Johannesburg, 28 Jul 2016
Within many industries, mergers and acquisitions are a common strategy to help maximise profits while spreading risk, say Ramakrishna Avasarala, SAP Oil and Gas consultant, Wipro and Gavin Holme, Country Head, Africa, Wipro. Regardless of whether a company has acquired another, has spun off into a new entity, or is divesting interests, it is essential to effectively manage IT as a key business goal.
Without effective IT integration in the case of a merger or a holistic and sustainable joint IT model for a new entity, the entire merger or acquisition could potentially fall through. Involving IT organisations on both sides from the start is critical, and IT engagement in the early stages of the process can help to ensure mergers and acquisitions can be completed smoothly and with minimal disruption.
Some considerations around IT
IT is a vital component of any modern business, and it makes sense therefore that it must continue to function successfully. Ensuring that this can happen is essential in the process of any merger or acquisition, and since IT plays an increasingly important role as the process progresses, IT engagement during the early stages can be highly beneficial.
There are many areas that should be examined, including an evaluation of infrastructure requirements, cost optimisation opportunities and the ability to leverage cloud-based infrastructure planning. Other areas to look at include negotiation of application licences with application vendors and identifying application system complexity and available documentation. It is also vital to ensure that the right System Integrator (SI) is selected for support and comes on board before the Transition Service Agreement (TSA) exit. The TSA should be formulated to protect the interests and ensure sustainability of the newly formed entity.
Application licences and IT configurations
One of the key areas during a merger or acquisition is that of application licences. Organisations need to determine whether any application licences, such as ERP systems, will need to be transferred to the new entity by the parent company. Organisations also need to understand what bolt-on applications are in use. There could be proprietary interfaces, which need a separate licence to be negotiated with the respective vendors. Many organisations make use of numerous business critical systems that are tightly integrated with ERP solutions.
Effectively dealing with application licences raises a number of questions. Companies need to understand how ownership and licences of applications will be transferred, whether any custom built applications will be omitted during the transfer, and whether those applications are business critical or used for legal reporting, in which case they need to be given higher priority to rewrite or redevelop them. It is also essential to consider how to handle shared master data, including vendors, customers and products, as well as historical data, and aspects such as credit limits, common customers, re-pricing of common products. Inventory ownership and transfer also needs to be prepared for, and changes to logos and names on custom forms, including purchase order print outs and customer invoices, must be completed before the new entity comes into existence. All of these considerations have an impact on IT systems, which may require changes to applications and modifications to configuration items.
Formulating the TSA
Another area that needs attention is the formulation of the Transition Service Agreement (TSA), which is an interim arrangement between the two entities involved in a merger or acquisition. It generally covers a period of one year, during which time the parent entity hosts and supports the newly formed entity's IT systems and also some of its business functions. Once the TSA expires the new entity will need to manage its own systems. From an IT perspective, there are several important points to consider when formulating the TSA, including who will manage the ERP system for operational support as well as application support and maintenance, and who will be responsible for business critical systems and application changes or upgrades during the TSA period. It is also important to consider and include exit clauses and notice periods.
Knowledge transfer
Knowledge transfer is another important area of the activities of any merger or acquisition. Business process documents, configuration and development documentation need to be identified and it must also be ascertained whether or not the parent entity will provide this documentation to the vendor identified to support the new entity. If not, then it is critical to select a vendor with the capability to quickly understand the system and business processes through reverse engineering, and create the required documentation.
Infrastructure is also an integral part of the IT management process. Decisions must be made as to whether the new system will be on premises or on cloud, and it must be ascertained if there is a business contingency plan in place and provision for bandwidth and connectivity to support user teams. While the TSA is in operation, it is necessary to replicate the existing development and quality systems for knowledge transfer to business and support teams so that they can test the integration with legacy systems.
After the merger or acquisition there would be a need for new security roles, new release strategies in procurement and modified workflows due to a change in business model and size. Change management therefore becomes an important part of the process. Other considerations include business contingency planning, factoring in some application and system downtime during the cutover. The contingency plan should have processes to capture the business data during the migration and then replicate it once the system comes up. Finally, it is important to ensure that inherited applications align with the long-term business strategy and IT roadmap of the new entity, which can be achieved by examining application rationalisation opportunities.
Creating sustainable IT solutions
Mergers and acquisitions are frequently driven by financial considerations, and as a result IT often comes into play very late in the game, as something of an afterthought. This often leads to knee-jerk planning with subsequent decreases in efficiency and increases in overall costs. Aside from this, failure to engage IT from the start may seriously threaten the viability of the whole endeavour. Engagement with IT at an early stage of the merger and acquisition process is essential and delivers a number of benefits, including lower total cost of ownership and effective preparation to enable business and external partners to handle the system changes and adopt quickly. The end result is the evolution of a sustainable IT model that can function post TSA.
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