One of the common regrets we often hear from senior executives during surveys and internal M&A capability assessments is that they “throttled back” on integration efforts too quickly post-closing. Meaning, they achieved short-term integration success, such as we have previously defined as “steady-state operations,” (See Getting Operational Cut-Over Right) but failed in many of the more important longer-term value-capture initiatives.
We believe at least part of the reason for this tendency, with respect to IT anyway, can be attributed to misunderstanding the important differences between IT integration and rationalization. To help address this challenge, I’d like to share part of a continuing conversation with my colleagues, John Sinkus and Doug Picirillo, whom I introduced last week. Briefly, John and Doug are two of our key IT due diligence and rationalization practice leaders at M&A Partners, and both are thirty-year veterans of the IT and M&A sectors. When they speak, I listen -- and learn -- so I thought you would be interested to hear what they had to say recently on this topic.
MH: Doug, you make an important distinction between IT integration and rationalization. Tell us more about that…
"Long-term value capture isn't complete until your IT ecosystem is optimized."
DP: IT integration and rationalization are very closely related, but not exactly the same. In our view, integration is primarily about getting to steady-state operations. But you can effectively integrate two organizations without achieving some of the most important synergies. This is especially true when both predecessor organizations have built-in inefficiencies. Rationalization is the process of identifying and eliminating the inefficiencies that come from redundancy, overinvestment in low-utility solutions and other causes both in newly-combined organizations and in mature entities.
Your point about executives stopping too early is very true. IT rationalization is the logical end of an M&A integration journey. Achieving steady-state operations should ordinarily be viewed as an important milestone outcome, but not “integration complete.” Long-term value capture isn’t complete until your IT ecosystem is optimized. That’s the job of rationalization -- wringing out the redundancies and needless complexities.
I should point out one other aspect. Generally speaking, this shouldn’t be viewed as an “either/or,” but as a continuum along the M&A lifecycle as illustrated in IT Integration vs. Rationalization. The first chart also points out the important linkage that everything must be directly driven by the business and strategic requirements. This establishes the IT requirements and priorities. Once that is accomplished, integrate first, then optimize.
MH: John, one of the most challenging aspects of integration is getting at the long-term value drivers, when so many of the organization’s resources and priorities are focused on short-term integration or achieving steady-state operations. From an IT perspective, what’s the strategic payoff? What should executives be thinking about as possible outcomes from IT rationalization?
JS: Doug has already mentioned a couple of the most common objectives – reducing the cost and complexity of IT. These are hugely important objectives, and generally produce substantial savings. For example, we have seen typical savings of 30% on IT technology spending; data centers reduced by 90%; and application portfolios shrunk to 40% of their previous size. All of this adds up to reduced complexity, which means improved manageability, and less management attention spent on “run and maintain” activities. It frees IT leadership to spend more time thinking about enabling competitive differentiation and innovation.
Along with improved manageability comes improved delivery speed, which also better enables the business to compete. When you add in improved governance and standards-based technology decision making, the IT organization becomes better equipped to focus on the most important and strategically significant priorities. Done right, and as we point out on slide two of IT Integration vs. Rationalization, we believe executives should view IT rationalization as one of the most important strategic initiatives they can do.
MH: How should executives get their arms around the budget, time and overall process requirements of rationalization?
DP: The answer can vary widely, depending on the scope and scale of the business and the IT environment, the availability of internal resources with strategy and architecture experience, and other factors. Typically, the effort is broken down into phases. In the early phases, which are measured in weeks or months, we work with the client to create a vision of the rationalized future state environment, and along with that, an executable roadmap – a strategy for getting from where they are to where they want to be. We align the IT roadmap with the business roadmap, and the business expectations for ROI and value creation horizons. That is, if the ROI of an M&A deal depends on getting to a steady state in 18 months and a rationalized state in 36 months, we accept that as a planning constraint.
Once we get tactical, there are many ways to structure the project teams. Some organizations can absorb most of the project work in their internal centers of excellence, by limiting other work to critical “run and maintain” requirements. In most cases, however, the heavy technical work is better performed by external advisors and contractors. It is very rare that an organization can do this entirely on their own. Often the internal team just doesn’t have the time or the tools.
With the right blend of internal and external resources, with great planning and execution skills, organizations can see benefits that meet and exceed strategic commitments. For example, in one recent project, the year-one impact was four times greater than the total project fees incurred.
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