The past two years highlighted many challenges for organizations, including their state of digital transformation and readiness for “the new normal.” Mergers and acquisitions proved to be one way to address the challenges, and significant M&A activity is forecast to continue across industries and geographies. Demergers were seen as another way to create value, with organizations freed to focus on core competencies.
Unfortunately, the success rates of M&A activities are low; failure rates are as high as 70-90%. While many aspects contribute to M&A success, technology plays an influential role. Whether companies explore M&A or a demerger, they must address many infrastructure and application challenges to have an optimized IT environment that meets the business, regulatory, and operational requirements for success. IT integration should not be an afterthought. If not planned properly, it can lead to significant cost overheads and operational challenges. Technology is the enabler for most business processes, so it is imperative that the IT landscape of the new entity is properly aligned with the business domains.
Mergers Must Address Redundant Applications
An organization’s IT landscape includes a host of applications to perform business processes ranging from payroll and CRM to order processing and supply-chain management. When companies merge, there are inevitable redundancies in applications and data sources that reduce the combined company’s agility while adding IT costs. This, in turn, can negatively impact product launches, operational efficiency, customer service, and other key functions.
Applications need to be assessed for redundancies or gaps in meeting business, technology, or compliance requirements. Ideally, all application redundancies should be eliminated as soon as possible to ensure minimum overhead from a run/operations perspective. And more important, to make sure the applications used are aligned with the defined enterprise architecture principles and address the business needs.
Organizations should identify and rationalize the business applications that are best suited to realize the goals of the new, merged identity. Duplicate applications may be retained for a short period, but they must eventually be decommissioned. During the “duplication” period, organizations can start by designating applications by region to address a business process – for example, using an order-management system running in the EU to handle orders for a specific region. Typically, this application rationalization approach includes:
- Classify applications into one of four categories: decommission, migrate/modernize, consolidate, or retain
- Assess the impact on business lines, processes, products, countries, and contracts (clients)
- Assess the impact on other applications, data stores, and infrastructure
It is imperative to have a strategy for application and integration rationalization (APR) to ensure that the company considers key inputs such as application priority, criticality, dependencies, and complexities. Other inputs should include strategic alignment with business processes, IT strategy, roadmap, technical complexity, and non-functional requirements.
Applications that will be part of the new/permanent IT landscape should be built following industry standards and best practices for real-time and batch integrations. For applications that will only exist temporarily during the active merger, a throwaway integration strategy should be employed using point-to-point integrations with little to no reuse value.
Demergers Should Setup Duplicate Processes
For demergers, key applications need to be replicated in the new environment. This could happen by region, line of business, or based on the reason for the demerger. Platforms need to be identified for the new application that is being carved out, and the data needs to be loaded into the application. Similar to the integration approaches for mergers, the initial data load could be a set of ETL jobs followed by a set of temporary integrations that send data from the original application to the new one. This could remain in place until the changed business processes within and outside the organization are fully functional.
To setup this process, leaders must make key business decisions about the:
- Technology stack – whether to replicate or choose a new platform
- Integration separation approach – whether to replicate integrations as-is or create new ones
- Identifying integrations for multi-wave rollout – whether to use an application-centric, business-centric, region-centric, or hybrid approach
Companies should follow best practices to plan their strategy for a demerger. Start by aligning with the overall separation principle to prioritize faster separation over transformation. Resist the urge to “fix” during the separation process. Create only the required integrations in the target integration platform. Group applications that are highly interdependent so that they are moved together in the same wave. Avoid the need for multiple temporary wiring and rewriting of applications during each wave. Finally, leverage the integration platform to abstract the wiring and rewiring to shield the applications from changes.
The technology strategy plays a critical role in the success of major endeavors like M&A and demergers. It is critical to make decisions on the target application landscape with a clear understanding of which applications/platforms will be retained, and which will be consolidated and decommissioned. The integration work required is non-trivial. The strategy needs to be well planned over multiple waves of migration/consolidation, and it must include tracking and governance to ensure success. By following our application and integration rationalization (APR) strategy, businesses can eliminate redundancies, address required infrastructure and application challenges, and achieve an optimized IT environment that meets the business, regulatory, and operational requirements for success.