IT has to work before anything else can

IT has to work before anything else can

Poor systems integration is a major - and costly - cause of failure in mergers and acquisitions.

When gaming giants Tattersall's and Unitab finalised their $4 billion merger last year, the combined company's new top technology executive, Stephen Lawrie, knew he was in for a wild ride. Not only did Lawrie have to integrate the two companies' disparate information technology systems, he also had to find cost savings to ensure the IT department played its part in delivering a promised $20 million or more in synergies from the merger over the next two years.

All this while keeping the critical wagering and other business applications running.

"We can damage a lot of revenue if we don't get the integration issues right," Lawrie says.

IT integration is one of the primary, but arguably least discussed, reasons for mergers and acquisitions failing to meet their stated goals.

While it is a major issue in industries like financial services or telecommunications, which spend a high proportion of their income on IT, most of today's large mergers and acquisitions will involve a substantial IT

component. Take Suncorp's acquisition of insurer Promina, the proposed merger of Bendigo and Adelaide banks, Telecom NZ's buy of fellow telco PowerTel - and even BlueScope Steel's purchase of Smorgon Steel's distribution arm.

Lawrie's dilemma is shared by many technology executives.

Thomson Financial estimates that Australian companies have been involved in $US172.6 billion ($194 billion) of deals so far this financial year. Grant Barker, who leads the consulting and services group Accenture's strategic IT effectiveness practice in Australia, South-East Asia and Korea, points to a recent study of 150 chief information officers and 150 other senior executives conducted by Accenture as evidence for the importance of IT during mergers and acquisitions.

The study found that poor IT integration was the most likely cause (at 38 per cent) of a failure to meet stated business goals from a merger or acquisition. Conversely, the early involvement of companies' IT departments

in a transaction and an appropriately funded IT budget were ranked as two of the most likely factors behind a merger meeting its goals.

Many companies have suffered from not paying enough attention to their technology systems after acquisitions. One example is the implosion sufferedby up and coming telco iiNet when, in May 2006, it suddenly issued an earnings downgrade of 39 per cent due to problems with revenue recognition.

At the time, iiNet executive chairman Peter Harley said it was obvious the company's coin-counting systems had not kept up with its acquisition trail,which had included dozens of smaller companies since 1993.

Lawrie agrees IT was critical during Tattersall's swallowing Unitab. He also had plenty of experience with integration from his past history as general

manager of technology at the acquisitive Unitab.

Lawrie points out many of Tattersall's business activities, particularly relating to its TAB network, but also its lotteries and poker machinebusinesses, fundamentally rely on technology for their daily operation.

In Tattersall's case, Lawrie did little work on most of the wagering applications as the disparate nature of Unitab and Tattersall's activities(even though they were broadly in the same industry) meant they could beleft running as they were.

However, the CIO had to go through the usual processes of integrating the telephone and data networks, email, finance and human resources systems: All systems that are crucial to the daily operation of any company. In other words, if Lawrie's team hadn't done its job, nobody else could.

Lawrie's task was complicated because Tattersall's had identified as a priority the closure of one of the merged entity's buildings. The hitch was that the building happened to contain some of its key back-end computer


Lawrie says the main risk he kept in the back of his mind during the subsequent system relocation was what would happen if customers couldn't access their normal services from Tattersall's.

Most companies have their own applications specialised to their industries. For example, where Tattersall's had wagering systems, telcos like Telstra and Optus operate extensive billing platforms so they can account for tiny

charges like mobile phone minutes used.

In the financial services sector, banks spend hundreds of millions (sometimes billions) of dollars on core banking systems that process billions of financial transactions. And most companies dealing with consumers maintain large databases of customer information. It's these that

often prove the biggest problem during a merger.

For example, when Australia and New Zealand Banking Group started swallowing National Bank of New Zealand in early 2004, ANZ's technology workers faced a large integration task involving the pair's core banking systems.

ANZ's former managing director of operations, technology and shared services, Mike Grime, at the time had to oversee an integration project in which his IT team's work accounted for half of a total project budget of

$240 million, managing more than 300 major individual changes to systems and infrastructure.

Regulatory and customer issues also raised their ugly heads; ANZ's plans to run a large amount of NBNZ's systems from Australia ended up being scuttled for several reasons; not only were many of the systems retained as is so that New Zealand customers would still feel they were dealing with the same entity, the Reserve Bank of New Zealand also introduced policies governing how many systems ANZ had to retain in the country.

In the resources industry, it's the same story with respect to specialized applications.

Following BlueScope Steel's $700 million acquisition of Smorgon Steel Group's distribution arm, one of its first tasks will be to decide whether to integrate the disparate distribution systems of the pair or to keep them

as stand-alone technologies.

In most acquisitions it is the technology and personnel of the acquiring company that take the prime positions in the merged entities. However BlueScope has reportedly left its options open as to whether it will extend Smorgon's distribution software into its systems or tackle the integration from the other way around.

BlueScope Steel spokeswoman Sandi Harwood says no decision has been made as yet, as the company is still examining all options in the period immediately after the acquisition. One key technology provider to BlueScope throughout the process will be its outsourcing provider, CSC. The steel specialist recently announced a contract renewal with CSC to the tune of $480 million over the next eight years.

Like Tattersall's, BlueScope has been balancing integration work with normal technology projects. It has upgraded other business support systems such as supply chain management software, in addition to refreshing disaster-recovery arrangements and more.

What can companies do to ensure the IT side of their merger or acquisition is successful?

Accenture's Grant Barker says it is imperative that IT departments are involved right from the beginning of due diligence.

Typically this would mean the CIO of the acquiring company maintaining close connections with the company's leadership, such as the chief executive and financial officers.

Otherwise, Barker says, technology executives at the new merged entity could inherit responsibility for an integration program about which they know little, and involving unrealistic cost-cutting targets.

Being involved right from the start also means technology executives can start planning early and minimise the risk to degrading service levels while efforts focus on integrating systems and cutting costs.

Lawrie says in his case it was difficult to be involved in the due diligence process because of Tabcorp's counterbid for Unitab. "There really wasn't a lot we could do before the thing was actually settled," he says, adding that he focused on getting the structure of his IT department together early and making sure everyone understood what the focus of the group would be.

"With all the mergers we had at Unitab, it was not necessarily easy to predict everything you were going to find," Lawrie says. "You really have to rely on the teams being able to solve the problem, so I do tend to spend a

bit of time on the organisational structure from a technology point of view early on."

Suncorp CIO Jeff Smith, who was appointed to lead the financial services giant's IT function following the Promina merger, also put the human element first. He says one of his first moves had been to centralise technology

decision making across the group in order to remove duplication of work and to identify where each required IT service was being performed best.

Smith's senior management team is now made up of four Suncorp executives, four former Promina executives and two that are new to the merged entity.

"There is a great deal of diversity, in race, gender and experience," he says. "We have tried to put the strengths of both of those groups together into one leadership team."

Smith says the IT portion of the Suncorp and Promina merger will take up more than half of the company's overall $355 million integration costs.

Suncorp has begun putting the groundwork in place for the integration of the actual technology systems involved. It is standardising the underlying infrastructure between Suncorp and the former Promina operations, such as

desktop and telephone systems and other technology building blocks such as data centres.

Suncorp was in a favourable position in this regard as it had recently upgraded and standardised its desktop software and was in the process of rolling out the latest next-generation voice over internet protocol (VoIP) telephone systems.

That basic layer of technology infrastructure will form the foundation that will support the merged group's higher-order business applications, such as specialised and banking applications, in future.

"One of the things we have been doing is looking at the best of both areas," Smith says.

"Banking is separate and not really part of the integration. But within personal finance, commercial and wealth [divisions] we are looking for the best practices, whether it is a business process or a system or both, and

then deciding which ones we will roll out to the other areas."

Smith is applying a philosophy that he calls "agile computing" to Suncorp's technology operations.

He says the idea originated at Apple about 10 years ago, when the technology group's chief executive, Steve Jobs, told his workforce to "start with design and then engineer around it", leading to a more integrated, rather

than hierarchical, philosophy of technology development.

A big risk of large IT development projects is that they will go astray and over budget in the long term, if not governed strictly all the way.

Accordingly, Smith's agile philosophy will lead Suncorp into doing six-month projects instead of the more traditional and lengthy development efforts.

"We are not going to run big, risky, high-cost things," Smith says. "We are going to reuse what we have rather than reinvent."

Accenture's Barker says it is important for CIOs and other IT workers to remember that mergers and acquisitions are not carried out for IT reasons.

"It's being done for business purposes," he says.

Accordingly, technology executives need to make sure that all of their efforts go into supporting the business and enabling it to work more effectively, rather than focusing on technology for its own sake.

This reasoning sits well with Smith. "It is no good thinking about IT initiatives any more; it is about business initiatives and how we are going to make the different business divisions better," he says.

© Fairfax Business Media

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Tags integrationMergers and acquisitionscostSuncorpproject failurepromina

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