The merger business may have slowed in recent months, but there is
nothing like a downturn to bring out the cheque-books and tempt
companies on the up to snaffle some bargains. If you are left to
sort out the post-signing ceremony mess, what should you look for
to get the best of both worlds?
Although merger activity has waned somewhat following the dotcom
craze - down to £543bn worldwide for the first six months of this
year according to KPMG (less than half the value of mergers during
the same period last year) - corporate marriages are still
occurring with unsettling regularity, leaving chaos in their wake
not only for the companies themselves but also for their suppliers
and service providers.
For the parties immediately involved, the fall-out from mergers
takes many forms, affecting people, business processes and
technology installations in substantial ways. Once a merger or
acquisition has been mooted, a state of paralysis is not uncommon.
Projects are put on hold and staff become demotivated.
"Even the thought of a merger can have a huge effect on both
companies," comments Eric Hagan, business development manager at
City Practitioners, which provides business and IT services to the
investment banking community and has witnessed the effects of many
mergers at close quarters. "It creates huge uncertainty, so people
stop making decisions and investments."
When the $30bn (£21bn) merger between Dresdner Kleinwort Benson and
Deutsche Bank collapsed last year, staff at Kleinwort's London
offices celebrated by wearing T-shirts to work proclaiming "I've
not been torched", reacting to comments from one Deutsche Bank
executive who'd been quoted as saying he'd torch the London-based
investment bank. Up to 90% of Kleinwort's staff had expected to
face redundancy if the merger had gone ahead because of the level
of overlap between the two investment banking operations; this
suggestion had sent shockwaves through the company.
If the merger had taken place, the ability to marry the companies'
IT operations would have played a critical role in determining its
commercial success. Although in the case of the German banks there
were many more factors to the merger failure, it is not uncommon
for mergers to be abandoned because of IT integration problems.
Most mergers and acquisitions are initiated in the pursuit of
greater market penetration and improved customer service coupled
with cost-cutting through the stripping out of any overlap and the
combining of operations. Since technology is the facilitator for
many of these perceived gains, the ability to consolidate systems
has become a deciding factor in whether many mergers go ahead. This
is especially the case in the financial services market where
merger activity levels are high and IT systems are seen as
particularly critical to strategic advantage. According to the
employers body the CBI, poorly executed mergers and acquisitions
are risking up to £550bn a year in shareholder value across Europe.
IT problems are at the heart of many of these unhappy unions.
Enter any existing IT outsourcing arrangements into the equation
and the situation becomes even more complex, as there are suddenly
more than two parties in the marriage. The question then arises
whether continuing with the service contract is appropriate, or,
where both parties are bringing outsourcing relationships into the
partnership, how to converge these into a single, consolidated
outsourcing strategy.
"Often, the more radical the merger, the more the challenge to the
outsourcing agreements," notes Alistair Cox, services director at
IT systems integrator NSC. "In our experience when large
organisations raise the spectre of merging their businesses, the
outsourcing commitments are often considered too late in the
process - potentially with catastrophic results as the original
outsourcing contract objectives may conflict directly with a newly
merged organisation."
"Quite often it becomes a competition between the two companies'
technology, their processes, and suppliers such as outsourcing
organisations," concurs Hagan. "Because the involved parties both
think their approach is best, management consultants are often
brought in for advice on what to keep and what to throw out. It is
rare to be able to take the best bits of both companies'
strategies. In a takeover the dominant company usually makes the
decisions but, if it is a merger like CityCorp and Travellers Group
or JP Morgan and Chase Manhattan, the situation becomes more
problematic."
Hagan advises that, in the event of a merger, joint working parties
be established early on which look at each area of the operation
that's being affected together, rather than audits being carved up
between the two sides. "Quick decisions are important too," he
says. "Don't draw these out. People need to know where they stand
so they can plan their next actions."
The existence of outsourcing arrangements can take some of the heat
out of the merger of IT operations as they provide a level of
continuity and neutrality in an otherwise highly disrupted
environment. However, these should not be excluded from the overall
IT review, which is being carried out in the interests of
consolidating and streamlining two companies' systems and,
therefore, affects outsourced technology and processes as much as
internal systems.
Ian Leask, managing consultant at Compass Management Consulting,
offers the following advice to companies reviewing the relative
merits of existing outsourcing arrangements in the event of a
merger. "The IT manager must ensure that (a) an objective view of
the existing contracts can be provided based on irrefutable facts,
(b) the end solution is an environment that will deliver on goals
and objectives, and (c) the newly-merged IT operation is in a
position to manage the remaining supplier relationship for ongoing
value."
The types of question that must be asked to achieve this are:
- Have the business requirements changed and is one of the
outsourcing agreements in a better position to address these?
- Is the outsourcer running the operation as effectively as
possible?
- How do costs compare with best-of-breed operations?
- Are the processes clearly mapped and understood?
- Is the right blend of capabilities in place between the
outsourcer and the organisation so that responsibilities clearly
map from one organisation to the other?
- Is there a focus on managing the relationship, or
micro-managing the supplier?
- Are all processes clearly mapped and understood?
If the upshot is that one contract needs to be terminated, or
revised, there could be hefty cost implications. For a one- to
three-year contract, the penalty could be more than 50% of the
value of the contract which has still to run. Some terminations can
run into hundreds of millions of pounds. "It is not uncommon for
one outsourcer to be dropped, which usually involves a termination
fee," says Charles Drayson, an IT partner at Andersen Legal.
While newer outsourcing contracts tend to make provision for the
effects of company mergers, many older-style contracts have not
taken this into account.
Where contracts have been designed to cover companies against the
impact of terminations in the case of a merger, hopefully these
should also include provision for a degree of co-operation from the
outsourcer after the contract has been severed - what's known as a
termination assistance clause. "This should include help with
migration, the passing over of equipment and the gradual hand-over
of the service, whether back to the internal IT department, or to a
second outsourcer," Drayson says. Organisations considering
terminating existing contracts should look for such clauses before
making any hasty decisions.
That said, few outsourcers can afford to burn their bridges by
exiting a contract with sour relations and, for a fee, will be glad
of the opportunity to phase out the work gradually with as much
support as possible. This process could take a couple of years, so
harmonious relationships are important.
A bigger issue is likely to be staff redeployment, as any employees
who were transferred to the outsourcer will now need to be
reintegrated into the company. Following the European Transfer of
Undertakings/Protection of Employment (TUPE) rules, which seek to
protect staff rights when outsourcing arrangements are formed,
unions may need to be consulted to ensure obligations to original
employees are honoured. When one outsourcing arrangement is being
dropped, this could result in an additional surplus of staff. If
the merger is international, this could be a particularly thorny
issue, since countries in southern Europe are notoriously sensitive
to employee rights in such scenarios.
"The best advice is to prepare for these eventualities in advance
as much as you can," says Drayson. "If you haven't, it's possible
to add in a co-operation agreement later," he adds, though once a
merger is under way it will be too late to renegotiate original
contract terms with an outsourcer whose future relationship with
your organisation is uncertain.
Even if the merged company decides to keep an existing outsourcing
relationship, another consideration is the extent to which the
original contract may now need to be changed. Requirements may
differ as the company's goals are repositioned, so active projects
may need to be redesigned or service level agreements may need to
be revised. Even more likely is that the original size and scope of
the contract will need to be adjusted one way or the other. Chris
Holder, partner at technology law firm Shaw Pittman, notes that any
growth or decline in the size of company or workload greater than
20% will typically mean the contract needs to be
renegotiated.
"The main objective should really be contract consolidation -
linking together existing outsourcing arrangements in order to cut
costs and ensure a consistent service throughout the new company,"
concludes Raza Khab, head of consulting at Servusb2b, a business
support specialist. "In a perfect world, the new business would let
a single super-contract, covering the business as a whole. This
would help to cut costs by eliminating duplication and reducing
management overheads. Letting a super-contract is not easy though
because of penalty clauses and lock-ins, so the next best thing is
to renegotiate contracts to ensure the various outsourcing
providers have clear business rules for working with each
other."
Outsourcing issues after a merger
- Outsourcing arrangements often get overlooked when the
implications of a merger are being considered in the early stages -
this is a mistake. Early planning and rapid, clear decisions are
essential
- In mergers where there is no obvious dominant party, the
services of an independent consultant may be needed to help decide
which IT systems and processes - and outsourcing arrangements - to
keep and which to reject
- Although lock-in and penalty clauses can be a hurdle to
consolidating outsourcing arrangements, the majority of today's
outsourcers would prefer to co-operate in the event of a merger
rather than leave things in a mess and risk their reputations. Aim
for a smooth transition for all concerned, and seek help with any
transition between outsourcers and/or your internal IT department,
even if the original contracts made no provision for this
- Staff issues need at least as much attention as the pure
technology issues. If outsourcing contracts are being changed or
terminated, make sure you honour staff commitments, especially
those which are legally binding under the European TUPE
Act.
Ten tips for post-merger arrangements
Ian Dunshire,
partner at KPMG Consulting responsible for systems integration in
retail banking, has been closely involved with some high-profile
mergers including Midland/HSBC and Lloyds/TSB. He offers the
following 10 tips on handling post-merger arrangements.
- Don't try to treat outsourcing arrangements in isolation from
business strategy. Driving out the new IT strategy needs to be an
iterative process involving joint planning between the IT function
and all other key business areas
- Involve your outsourcers from the outset. They will be
amazingly creative to come up with ideas to secure your ongoing
patronage
- Gather the facts quickly on the effectiveness of outsource
arrangements. Look into the contractual position (eg penalty
clauses for early termination), the past performance of the
outsourcer against service level agreements, current and future
costings
- Compare the options on a level playing field. Take sufficient
time to get the facts together to enable comparison of outsourcer
versus outsourcer and outsourcer versus internal function to be
measured on an objective basis. Internal and external comparisons
can often be difficult (and emotionally charged)
- Prepare a performance checklist for assessing outsourcers. How
well has the outsourcer performed? What are the performance
trends?
- Try to avoid acting on pre-conceptions. Judge on the facts
rather than emotion. Try to avoid the trench warfare that often
occurs when merger partners take sides too early
- Communicate internally and externally. Attrition of key staff
from both the internal and outsourced teams is a major hazard in
the post-merger days. Keep all staff as informed and involved as is
practical to avoid the inevitable rumours and innuendo. Remember
that outsourcers have feelings too
- Don't dither. Assess the facts and act. Conventional wisdom
allows a 100-day post-merger honeymoon period in which to
demonstrate ability to deliver
- Manage the ongoing outsource arrangements tightly. Whether the
arrangements are to continue or not, it is important to keep your
eye on the ball and maintain service levels
- Don't resort to outsourcing to solve your post-merger
business/IT problems. The advice "never outsource a problem"
remains true in post-merger times. Fix the problem first, involving
the outsourcers as necessary, before pressing the outsource
button.
Case study: Last-minute outsourcing saves investment bank
merger
When systems integrator and outsourcer Parity
Solutions was called in to a large investment bank to help free up
the flow of information between it and the organisation it was
acquiring, the job quickly became a mercy mission. The bank had
realised very late in the day that it couldn't access vital
information from the company it was taking over to complete the due
diligence process and the takeover - already progressing
financially - was in jeopardy, recalls Eddie Dodds, head of
Parity's commercial sector division.
Three different IT infrastructures were involved - the two
companies involved in the $2bn takeover, plus a consultancy which
had been brought in to facilitate the acquisition. When they found
they couldn't solve the problem between them, they had no choice to
outsource the project to a fourth party. For Parity, this resulted
in a two-year facilities management contract.
Parity stepped in as change management consultant and developed a
bespoke project office environment that could be used for
exchanging documents securely over the Internet without having to
use e-mail. Its staff arrived on the Monday and had a working
prototype by the Friday. Within 10 weeks, the full system was up
and running. As well as designing the system, Parity managed it for
the two companies in an early application service provider-type
arrangement - running a secure server that allowed 12 senior
project managers around the world to exchange information securely
day or night, using document templates that complied with due
diligence requirements.
The two-year contract carried the companies until the
administration associated with the merger had been completed and
archived, at which point the Web server was closed down.