Integrating IT: The Real Lessons Are Learned After The Merger


The past few years have brought about many sweeping and costly changes to the
energy industry. Post-merger power companies in particular are reeling in a
business climate inundated with complex issues. The unexpected effects of deregulation,
convergence, Web-enabling technologies, and the advent of new competition via
new spin-offs and fresh start-ups has merged and/or acquired businesses wondering
how to achieve and sustain the speed, effectiveness and value to realize post-M&A
IT integration.

Most businesses think that the right solution is to seek economies of scale
via the elimination of process redundancies that will, in turn, allow for a
significant reduction in labor costs. But the truer, perhaps longer lasting,
solution is the one that provides the right mix of process, application and
emerging technologies, and combines them with effective program management of
the entire process. In order for program management to be successful, a clearly
defined set of integration initiatives or projects must be thoroughly planned.
This initial planning is critical to the success of the merger, because it aligns
the strategy, processes, organization, and technology of the companies to help
ensure they achieve the merger’s objectives.

How long after a merger or acquisition should IT integration be considered?

IT integration planning should begin during the due diligence process. It is
critical that the costs and savings associated with IT integration are assessed
in great detail when organizations consider the feasibility of a potential merger.
The reality is that M&A integration costs associated with IT (both infrastructure
and application integration) are usually 45 to 65 percent of the integration
budget, and can account for as much as 35 to 55 percent of the synergistic savings.

Although it is difficult to quantify the American energy players currently working
on post-M&A IT integration initiatives we can certainly say that:

1. Every one of these companies will have undergone some type of post-merger
activity during the transitional period; and

2. Most IT integration activities continue 12 to 24 months after the merger
is closed, depending on the level of integration that is sought.

How does a company determine priorities and then develop a game plan?

In a typical merger, IT integration activities can be classified into three
broad categories: process, application, and infrastructure. Process integration
activities are focused on identifying common or new business processes that
will be employed by the combined organization. These process definitions then
need to be supported through an integrated set of applications. For example,
a common, centralized accounts payables process is identified while an integrated
AP application (usually in the form of an ERP) facilitates the fulfillment of
these processes. The third component is ensuring that the technical infrastructure
is available to enable the application integration. In this example, network
connectivity and bandwidth would be critical to support a high-volume common
AP environment.

The integration project itself should follow a five-step approach:


Understand Strategic Positioning

Without a doubt, solid leadership is the most important key to success and
must be identified and fully dedicated from day one. These leaders will institute
the strategic vision of the organization. This will enable the project team
to align the strategic objectives in processes, application and infrastructure
with the planned IT integration initiatives to achieve the defined synergy savings.
Key business and technology leaders are also identified and formal decision-making
and governance processes are adapted.

Synergy Validation & IT Review

Here, team leaders review the identified synergy savings figures with the appropriate
integration team members. This information will be critical during the cost
and resource review phase, as significant cost justification is usually required
to proceed with IT integration projects. A critical component to the overall
IT initiative-planning effort is identifying the estimated capital and recurring
costs for each integration project. Since a significant percentage of this cost
typically involves technical infrastructure-related items (e.g., hardware, network
upgrades), it is important to have a comprehensive understanding of the current
IT environment for both organizations.


Figure 2 – Synergy savings cannot be achieved without fully aligning all parts
of the integration effort.

Develop Integration Plans

During this phase, the team will assess and evaluate each integration project
for impacts, dependencies, and cost factors in several areas including business
processes, infrastructure, applications, and data security. A detailed work
plan is developed that includes complete resource-loading, skill set requirements,
and dependency identification. A risk assessment for the project is also developed
that documents risk-mitigation suggestions and contingency plans if appropriate.
Once a detailed initiative plan has been reviewed and accepted, it is linked
back into the overall IT master schedule.

Cost & Resource Review

A human resource plan is developed and determinations are made in regard to
future staffing needs. While the estimated cost for the integration projects
and the potential synergy savings were documented and reviewed during the integration
planning phase, here these costs are reviewed from an overall perspective. If
a significant variance exists between the initial synergy savings and cost estimates
and the values produced by the project team, the estimating metrics and cost
factors are revisited and appropriate adjustments are made.


Now it’s time to see if all of the analysis, preparation, leadership decisions
and project plans have paid off — it’s time to implement. Leaders will
execute their organization’s realignment communication plan and implement all
targeted organization, process, and technology changes, including e-business
tools. Business process validation is conducted and KP/CIs are tracked. Post-implementation
support is also provided as necessary.

It is important to note that while the overall approach to a post-M&A IT integration
is often the same, the decisions of what to integrate differ between organizations,
and rely largely on both strategic business decisions and the amount of synergy
savings enterprises have agreed to deliver to stakeholders.

What is the time frame for a typical post-M&A IT integration effort?

Of course, this number varies according to the level of integration achieved,
whether all of the projected targets were accurately met and if schedules were
strictly enforced. However, for optimal results, integration planning should
begin during the due diligence process (pre-deal) and should be completed 18
to 24 months after the deal is closed. Activities that extend beyond 24 months
of post-close may not be considered true integration activities.


What are the pros and cons of a comprehensive IT integration?

Although it is somewhat difficult to completely categorize results as either
pro or con, outcomes could be considered as perceived rewards, and the risks
and challenges commonly associated with a comprehensive IT integration.

Most evident are the rewards that come in the form of bottom-line, hard savings
derived from FTE (full-time equivalent) reductions that could only be achieved
through comprehensive systems consolidation. IT operation, and operation and
maintenance (O&M) costs are substantially reduced. Another equally tangible
benefit is that common business processes are more easily enforced through common

Still, risks and challenges need to be carefully considered. It is quite possible
that integration activities might take as many as two to three years to complete
— diverting resources from new business ventures during this time. IT integration
also commands an up-front investment, and a strong business commitment is critical
to undertaking a successful IT integration project.

What are expected cost savings?

Cost savings can typically be divided into two areas: core IT savings (e.g.,
data center consolidation, platform consolidation, etc.) and business savings
from IT integration/consolidation (e.g., FTE reductions from consolidating the
AP department into a single system).
Business savings are usually directly related to the synergy savings documented
in merger filings. With the regulated utilities, additional savings are often
considered “bad” because they need to be passed on to ratepayers and cannot
be retained and/or reinvested by the organization. For example, while one merger
recently agreed to deliver $170 million in savings over three years with $100
million in the first year, another has said that they will deliver little or
no savings.

What key metrics are put into place to measure success?

A key metric is the ability to achieve targeted synergy savings. This can be
measured, for example, through FTE reductions or the ability of the organization
to successfully function under the reduced post-merger budget. Often, individual
integration projects will develop their own set of metrics. For example, a consolidation
of a financials system may have a metric of reducing the monthly closing cycle
by two days.

How much does a large-scale integration cost?

In our experience, we have seen such projects range from as little as $15 to
20 million to many more tens of millions of dollars, depending on such diverse
factors as the size of the merged organizations, the level of integration needed,
the anticipated savings from FTE reductions and consolidation of infrastructure/processes,
and the levels of technology to be instituted.

All post-M&A IT integration teams must focus on two things: capturing the benefits
and integrating the business. In order to capture the benefits, the enterprise
seeks to achieve business value goals as quickly as possible by driving short-term
value and exceeding the market’s expectations. Integrating the business essentially
translates into a seamless implementation of combined day-to-day operations
and positioning the enterprise for future growth.

Success is evident when the newly merged business can produce prioritized plans
to reap the benefits and post-merger integration checklists. Misalignment between
the IT initiatives and the overall business strategy, process, and organization
will prevent the realization of synergy savings. With a sound strategic enterprise
architecture approach, proper alignment can be achieved, resulting in realization
of the synergy savings.


Post-merger IT Integration can often be the Achilles heel of merger integration;
however, it also offers the potential for enormous value creation. Planning
for IT integration must begin during the due diligence process and a target
budget should be established. This budget should be balanced with the amount
of synergy and cost savings that have been identified. By following a structured,
methodical approach to IT integration that involves the appropriate alignment
of business strategy, process, organization, and technology, the organization
can reap the benefits of — and capitalize on — the post-M&A IT Integration.

“Lessons learned” that we have passed along to clients

1. Synergies are always initially overestimated and the effort to achieve them
is always underestimated.
2. Top management must support the business objectives that drive IT application
3. The IT integration process will always take longer to complete than originally
estimated. The biggest delay comes from the business’ inability to make timely
decisions. Understand your dependencies and be able to clearly articulate them
to management.
4. Start contract negotiations with software/hardware vendors earlier. Don’t
wait until after close when time is no longer on your side.
5. Have a clear understanding of the cost breakdown for each integration project;
you will be asked multiple times to justify and/or revise them downward.
6. When planning integration projects, have a clear view of the resource requirements
and constraints for each organization. Do not over-allocate them.
7. Business decisions must drive application integration decisions. A balance
must be achieved between operational efficiency, implementation costs, and synergy
8. Communication is critical. You can never overcommunicate.
9. The close date can change two or three times. Have a flexible plan that can
easily be modified to different scenarios.
10. Don’t underestimate the resistance and negativity you will get from the
acquired organization. This must be monitored through a change management process.