Strategy is critical for melding technology during acquisitions

by Michael Sisco | Dec 18, 2002 8:00:00 AM

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Takeaway: Managing a technology meld in a merger/acquisition requires a set strategy before making any decisions. The strategy determines which technologies you'll keep, which you'll dump, and how to make sure the decision benefits the organization.

I recently mapped out the three rules CIOs should follow when managing the personnel aspect of corporate acquisitions. The flip side of the assimilation equation is managing the technology in the merger/acquisition environment—such as deciding what to do with duplicate systems.

The most critical step is developing a strategy before making any decisions. CIOs know that running a newly formed company from the same set of business applications provides many benefits: lower support expenses, the ability to measure performance with the same parameters, and the productivity advantages of one system over the other.

You know that business applications are not created equally, and preference for one over another likely depends on user familiarity. However, making an objective evaluation and deciding which one to use is not always straightforward.

In the early 1990s, I worked for a healthcare company that acquired more than 35 companies in a five-year stretch. In every case, the acquired company used a medical billing application to support its operations. With almost every acquired company, the users at that company believed that their billing application was superior. The decision-making was quite a challenge.

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Missed a part of our due diligence series?
Catch up with the first five articles in the series:

• “The art of technology due diligence”: Learn the basic approaches to performing due diligence following a company acquisition.
• “Preparing for IT due diligence”: Understand the key assumptions, specifically as they relate to the company’s technological capabilities or dependencies, and the importance of using a Technology Due Diligence Request list.
• “IT due diligence: The on-site discovery visit”: Because no two due diligence projects are the same, it’s important to have a plan for the visit. Sisco explains how to formulate a plan of action for the due diligence on-site visit to make sure your investigation is complete.
• “Write an effective IT due diligence report”: Creating a concise report that summarizes findings for the CEO and board while including enough detail for future reference isn’t easy. This installment provides a report template to help you organize the details.
• "Three rules for successful staff assimilation in an acquisition": The big key to success in IT staff assimilation during a corporate acquisition is creating a strong plan relating to staffing requirements and decisions.

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Without a business applications strategy in place, users will have more opportunity to argue for their own application. What most users don’t realize are the many challenges involved in migrating to any new business application—training, file conversions, and productivity loss due to the learning curve. There might even be loss of revenue or increased operations expense due to conversion problems.

Developing the right strategy
So, how do you develop the best strategy? Here’s an example that might help:

Assume three healthcare billing companies are being acquired by one enterprise. These are the dynamics related to their primary business software, a billing application (see Figure A).
Figure A

Issue Company A Company B Company C Revenue $100 million $50 million $10 million EBITDA 11.5% 13% 15% Number of clients 150 75 10 Billing offices 18 15 2 Number of employees (users) 120 65 16 Electronic interfaces 50 25 10 Systems capacity Good Poor Poor

Understand upfront that there is no simple way to decide on the best application to build the future of the business on. You must weigh all the variables. Looking at these three companies and their possibilities, I would ask the following questions:

1. Which application offers the best productivity? Earnings (EBITDA) is the best with the “C” scenario.
2. Which affects the most people? “A” affects almost twice as many people.
3. Which has the highest risk? “A” has twice as many clients and revenue.
4. Which is the hardest to migrate? “A” because of the interfaces that have to be converted, number of clients, and users affected.
5. Which application offers the best feature/function for the long run? There is no “answer” because this is subjective.
6. Which application offers the best growth capacity? Again, this is a subjective question.
7. Which application is the best to support? This is subjective but costs can be quantified.

While several questions lead to specific answers, others are more subjective. The final decision must be made after analyzing all of the appropriate variables.

I’ve often mentioned to IT managers that there really is no perfect application—all business applications offer positives and unique challenges. It typically comes down to which one is easiest to migrate to, given the current circumstances. As long as it has long-term support and enhancement potential, it’s a viable candidate.

The need to communicate
Once you’ve analyzed your options and determined your best applications strategy, it’s time to discuss it with the rest of senior management to gain agreement and support. Then you’ll communicate your IT business applications strategy to those who need to know, including the operations managers and your IT staff.

Let them know where the company is headed and why. Be prepared to defend your decisions; there will be many that will want you to take a different direction.

Once your strategy is defined and all of senior management is on board, it’s easier to move forward. When you’re undecided, you lose so much productivity in discussing all the options with those that want you to use “their system.”

Prepare a business app conversion plan
The next step is to build a plan to convert one application and its users and clients to another business application.

As an IBM SE in the late 70s, I installed many software applications. It was apparent to me then, and it still is today, that you can develop a project plan template that will handle 80 percent or more of any system migration.

TechRepublic members can download my standard business application systems conversion plan to get a quick start on this effort. The template is easily modifiable for specific situations.

A quick word about infrastructure
Typically, the company with the largest number of users is the easiest one to migrate other companies to. However, CIOs must consider the stability, support, and growth capacity of the larger company’s infrastructure.

Just because there are more users doesn’t make it the best solution. Assess the company’s growth plans and be sure to migrate users toward the systems that you want to maintain for the longest period of time. Also look at the tools that are available or in use and make the decision that works toward maintaining a very stable and productive environment for the long term.

I always try to go with my IT organization’s strengths while filling in gaps of expertise or functionality. You must pursue the opportunities that best support the company’s needs, and are the most cost-effective solutions to implement and maintain.

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The final series installment
The seventh, and last, article in Mike Sisco’s IT due diligence series examines best practices when it comes to measuring technology. Find out how to make sure the technology organization will be focused on leveraging the value of the new company after the merger or acquisition. This installment covers a few key measurements worth tracking.

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Mike Sisco is the CEO of MDE Enterprises, an IT management training and consulting company. For more of Mike’s management insight, take a look at his IT Manager Development Series.

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