Pre-merger IT and business process due diligence: look before you leap.Not long ago, a successful and ambitious insurance provider embarked on a strategy of acquiring a number of its smaller competitors, promising shareholders a strong return as a result of synergies in the companies' products and client bases. In each acquisition scenario, the company conducted the requisite legal and financial due diligence. But its pre-acquisition analyses skimmed over one critical factor: the back-end systems, technologies, and business processes that ran each of the companies it was acquiring. In fact, the company soon found the back-end systems and processes so diverse and difficult to integrate that it effectively ended up running each of the acquired organizations as separate units. So while the company was able to consolidate the financial statements of its holdings, it could not consolidate operations. Bogged down by excess infrastructure and staff, it failed to deliver the synergies and return on investment promised to its shareholders, and eventually it went out of business. This unfortunate but true story illustrates one of the most common reasons that business combinations fail to live up to expectations: the inability to standardize business processes and systems once the deal is consummated. Merging operations, but at what price?Technology and business processes must be a key part of pre-merger due diligence. Incorporating this analysis before finalizing a deal or a deal price can determine whether systems are compatible and up-to-date, or whether the real cost of the acquisition may be much higher due to a variety of risks, including: - Proprietary or custom systems that will be difficult to integrate.
- Systems or key applications supported by a vendor that is no longer in business.
- Poor quality or inconsistent data.
- Difficulties in accessing data.
Identifying potential process and technology issues up front enables the acquiring organization to establish a deal price that is realistic and accurately based on the costs that will be incurred during post-merger integration efforts. And it will help avoid situations, such as the one above, where significant incompatibilities make it next to impossible to combine operations without severe disruptions to service. Evaluating IT from all angles.A comprehensive review will examine the information technology/services strategy, people, process, and technology facets of a prospective acquisition, as well as factors such as the processes that drive information-based products and services. Strategy A review of the organization's IT strategy will define the role that technology plays in shaping the company's future and supporting its operations, as well as the value it creates for the organization. This review considers such questions as: - Is the company's IT strategic and a source of competitive advantage, does it simply exist for office automation and support, or is it somewhere in between?
- To what extent is the business highly transaction oriented or information/data rich?
- Does the business have a formal, documented technology strategy?
- What are the company's three to five year projections for customer accounts, transaction volumes, data volumes, end users, etc.?
- What IT-based intellectual property -- e.g., patents, trademarks, techniques, tools, software, etc. -- does the company own, and what safeguards are in place to protect that property?
People Assessing the organization's IT structure, skills, and research and development capabilities will provide insight into scope of effort required to integrate teams, cultural differences, future training requirements, and other factors affecting the cost and timeframe for transition. A comprehensive review will address questions such as: - Is there a formal organization chart for the technology function?
- Do staff members have job descriptions?
- Do technology teams currently operate in a centralized or decentralized manner?
- What are the current skill levels?
- Do staff members hold the right certifications, training, etc.?
- To what extent does the organization rely on third parties (vendors, contractors, consultants, etc.)? What agreements are in place?
Processes Understanding the organization's processes for supporting internal systems and products will project the potential ease or difficulty of merging operations. Questions to ask include: - Has the organization documented its processes for systems development, testing, deployment, security, change control, capacity planning, or other processes?
- What security policies, processes, and tools are in place?
- Does the company have hardware and software standards, and does it enforce them?
- Does the company have adequate documentation for custom applications?
- Are there service level agreements or commitments in place with the business, end users, or external customers?
Technology Finally, creating an inventory of the company's technology assets will provide a basis for defining post-combination technology standards and for estimating the effort involved in combining operations. This involves asking questions such as: - Does the company have a complete inventory of its business-critical applications?
- How do customers or business partners access the company's systems?
- To what extent does the company rely on custom or proprietary systems?
- What type of remote access technology is in place?
- What are the operating systems and versions of the servers and desktops?
- What is the connectivity between locations?
- Are there current system performance or reliability issues?
- Does the company have current and valid licenses for its third-party applications?
Deliver on the expectations.Technology and business process due diligence is every bit as important as the legal and financial reviews that a company undertakes when considering an acquisition. But many organizations look past the practical issues to the potential financial benefits -- often making costly assumptions about effort required to standardize and combine operations following a deal. It is not difficult or necessarily time consuming to implement a comprehensive review of the target's technology and business processes. A planned approach and the right list of questions will make it easier to evaluate a potential combination and plan for integration. At a minimum, it can help arrive at an acquisition price that reflects the realities of combining entities or determine whether the deal is worth pursuing in the first place. Beyond that, it can jump-start the integration planning process, enabling the merging organizations to move more quickly toward delivering the synergies that brought them together in the first place.
West Monroe Partners helps organizations evaluate business technology and processes, and consolidate and standardize operations to achieve organizational goals. For more information, please contact
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