Posts Tagged ‘Matthew Carmen’

Integration: Keys to the successful merger of companies

by Matthew Carmen on August 2, 2010

There is really only one reason for the merger of corporate entities: the creation of more shareholder value (whomever the shareholders are) from the two, than were there separately.  The creation of more profit is done through doing business more efficiently and effectively, which takes on many forms, depending on the where in the organization one resides.

When a corporate combination of any kind (merger, purchase of business unit, hostile takeover, etc) is announced, it is usually the first time that the vast majority of employees, on both sides of the transaction, have heard this is happening.  This announcement will trigger many acts.  Executive management, the “C level” and their support will be working on the new strategy of the combined entity, the purchased entities employees will be worrying about their futures, etc.  The real work is realized at the operational levels of both entities.

In most cases, the purchasing company is restricted from speaking with the company being acquired until the purchase is finalized.  The high level executives on each side may have spoken about strategic issues of running the combined entity, but the nuts and bolts of daily operations typically have not been fleshed out.  Once final approval for “the deal” has happened, the clock starts regarding  the time it will take to integrate the two organizations into one cohesive unit.  The faster this occurs, the quicker the goals of the merger, greater shareholder value, can be achieved.  According to CNBC, nine out of ten mergers do not fully meet the goals of their acquisition. This is largely due to a failure to integrate companies properly.

This failure to integrate can be seen in the current Gulf of Mexico oil spill debacle.  British Petroleum (BP) never integrated its purchases in the United States, Atlantic Richfield Company (ARCO) and American Oil Company (Amoco).  These companies don’t even share branding with their parent company, much less financial and IT systems.  An integrated entity may have helped BP to be more proactive in its maintenance of gulf oil platforms and wells, possibly stopping or at least lessening the catastrophe that occurred with Deep Water Horizon.

During the period of time between when the corporate combination is announced and when it is approved by shareholders, government entities, etc. a lot takes place behind the scenes, often without discussion between the entities.  The main task that takes place in successful integrations is proper preparation within operational areas.  This preparation includes putting together the processes and procedures that will need to take place to reach the corporate goals.  In companies that are in a merger mode, meaning they are growing through regular acquisitions, many of these processes and procedures can be used over and over again, and usually are.  For the company that does not participate in acquisition often, creating these processes and procedures can seem like a daunting task.  There are many consulting companies, from the Accenture’s and Deloitte’s of the world down to small specialty firms (such as my own – Datacenter Trust) who concentrate on the portions of the business where they have specific expertise and can help complete or even manage the integration process.

Once the acquisition has been approved, the integration process begins.  I participated in multiple integrations while employed at one of the largest entertainment companies in the world, where I was the lead financial representative to the Program Management Office (PMO).  One example of an operational process that needed to be looked at during each acquisition was the issue of entertainer royalties, the way in which actors, musicians, etc. get paid on their current and past work.  It was the job of that department to look at the current royalty application being used and the royalty application of the acquired entity and choose which application is better, if neither was best of breed, outside solutions may have been looked at.  “Better” is a very subjective idea, one which in this case was left up to the experts in each department that needed to make a choice, regardless of application.  Anyhow, once a choice was made, a plan was put together and included cost analysis, equipment needs, software licensing needs, etc.  Once all of the application consolidation plans, hundreds or even thousands, were finished, they were turned over to the PMO.

The job of the PMO was to look for efficiencies within all the plans.  These efficiencies were all tied to being able to have more purchasing power, economies of scale.  Economies of scale says that one company with 100,000 users will get better pricing then two companies with 50,000 users each.  This is due to the fact that it is harder for the company with 100,000 users to make a future change in usage. We were able to negotiate with vendors based on the size of the new entity, gaining pricing power in the areas of hardware (PC’s, servers, etc), software (applications and packages) and services (consulting, facilities, electricity, etc).   In the finance department, we were able to leverage the major vendors in the space, for our budget & planning system and accounting system, to get pricing that was over 35% better than it had been in the past.  We also got all of our users on the same systems, making reporting easier than it had been before.  The integration, in total, saved the combined entity over $400M in annual spend.  The largest areas of savings were software maintenance and facilities.

Datacenter consolidation is an area that must be looked at closely for a successful integration of IT operations.  Back to my example above, the combined entertainment giant decided that six global datacenters was the appropriate number.  The number could have been lower, but there were many global political issues, etc.  Formerly, the two companies had a total of 18 datacenters.  In two geographical instances, the two companies had data centers right down the street from one another.  By going to six global datacenters, the new company was able to save a great portion of the previously mentioned $400M.  Disaster recover became an in-house activity, electricity usage was cut by over 33% and the location of applications became a mute point, where it had been a political battle field before.

Conclusion

Integration of operational areas between merging entities is crucial to meeting the overall goal of growing shareholder value.  When done properly, the measurable goals of an acquisition can be easily met.  When convoluted, the acquisition looks like a bad idea two, five, and ten years out.  The last thing any management team wants to do is fail in an acquisition.  Loss of employment, legal proceedings, and possible acquisition by another entity are sure to follow, and no one wants to go through that.  Everyone associated with a company: executives, employees and shareholders alike, benefit from a well-planned and managed integration.

Week In Review – Jun 20 – Jun 26, 2010

by Magesh Tarala on June 27, 2010

3 Steps to making the Outsourcing choice

by Matthew Carmen, Jun 21, 2010

It is now rare to find a company, of any size, that hasn’t outsourced some portion of their IT functions.  This could be as small as an application or as large as the company’s entire IT department.  If you’re considering outsourcing within your own organization, Matthew’s article will help you think through the next steps in detail.  more…

Leadership and Mythology #7: Zeus, Greed and Change

by Gary Monti, Jun 22, 2010

Being greedy can lead to disastrous results. Nurturing your network and cultivating abundance is critical for sustained success and peace of mind. Greed and its consequences show up in Greek mythology. The lessons are quite relevant today especially in a complex, chaotic business world. more…

Social Media and Tribes #3: Mob mentality

by Deepika Bajaj, Jun 23, 2010

Contrary to popular conventions about the Web opening minds, people are more likely to read information or participate in social groups that reinforce what they already believe. A tribe can show dramatic increase in the undesirable action compared with doing nothing at all, because it demonstrated that lots of others engaged in the behavior. But if your message to your tribe is right, you can make positive change happen.  more…

Flexible Focus #7: Inside the lines

by William Reed, Jun 24, 2010

Thinking outside the box is a synonym for creativity. Although this metaphor has captured the popular imagination, the real challenge is to engage in applied creative thinking that solves real problems. Just like tennis is a game that is played entirely within the box, the most exciting and productive creative work is often produced and performed inside the box. In this article William explains how to use the Mandala chart to expand your thinking and stay within the lines.  more…

Author’s Journey #27: Building relationships with your readers

by Roger Parker, Jun 25, 2010

It is increasingly obvious that the whole point of writing a book is not to sell books, but to build long-term and profitable reader relationships. Consider your book the core of your long-term self (or business) marketing plan. In this scenario, your book becomes the hub of a relationship-building strategy that begins long before your book appears and continues for years afterward. more…

From the time the idea of a company was developed, those who control the purse strings (finance) and those who manage the income (sales, operations, and marketing) are often adversaries.

A frequent igniter of these tensions is a situation where an operations or business group wants to quickly move forward with a project (XX optimization, for example) which requires a capital investment.

Before approving funding, however, the finance organization must complete its due diligence by quantifying the benefits outlined in the business case. This timing gap often creates a bottleneck and uncertainty about the projects’ implementation and/or timing.

These bottlenecks can be avoided by all stakeholders working together to build a strong, interactive relationship around the project.   Keys to building this relationship are education, communication, and ultimately, including the finance team in your project.  The capacity to master the first two skills will lead to your finance organization becoming a trusted advisor and consistently being invited to serve as an active participant in your strategic initiatives.

Education

It’s a two way street.  With over a dozen years of providing strategic financial support, I have consistently found that education is the first step in building bridges to a better working relationship.  It is as much a necessity for the financial person to understand what the operations groups do, and vice versa.  While working at a for-profit healthcare organization, I held a weekly course for 10 weeks in order to educate the IT infrastructure group management team on the objectives of the finance group and how a working knowledge of finance objectives can add value to the IT organization and help them – and the company overall – to become more successful.  Once the course was completed, the IT management team understood why and how their involvement in budgeting and financial planning is important to the company’s operations, why their participation in the ‘month-end close’ process is crucial to meeting the goals of the company, and also why the building of business cases for all projects is essential for long-term financial planning and overall success.

I have also found that, from the financial team side, learning what the operations groups do, and how they do it, is vital to the success of a financial analyst.  By fostering an active relationship with my ‘customer’ – the operations team – and understanding how they manage IT facilities, call centers, or manage hardware environments, I was consistently able to develop a better relationship with these supported groups – and we always celebrated our successes together.

Communication

This begins with the education phase and continues to build a foundation of trust.  Once the financial representation and the operations groups understand what the other does, it becomes easier to support the others’ efforts.  The key to effective financial communications is to remain consistent with operational or business partner requirements, and to be cognizant of the execution of new requirements and their execution. Make no mistake – the execution of these objectives can be difficult at times; this means the month-end close process must run the same way each month, and the systems of the budget process are changed as little as possible each year.  The information required to develop a business case is the same, regardless of the project.  In the event any strategic change does occurs,  any corresponding  changes in financial requirements need to be carefully considered and communicated so as to not to compound further disruption to the organization. Once consistency is achieved, the analyst and the group he or she supports can get to real work, the work of optimizing the business and reaching the ultimate goals of the company:  profitability, social goals, etc. This is the trusted advisor stage.

The trusted advisor

This is the ultimate goal of the financial representative, and where the fun begins.  As an analyst, I remember my colleagues consistently stating that the most boring part of their job was the “regular” work.  My experience is, once you have a system in place for achieving positive results in a routine activity such as the month-end close, that task often becomes mundane. For a corporate finance person, the interesting work is that which includes participation leading to realizing corporate goals.  Ways in which the financial analyst can participate in this process include performing lease vs. buy analyses for new equipment and software purchases, finding savings within a project, conduct audits to make sure the company is ‘getting what it pays for’ from each of the many vendors and service providers, and also establishing metrics and key performance indictors (KPIs) to put dollar figures on operational measurements and use this information to make key business decisions, etc.  Serving as a trusted advisor to the operations management team can be exceptionally rewarding; it allows an analyst to be creative and to develop solutions that help to both ensure a successful project and contribute to the company reaching its goals.

Achieving the role of trusted advisor and building that relationship between finance and the operations groups is important to the success of the entire organization.  The more adversarial the relationship, the more difficult it becomes to complete the work – both the monotonous (yet necessary) work and the creative solution work.  Once these barriers are eliminated – from either the operational or financial end (or both) – all jobs become easier, more efficient, and much more rewarding to each employee.  Motivated employees will not get excited about doing the same job every day. To them, variety and professional growth are the spices of life, and job functions in all areas of the company become more efficient when the relations between all groups within the company are high

One of the best ways to keep Information Technology (IT) costs to a minimum is through a systematic  undertaking known as Lifecycle Management.  A successful implementation will make it easy for IT, finance and the user community to know many vital pieces of information and be able to act upon them.  The knowledge that becomes known is:

  1. What the company owns or leases (hardware, software and services)
  2. What the company uses and where it is, and
  3. Is the company getting what the vendor has promised (bang for the buck).

The main key to success is sound process.  This cannot be stressed enough, hard work in the planning and implementation stages will reap huge benefits once your lifecycle program goes into production.   The more operational groups within the company that you can include in your planning stage, without giving them say over the ultimate solution, the more useful your lifecycle program will be.  An example of this is including the finance group in the planning process.  With the participation of the finance group, the lifecycle management system can ultimately feed the company budgeting system, making the budget process more efficient.

Stage 1:  Contract Management; What does the company own and lease?

It may surprise you that many companies cannot answer the simple question: What IT assets (hardware, software and services) do you own and lease?  By being able to answer this question, costs (potentially millions of dollars depending on the size of your organization) can be saved and reallocated to other corporate initiatives.  This is achievable through weeding out expired leases, eliminating hardware maintenance that is no longer applicable and the write-off of corporate software and hardware assets that are no longer in use.

The easiest way to start getting this information is to look at the previous year’s payments – accounts payable.  This will let the person or group managing this process to see what vendors the company is doing business with.  This action should be followed up by an inventory of that file cabinet full of contacts that no one ever opens.  Once inventoried, each vendor should be contacted to make sure all agreements in place are known and copies are on file with the contract management project.  This allows the second phase of contact management to happen, building a usable database.

Ideally, the database being built will eventually be used to inform IT managers that the equipment they use is coming to the end of useful life whether owned or leased.  Secondly, on the software side, managers will be informed when annual maintenance is due, how many licenses are owned, and by tying the asset management system, talked about later in this article, how many licenses are being used.   By getting this information early, managers in all areas of operations can make informed decisions and have time to act upon them; ultimately saving money by lessening the frequency of late payments and owning what you are using and planning to use in the near future.

Stage 2:  Asset Management; What does the company use and where is it?

Knowing what your company uses and where it is located is as important as knowing what you own.  By knowing these facts, groups both within and outside of IT can more effectively budget, plan and allocate resources.  Examples of this include: 1) The data center facilities group can more accurately plan for power expenditures, floor space usage and eventual expansions of the data center environment, if they know what equipment is being used and where it is located;  2) The disaster recovery group can plan their activities more effectively when they know exactly what equipment is being used and what software and applications are running on it;  and lastly 3) By knowing what is running on servers and the percentage of usage, etc.  Equipment can run at a higher usage level and put the purchase or lease of new equipment further into the future.

For larger enterprises, it may be cost effective to hire a company to do a complete physical inventory of its IT assets.  The results of this physical inventory can be analyzed against the information acquired in the contract management activity and then analyzed against the company’s IT department’s system wide device finding software (i.e. Microsoft, HP Open system, and various other vendors).  The asset management team can then work to figure out the differences between the three systems, which should not be more than 15% of the total assets.

On the software side, there are many agent and agent-less products that can be put onto the company’s network to discover what is running on each piece of equipment the software can see.  With the data that is provided, analysis can take place between what is owned and what is being used.  You may find that through many projects over the years you now own, say, 15,000 licenses of a certain software, even though you only have 10,000 employees.  Action can be taken to cancel the annual maintenance on unused licenses and write-off the non-depreciated capital expenditure associated with the purchase of the software.  You may also find that you are under-licensed on certain software applications, so be prepared to have some expenditure offset the overall savings that will occur.

Stage 3:  Vendor Management; Are vendor promises being kept?

This portion of lifecycle management is the most subjective.  Measuring if a vendor is truly providing what they say they are is complicated.  Metrics and Key Performance Indicators (KPIs) need to be developed for each obligation each vendor has signed up for.

Example:  If a PC vendor makes the claim that your company will get 20% longer life from their product, as opposed to its competitor’s product, metrics and KPIs need to be developed so that the results can be reported on either monthly or quarterly.

Hopefully your analytics came to the conclusion that your vendor is living up to the agreement it signed, which is usually the case.  If the vendor is not living up to it obligations, there could be many reasons.  These reasons include:  1) scope of work was not completely known at time of signing, meaning that failure to live up to its obligations are partially the fault of the customer, and just as likely 2) the vendor made claims it could not live up to, just to get business .

There are many ways to report vendor management information.  I have found that the most effective way is a simple dashboard, a quartered one-page report that shows all pertinent financial, contractual, usage and service information.  Once approved by corporate powers, a scheduled meeting takes place and the findings are presented to the vendor.  If vendor is living up to contractual agreements, future strategy or other topics may be discussed.  If the vendor is not providing its obligations, a discussion of why will definitely occur, followed by ways in which improvement can be made.  This is not necessarily a bad conversation, new understanding of the relationship will definitely take place and the corporate relationship will become stronger though the process, as long as positive results ensue.

Conclusion:

The steps listed above need to be tied together, resulting in an interface which brings all the information to a usable form. This is crucial.  Once this happens, the magic starts: managers are able to make informed decisions, leased equipment is returned on time (instead of having its monthly payment made for years on end) and overall, IT costs are minimized.  The company only pays for what it is using and at the end of the day, controlling costs while providing needed services, is the name of the game.