the winner, andthus we wanted to assess the ven-dors on a set of common evaluativepoints: the current features andfunctions of their respective pack-ages, management issues, futuredirections, and financial conditions.
At the same time, we implementedour Software Evaluation Model(SEM) (see Figure 1). This tool
is used to compare multipledecision components, the valuesof which may be objective (e.g.,license costs) or subjective (e.g.,ease of use). By weighting thecomponents based on their rela-tive importance to the client (seeFigure 2), the model adjusts theraw scores into a more meaningfulweighted score. It is these weightedscores that allow for an objectivecomparison between compli-cated alternatives (see Figure 3).According to the SEM process,SV2’s solution came out on top(Figure 4).
Vol. 18, No. 10 33
Raw
Score
Wght’d
Score
Raw
Sco re
Wght‘d
Sco re
Done Propos al Res pons e 4
50 200 50 20050 200 50 200
30 120 50 200130 520 150 600
Done Vend or Finan cial D ata 8
30 240 70 560
50 400 30 24080 640 100 800
Done Backg round Data 6
50 300 70 420
50 300 70 42070 420 50 300
Financial Statements Audited
Industry Software Development Experience
Section
Weight
Format ComplianceTimeliness
Business Partnering and CertificationsInternational Support
5D IDM
4.4
4.5
RFP
Ref. PROPOSAL CONTENT
Completeness
Financial Stability
4.6
Section Total
Section Total
1
2
3
4
5
6Incorporated client
template to PBS usingfunctional and
technical sections
Reviewed RFP contentwith client, incorporating
changes and builds
Removed functionaland technical sections
Developed a scripteddemo for client,
adding two sections:
• Strategic partners• Quality
After final review,RFP sent to SV1
and SV2 withtime-sensitiveexpectations
Vendors respond to RFP;proposals returned with reasonable time
expectations
PBS evaluated and scoredproposal content and
compliance to proposalrequirements
SEM
RFPrequesttemplate
Client-scripted
demo
Client-scripteddemo
Figure 1 — PBS’s Software Evaluation Model (SEM).
Weighting Scoring
2 = Minimal weight
4 = Low
6 = Medium
8 = High importance
10 = Mandatory requirement
0 = Response missing from proposal
10 = Does not meet criteria
30 = Minimal specification
50 = Meets criteria
70 = Exceeds criteria
90 = Outstanding functionality
Figure 2 — Client-approved weighting and scoring values.
TCO AnalysisSince the team had access to fairlygood historical cost data, we deter-mined that a TCO analysis with afive-year time horizon would beuseful for the client. We had accu-rate infrastructure configurationsand related cost data, including
network architecture. The detailedRFP gave us accurate licensing,conversion, and training cost data.
Based on the client’s historicalcost data and the vendors’ RFPresponses, the team showed thatSV2’s solution was $6 millioncheaper than SV1’s (see Figure 5).
Naturally, the team consideredthis a significant finding.
Implementation PlanEach vendor was asked to providethe implementation plan that theywould follow if they were the suc-cessful candidate. SV2 submitteda plan that was so high level as tobe meaningless from our point ofview; it gave us no clue as to howthe vendor would approach thereplacement of their competitor’shardware, software, and data. Butat least SV2 provided a plan — SV1elected to ignore the requestentirely. Therefore, SV2 took thiscategory by default.
Face-to-Face InterviewsThe client decided to conduct theirown face-to-face interviews withthe vendors. The client conveneda representative set of team mem-bers who had relationships with the
Missing product strategies severely hindersclient’s ability to plan future technology implementations.
RFPRef. Proposal Content
SectionWeight
RawScore
WeightedScore
RawScore
WeightedScore
SV1 SV2
4.11 Development and strategy
Five-year development plan
Plan effectiveness
Prior release support
Update history and plans
Section Total
Comments:
• No discussion with hardware/software vendors of future technology platform alignments.
• No discussion about using new/emerging standards such as .NET, Linux, XML, Web services, and EJB.
1,400
Figure 3 — SEM proposal content page.
100.0%46.3%40.0%11,4201,4109,8601,220
4.4%1,080 2.4%1.9%6001004808064.16
5.8%1,440 1.9%3.2%4806080010084.15
2.2%540 1.2%1.2%300503005064.14
23.4%5,760 6.8%5.2%1,6802101,28016084.13
5.8%1,4403.2%2.6%8001006408084.12
14.6%3,6005.7%4.1%1,4001401,000100104.11
7.3%1,800 3.2%2.6%80010064080104.10
5.8%1,440 3.2%2.6%8001006408084.9
11.7%2,880 6.5%6.5%1,6002001,60020084.7
8.8%2,1606.3%5.4%1,5601001,3208064.6
5.8%1,4403.2%2.6%8001006408084.5
1,080 2.4%2.1%60015052013044.4
RFP
Ref.
Raw
Score
Weighted
Score
SV1 SV2 SV1 SV2 Ideal
Raw
Score
Weighted
Score
Weighted
Percent
Weighted
Percent
Weighted
Percent
Weighted
Score
24,660
4.4%
Proposal Content
Section
Weight
Proposal response
Vendor financial data
Background data
Quality control
Partner assessment
Centralized/distributed environments
Development strategy
Migration strategy
Pricing
Contract for services
Global solution
Source code agreement
Proposal Content Total
SV2 accumulates highest point total.
Figure 4 — SEM summary page.
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vendors. The unanimous opinionfrom the vendor meetings was thatSV2 won the interview category.The SV1 group had displayed aconceited attitude about their cus-tomers and their product, and therewere serious disconnects betweenthe company’s rank and file andthe newly installed management.
The Customer PerspectiveThe team wanted to include a cus-tomer perspective of each vendor.Since there was a body of opinionsabout each of the vendors, it wasapparent from interviews with theclient that SV2 prevailed in the cus-tomer perspective category.
Functional Gap AnalysisAs each support staff had excellentsubject matter knowledge of thetwo packages, it was fairly easy toperform a functional gap analysisof SP1 and SP2. It was obvious thatSP1 included many more functions,and therefore it won this category.
Yet there were factors that the PBSteam felt mitigated the seeminglylarge gap in functionality betweenthe packages. For instance, thedesign of SP2 allowed customersto easily add to the base packageany functionality they required. SP1,on the other hand, was designedin such a way that it was difficultto add functionality, and it thereforehad a great deal of embeddedfunctionality that a specific cus-tomer may or may not need.Indeed, there seemed to be func-tionality in SP1 that no donor centerwould ever use.
FDA ApprovalBoth packages supported donorcenter management StandardOperating Procedures that wereapproved and validated by theUS Food and Drug Administration(FDA), so the evaluation teamcalled this category a draw.
Dismantling the Goalposts:Project ExecutionThe project team felt that themethodology we brought to theproject would have given the clienta complete picture of the requiredtradeoffs and enabled them tomake an informed decision aboutthe two software packages. As theproject progressed, however, werealized that the client had nointention of leaving the processalone.
It became obvious to the PBSteam early on that the client’smanagement was predeterminedto influence the decision toward
SV1’s package. This was not justclient bias, which we encounter atmany stages in our evaluations.Generally speaking, people want tokeep what they know, stay in theircomfort zone, whether it is good forthe company or not; we’ve come toexpect such resistance. This wassomething different. The clientbegan to alter our proposedmethodology, steering away fromany evaluation that would showtheir favored vendor in an unfavor-able light, such as structureddemonstrations of the softwareand anonymous surveys of the
Vol. 18, No. 10 35
SV2Cost Categories
Five-YearTCO Capitalized Year 1 Year 2 Year 3 Year 4 Year 5
vendors’ existing customer base. Allthe while, the client reassured theproject team that they were onlyaltering the methodology to savetime and money.
At the same time, unbeknownst tothe team, the client’s managementhad decided to retain the acquiredasset’s MIS director to be our SP2SME. This individual quickly dis-cerned the acquirer’s negative atti-tude toward SP2, and he was notabout to buck the majority decisionof those who had just hired him.From that point on, he no longerprovided good information aboutSV2’s product. We had to rely on hisnow ex-staff, who had also begunto suspect that the decision hadalready been made.
On the Merits:Our RecommendationPBS recommended that the clientimplement SV2’s offering. This wasbased on our objective review ofthe various categories the PBSteam had reviewed and evaluated.
Figure 6 shows that SV1’s productexcelled in only one category, thatof functionality. The PBS teamreported accurately that SV1 didexceed in this category. However,the team believed that the func-tional gaps identified were of mini-mal operational consequence,especially since SV2’s package hadbeen used to successfully managedonor centers nationwide for years.
You Can Lead a Horse to Water: The Client’s DecisionThe client decided to go against ourrecommendation and implementSP1 in the acquired donor centers.Their feeling was that by closingsome duplicate centers, thusreducing the acquired centersfrom 60 to 45, the TCO would bereduced to an acceptable level.The investment in infrastructurewas considered “free money,”since the corporate parent hadmade a large amount of fundsavailable to handle contingenciesrelated to the acquisition. Thisdecision turned out to have someunintended consequences.
THE AFTERMATH
Once the decision was made toimplement SV1’s package in thenewly acquired donor centers, anissue surfaced that brought theexisting donor centers to a full stop.The client discovered that theirdecision to use the centralized dis-tribution center, which was highlyintegrated with the SV2’s donorcenter software, would not workwith SV1’s logistical software.
The main problem was an obviousdiscrepancy between the six-digitbarcode used throughout SP2 andthe 10-digit barcode used in SP1.(Structured demos of the softwarewould have revealed this incompat-ibility, but as I mentioned earlier,the client’s management would notallow us to conduct them.) A previ-ous FDA consent decree meant thatthe centralized distribution centerhad only two options for solvingthe problem: maintain theircurrent system or use their manualbackup procedure, which, from aproduct volume standpoint, wasunworkable.
Each month, thousands of liters ofproduct passed through the distrib-ution center, where they werebatched based on protein and anti-body characteristics and sent eitherto the client’s production facility(where the products were used asfeed stocks for highly complexproducts for the medical industry)or to other pharmaceutical orbiotech companies. Production atthese facilities comes to a completehalt when the feed stocks don’tarrive. Unfortunately, PBS was
never asked to evaluate the integra-tion issues surrounding the donorcenters, the distribution center, andthe manufacturing plant. While theimpact of the barcode problem onthe downstream supply chain wasnot part of this case study, we mustassume it was considerable.
In fact, the incompatibility forcedthe existing donor centers to com-pletely alter their shipments to thedistribution center and plant facili-ties in both the US and Europe.This disruption lasted around sixmonths and cost the company anestimated $4 million in revenue.
The only viable solution was toimmediately install SV1’s logisticalpackage in every acquired donorcenter and at the centralized distri-bution center. This took around sixmonths and cost another $2 mil-lion. Remember, this was in addi-tion to the estimated $6 milliondifference in the five-year TCOthat resulted when the companydecided to convert the remainingacquired donor centers to SP1.In the end, client management’sbiased decision to implement SP1company-wide incurred $10-12 mil-lion in extra costs that could havebeen avoided had they chosen SP2,the objective winner of our exten-sive evaluation. Of course, our expost facto evaluation would nothave been necessary if the clienthad done IT due diligence in thefirst place.
LESSONS LEARNED
Clearly, IT due diligence should bedone prior to making the decisionto acquire an asset. Moreover, thisdue diligence should include allaspects of the information technol-ogy environment. IT is too inte-grated and too important for thefuture state of the company to beomitted from the due diligenceprocess or for that process to berestricted or compromised in itsscope.
Oftentimes, people assume that“to the victor belong the spoils.”But just because the acquirer wassuccessful, it does not necessarilyfollow that they have the best tech-nology and processes. Only anunbiased evaluation can make thatdetermination. Engaging an inde-pendent third party to give you atruly objective evaluation can coun-teract inhouse bias, hidden agen-das, and rank incompetence.
As PBS’s experience shows, how-ever, the time for this evaluation isduring the due diligence phase,when the management team isusually much more motivated totake an objective view of the assetand the situation surrounding thedecisions being made. By the timewe were called in to do the evalua-tion in this case, the winner hadalready been determined. What theclient’s management was lookingfor was justification for their deci-sion, not the best decision for thecompany.
Even though the IT due diligenceprocess may not alter the decisionto buy an asset, it can influencewhat the acquiring company offersfor that asset. The budget for effec-tively integrating the acquiredcompany must contain an objectiveestimate of IT integration efforts. ITdue diligence can also have a sig-nificant impact on how long it takesfor the company to achieve itsmerger objectives. With IT becom-ing more and more integrated intothe fabric of business, especiallywith large international enterprises,the transition services that must bein place on day one can be devel-oped as part of the IT due diligenceeffort. For all these reasons andmore, IT due diligence is money,time, and effort well spent.
Reagan George is a Partner withParagon Business Solutions, Inc., acompany that focuses on specific man-agement priorities such as M&A due dili-gence, especially in the operational andIT functions; business strategy; IT align-ment; and operational improvements.
A common mistake in project man-agement — whether the initiative isas large as a corporate merger or assmall as installing a new softwarepackage on 20 computers — is thelack of consideration of the humanfactors related to IT employees.Without effective human needsanalysis, you’re likely to run intoan invisible brick wall. This wall isinvisible because we do not con-sider it a factor, but it is an impor-tant factor just the same.
Imagine this scenario:
You are Sandra Teaford, the ITdirector for a large company thathas just acquired another smallercompany. Your organization,Overhead Cables 4U, developscabling used in the manufactureof garage doors and other pulley-driven doorways. The companyyou’ve just acquired, The CabledWarehouse Company (TCWC), wasa direct competitor within the nichemarket of large warehouse over-head doors. You’ve been asked tomerge the information systems ofthe two organizations, with a focuson consistency across the eventualjoined entity. TCWC will be oper-ated as a separate division of theorganization with their own IT staffand will take over all large ware-house overhead door business.
As your first act, you meet with theIT manager of TCWC to discuss thesystems currently being used andtheir preexisting plans for the future.Your organization is primarily aMicrosoft shop, and you quicklylearn that TCWC uses Novelltechnologies, as well as Linux.Foreseeing a compatibility issuebetween the systems, and knowingthat TCWC has just 327 desktopcomputers and 18 servers com-pared to your 2,100 desktop com-puters and 136 servers, you decideto force a conversion to Microsofttechnologies in the newly acquiredcompany.
The merger seems to be going welluntil you enter your office one dayto see a copy of the most recentfinancial reports for the WarehouseDoors division (formerly TCWC).According to the report, earningsare down by 37% for the mostrecent quarter, and production isdown by 31%. There is a noteattached asking you to stop byyour CEO’s office.
When you walk into the office, theCEO directs you to sit down andbegins to communicate the state ofthe Warehouse Doors division. Hesays that there seems to be tremen-dous resistance to the new networkand wants you to resolve the prob-lems within 60 days. He also tellsyou, “It’s not just the users. The IT
manager tells me that the morale ofthe techs is very low. We’ve got todo something about this, Sandra.”
What happened? The answer, inthis case, is simple. Sandra did notdetermine the requirements for theIT systems in the TCWC organiza-tion, and, specifically, she did notconsider the human needs of the ITprofessionals. She probably alsoassumed that since the parent com-pany had so many more desktopcomputers and servers that it waslogical to convert the smaller com-pany to the Windows platform.While this assumption is oftentrue, it does not allow for the realitythat IT employees are humans,and humans often have difficultydealing with change.
REQUIREMENTS AND HUMANNEEDS ANALYSIS (BRIEFLY)DEFINED
A requirement is something thatmust be in the final product if it isto provide the expected value.Requirements analysis, then, is theall-inclusive process of determiningthe requirements of a project. Thisincludes requirements discovery,categorization, and feasibility analy-sis. If you want to get an ROI fromyour requirements analysis, youwon’t want to skip any of thesesteps.
The Importance of Human Needs Analysis in the Due Diligence Process
by Tom Carpenter
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By human needs analysis, I meanthe analysis of the needs of thosewho must accept your systems andsolutions. To be successful, yoursolution must help the IT profes-sionals involved to:
1. Achieve results
2. Build relationships
3. Have security
4. Receive recognition
These four core human needs mustbe met, and your solution should bepresented in a way that logicallyaddresses these needs.
Feasibility AnalysisPart of both requirements andhuman needs analysis is feasibilityanalysis. This is where, in the mostbasic sense, we ask: Is this solutionfeasible? Can it be done with con-sideration of the technical require-ments and human needs?
There are many methods andprocesses used in requirementsanalysis, and there are equally asmany good resources to help youmaster these. Therefore, I want tofocus on human needs analysis forthe remainder of this article.
I believe feasibility analysis is themost important part of require-ments analysis and that it plays acrucial role in human needs analy-sis. The reason can be summed upin the words of Daryl Conner, fromhis enlightening book Managing atthe Speed of Change: “To managechange well, you must use soberselling as your approach” [1]. Inother words, don’t overpromisewhen it comes to what your IT
project will deliver. It is tempting topresent your solution and simplyexpect the IT employees to acceptit without winning them over. Whilethis behavior might save you from abattle and much effort today, it willcreate a greater war tomorrow, onethat you will ultimately lose.
To perform feasibility analysisrelated to human needs, answerthe following questions about eachtechnology change you are making:
Is there a clear plan thatdemonstrates milestones anddeadlines? (results)
Do strong relationships exist inthe current work teams? If so,can the relationships be lever-aged? If not, can you createnew teams and foster relation-ship development amongthose teams? (relationships)
Do you have a communica-tions plan that clearly outlinesthe roles of all individuals inrelation to the new system?(security)
Is there an opportunity for peo-ple to receive recognition asyou evolve through the systemimplementation or corporatemerger? (recognition)
This list of questions will get youstarted, and I’m sure there are oth-ers you’ll need to ask in more spe-cific situations. As you can see,feasibility analysis forces you to asksome hard questions about yourenvironment and, more specifi-cally, your technology profession-als. The focus is on the four corehuman needs that we can logicallyaddress in the workplace.
The result of feasibility analysis willbe, almost without exception, thediscovery of human needs thatmust be addressed. The deliverableof this feasibility analysis should bea strategic action plan for dealingwith the human needs surroundingyour project. This action planshould include:
A strategic communicationsplan
A team-building plan
An implementation plan
The strategic communicationsplan will include the core of yourmessage. This message should beshaped in a way to foster interestand desire and to provoke as littlerejection as possible. The strategiccommunications plan should alsoinclude the people who must beinvolved in the communicationsand at what stage they should beinvolved. Recognition-orientedemployees will benefit from thisplan’s focus on recognition eventsthroughout the project’s lifecycle.
Your team-building plan will out-line opportunities for team-buildingamong existing and new teams.These events do not have to beexpensive offsite investments. Theycan be as simple as coding compe-titions and team meetings. These
team-building opportunities willhelp keep the relationship-orientedemployees’ commitment levelshigh.
The implementation plan servesan extremely important role. Itclearly communicates when majormilestones and key deadlines willbe reached throughout the mergeror implementation project. Thisdocument will benefit those witha results orientation. Those with asecurity orientation will be helpedby knowing the role they will play atkey points in the project.
Together these three documentswill help you bring continual focusto the four core motivators.1
ANALYZING THE FAILED MERGER
Now let’s go back to the failedmerger between Overhead Cables4U and TCWC. There are many rea-sons why merger and acquisitionprojects fail in the IT portion of theendeavor. I’d like to cover threesuch reasons and show you howto avoid them in most situations.These three reasons are:
1. Ignoring the IT culture
2. Overlooking the in-placetechnology
3. Underestimating the impact ofthe project
Ignoring the IT CultureOne of the most frequently over-looked areas of analysis is thatof subcultures, which is a veryimportant factor for those of us
in IT. This is because different ITgroups have very different cultures,and the culture of any particular ITgroup is usually different from thatof its host company.
If you are involved in a corporateacquisition or merger, you mustconsider the cultures of the ITgroups in each company. A com-pany’s culture is composed of itsshared beliefs, behaviors, and val-ues. Within IT, this includes ourchosen toolsets, because we forma strong attachment to the toolsetswe use most frequently. I’m sureyou’ve seen or heard of a Linuxtech who swears no other technol-ogy is useful or a designer whoinsists that you just can’t designeffectively on a PC as opposed to aMac. The reality is that we becomebiased toward what we are mostcomfortable with, to the pointthat we do not really look at thealternatives.
It is also important to recognize thelink between this behavior and theneed for recognition. If we reject atechnology that our IT professionalsare committed to, they feel we arerejecting them and, therefore, notrecognizing the value they bring. ITprofessionals can become highlycommitted to a technology, just asdoctors or lawyers can becomehighly committed to a solutionrelated to their profession.
My background is in managing net-work infrastructure and operatingsystem rollout projects, as well assoftware development. Becauseof this, I have maintained mytechnical expertise over the years.However, this technical expertise
is in the area of Microsoft tech-nologies, because that is whatI’ve used in all the environmentsI’ve supported.
Some years ago, I had the opportu-nity to compete with a Unix guru in ashowdown at a weekend user groupevent. We were asked to bring ourcomputers and be prepared to “one-up” each other. The Unix guruwould perform something on hiscomputer, and then I would have todo the same. In 10 iterations, he wasunable to stump me.
Next, it was my turn. I was sure Iwould stymie him as I jumped intothe graphical interface. After all,this is the advantage and power ofWindows over Unix. After 10 itera-tions of my best tricks, however, hewas also un-stumped. In the end, itwas a stalemate. The only thing weproved was that neither of us knewmuch about the other’s favoriteoperating system.
This story illustrates how commit-ted to their preferred systems ITprofessionals can be. In our mergercase study, it is highly possible thatthere was great resistance to learn-ing the Microsoft technologies overthe Novell or Linux systems. It isalso possible that TCWC’s ITgroup put little effort into usingthe Microsoft technologies in orderto “prove a point.”
Overlooking the In-PlaceTechnologyIt is very important to rememberthat people do not always use tech-nology in the way we think theywill. This is significant in situationslike our case study merger. The
1For more information on the four coremotivators, see [2].
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Novell and Linux systems may behighly customized, offering capabil-ities to the user community thatcannot be provided withouttremendous learning curves in theMicrosoft environment. Remember,capability is the combination oftechnical ability, system features,and willingness. If you are willingand the system has the features butyou lack the technical ability, youare not capable. This is a commonoccurrence in corporate mergerswhen one entity is forced to adoptthe systems of the other.
You must also look at the user com-munity more directly. Users mayhave invested great effort to masterthe interfaces to the existing sys-tems. Will they be willing to investthat effort again to reach the samelevels of efficiency with the newsystems? The commitment of theuser community cannot be over-looked. There have to be com-pelling reasons and tangiblebenefits for users to stop what theyare doing and make large-scalechanges in how they operate.
Underestimating the Impact of the ProjectThe third and final possible reasonfor failure that we’ll look at is under-estimating the impact of the proj-ect. There are multiple points ofimpact that must be considered,some of which were discussed inthe previous section. These impactpoints include:
When I talk about the user and ITcommunities being impacted in apractical way, I am referring to theimpact the merger has on themoutside of their emotional or socialrealities. In other words, if they areexpected to use a different tech-nology that requires four steps todo what used to be done in three(assuming the steps take the sameamount of time), they cannot beexpected to perform at the samespeed.
The procedural impact may alsorequire changes to non-IT equip-ment or facilities, such as packingequipment or room size. This hasto do with the fact that a change inprocess may demand a change inphysical space requirements.
Technical impact points are usuallythe easiest to analyze, but theymust not be overlooked. Will thecurrent infrastructure provide theneeded bandwidth? Will newerauthentication methods be neededto provide security across the newWAN? Technical impact points canbe very expensive on paper, but Iwould suggest that the greater costis often in the user and IT commu-nity impact areas.
AVOIDING FAILURE
We’ve now seen the three likelypoints of failure in our case study.How can we prevent these failures
through the effective use of humanneeds analysis?
Requirements analysis will demandthat you discover the needs of bothcompanies from a technologicalperspective. The very processof this investigation shows theacquired company that you careabout their needs, and this willhelp reduce the levels of resis-tance. However, it will not beenough if you do not conducthuman needs analysis.
When merging two or more IT cul-tures, the project managers musttake into account the feelings ofall groups. There will be fears andconcerns that should be addressed.Managers should make an effort toinventory the skills of all IT employ-ees and determine how those skillscan be used in the most effectiveway. The most important thing toremember is that IT professionalscan become very committed to atechnology, and taking it away fromthem completely can cause themto disconnect from the organiza-tion. This disconnect will result inlowered productivity and, possibly,the loss of some employees. WhileI am not suggesting that all tech-nologies should be maintained,I am suggesting this must be
considered when an IT professionalwill be retained as an employee.
As part of due diligence, ensure thatyou include people in your require-ments analysis. Human needsanalysis can be seen as indepen-dent from requirements analysis oras a subset of the same. Howeveryou look at it, if you need high pro-ductivity levels, you will need highlevels of morale, and thus theseIT culture issues will become avery important part of your projectplanning.
Requirements analysis will revealthe ways the existing technology isbeing used. This will force you todo the opposite of “ignoring in-place technology.” As you analyzethe existing systems, you will deter-mine the requirements of futuresystems. You will also uncovermany human needs issues in thisprocess.
The third problem, underestimatingthe impact of the project, will bediminished greatly by the process
of requirements and human needsanalysis. While you are performingthis analysis, you are painting adetailed picture of the impactthe project will have on theorganization.
CONCLUSION
Without effective human needsanalysis, IT projects are set up tofail. This is particularly true in M&Aprojects, but it is not limited tothese large-scale situations. Thisanalysis will help you solidify thedemands of the project, limit thescope throughout the work cycle,and communicate a realistic pic-ture of what your project canprovide.
IT really can make the differencebetween success and failure in anM&A. When effective requirementsand human needs analysis tech-niques are employed, the IT depart-ment can bring great value to theprocess and assist in a smoothtransition to the future.
REFERENCE
1. Conner, Daryl R. Managing at theSpeed of Change. Villard, 1993.
2. Rockhurst College ContinuingEducation Center. How to Workwith People: Understanding TeamDynamics. National PressPublications, 2000.
Tom Carpenter is the President ofSYSEDCO, a training and consultingfirm located in Springfield, Ohio, USA.Mr. Carpenter is the author of ProjectManagement for the IT Pro andCommunicating IT: PowerfulCommunication Skills for ITProfessionals. As a public speakerat more than 40 events each year,Mr. Carpenter provides insights andsolutions for today’s IT professionals.His project management and profes-sional development seminars, designedspecifically for IT experts, are taking theIT profession to the next level.
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IT Due Diligence in M&As: MinimizeRisk and Maximize OpportunityIn far too many mergers and acquisitions(M&As), companies conduct only legal andfinancial due diligence — but rarely evalu-ate their IT exposures. However, with busi-ness units more dependent on technologythan ever before, it is especially important to conduct IT due diligence during an M&Ato ensure the continuation of operationsduring and after the transition.
The new Cutter Consortium report IT DueDiligence in M&As: Minimize Risk andMaximize Opportunity by Mike Siscoexplains the importance of IT due diligenceand guides you through the seven essentialsteps for conducting an effective, successfulIT due diligence assessment in your organi-zation. Whatever role your organization isplaying during the M&A, you’ll walk awaywith three IT due diligence deliverables —budget data, the IT due diligence report,and a technology transition and supportplan. And you’ll learn how these deliver-ables will help you effectively operate andmanage the technology resources of yournew company.
This report will help you:
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Avoid risk and take advantage ofbusiness opportunities.
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Mike Sisco is the CEO andfounder of MDE Enterprises,Inc., an IT managementtraining and consulting com-pany. Prior to starting MDE,Mr. Sisco was an IT manager
and CIO for more than 20 years. He hasled more than 40 IT due diligence projectsand has developed multiple processesand tools.
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