Time to Remodel the Kitchen?

Although determining full and realistic corporate valuation is a task I’ll leave to people of sterner stuff than I (since Facebook went public, not many could begin to speculate on the bigger picture of even small enterprise valuation), I’ve recently been working with a few clients whom have reminded me of why one sometimes needs to remodel.

Nowadays, information technology is often seen as a means to an end. It’s a necessary evil. It’s overhead to your real business. You joined the technological revolution, and your competitors who didn’t, well… sunk. Or… you entered the market with the proper technology in place, and, seatbelt fastened, have taken your place in the market. Good for you. You’ve got this… right?

I’m a software system architect. I envision and build out information technology. I often like to model ideas around analogies to communicate them, because it takes the tech jargon out of it. Now that I’ve painted the picture, let’s think about what’s cooking behind the office doors.

It’s been said that the kitchen is the heart of the home. When it comes to the enterprise (big and small) your company’s production might get done in the shop, but sooner or later, everyone gets fed business processes, which are often cooked in the kitchen of technology. In fact, technology is often so integral to what many companies do nowadays that it’s usually hard to tell where, in your technology stack, business and production processes begin. Indeed, processes all cycle back around, and they almost certainly end with information technology again.

Truly, we’ve come a long way since the ’70s, when implementing any form of “revolutionary” information technology was the basis of a competitive advantage. Nowadays, if you don’t have information technology in the process somewhere, you’re probably only toying with a hobby. It’s not news. Technology graduated from a revolutionary competitive advantage to the realm of commoditized overhead well over a decade ago.

Ok… ok… You have the obligatory kitchen in your home. So what?

If you think of the kitchen in your home as commoditized overhead, you probably are missing out on the even bigger value an update could bring you at appraisal time. Like a home assessment, due diligence as part of corporate valuation will turn up the rusty mouse traps behind the avocado refridgerator and under the porcelain sink:

  • Still rocking 2000 Server with ActiveX?
  • Cold Fusion skills are becoming a specialty, probably not a good talent pool in the area, might be expensive to find resources to maintain those components.
  • Did you say you can spell iSeries? Great, can you administer it?
  • No one’s even touched the SharePoint Team Services server since it was installed by folks from overseas.
  • The community that supported your Open Source components… dried up?
  • Cloud SLAs, Serviceability?
  • Compliance?
  • Disaster Management?
  • Scalability?
  • Security?
  • Documentation…?
    • Don’t even go there.

As you can see… “Everything but the kitchen sink” no longer applies. The kitchen sink is transparently accounted for as well. A well designed information technology infrastructure needs to go beyond hardware and software. It considers redundancy/disaster management, security, operating conditions, such as room to operate and grow, and of course, if there are any undue risks or burdens placed on particular technologies, vendors, or even employees. Full valuation goes further, looking outside the walls to cloud providers and social media outlets. Finally, no inspection would be complete without a look at compliance, of course.

If your information technology does not serve your investors’ needs, your CEO’s needs, your VP of Marketing and Sales’ needs, as well as production’s… but most importantly your customers’, your information technology is detracting from the valuation of your company.

If the work has been done, due diligence will show off the working utility, maintainability, security, scalability, and superior added value of the well-designed enterprise IT infrastructure refresh.

To elaborate on that, a good information technology infrastructure provides a superior customer experience no matter how a customer chooses to interact with your company. Whether it’s at the concierge’s counter, in the drive-through, at a kiosk, on the phone, at your reseller’s office, in a browser or mobile app, your customers should be satisfied with their experience.

Don’t stop with simply tossing dated appliances and replacing them. Really think about how the technologies work together, and how people work with them. This is key… if you take replacement appliances off the shelf and simply plug them in, you are (at best) merely keeping up with your competitors. If you want the full value add, you need to specialize. You need to bend the components to your processes. It’s not just what you’ve got.  It’s how you use it.  It’s the critical difference between overhead and advantage.

Maybe the Augmented Reality Kitchen won’t provide a good return on investment (yet), but… there’s probably a lot that will.

Carving out a new company, aka “Just Add Water”

Earlier this month, our Google Alerts picked up a press release praising our role in a recent carve-out project. It was a nice surprise for us, and has generated some inquiries about our role. In this post, I’ll quickly scope out the project, and our role, for you.

Edgewater Technology was approached by one of our existing clients to assist with defining technology strategy for a “carve-out” that they were bidding on. Both parties sought a way to minimize or eliminate the need for a transition services agreement (TSA) and close the deal as quickly as possible. Our client, the buyer, intended to integrate the carve-out into one of their existing portfolio companies. This portfolio company was running well with a lean organizational model and homegrown ERP platform, but it was clear that it could not absorb the new acquisition with its existing enterprise technology architecture. Senior consultants from Edgewater Technology’s M&A and Infrastructure Services practices, with our colleagues from Edgewater Fullscope, our sister company with expertise in implementing Microsoft Dynamics AX, quickly put together a strategy based on:

  • Migration of the acquisition onto Microsoft Dynamics AX
  • A new corporate network  to link the parent company with 1 US and two international sites, providing for remote access for employees and contractors as well
  • Hosted MS Exchange based email
  • Hosted MS Sharepoint
  • Virtualized application deployment in Edgewater’s Data Center

In addition to implementing the technologies described above, Edgewater rehosted a smaller ERP system in use at one of the international sites, to avoid having to take on two ERP application migrations at once. This business unit will eventually migrate onto AX after the initial  stabilization of the US business is completed.

Because of Edgewater’s 10+ years of experience with M&A integration, program management, business process definition and organizational change management, our team provided these wraparound services as well, spearheading a Program Management Office that embraced all US and International acquisition sites and members of both the Buyer’s and Seller’s transition teams.

In an intense 120 day transition, Edgewater successfully completed the implementation of all the technology described above, as well as definition of key business processes for a global organization that relies on international suppliers and domestic third party logistics providers.  Some of the challenges we addressed along the way included: 

  • Bringing up a short-term web-based EDI solution to meet the aggressive timeline, while beginning to rollout integrated EDI processing in time for Day 1
  • Reconciling numerous issues data migration issues
  • Replanning exercises to address unforeseen obstacles without jeopardizing the timeline
  • Scaling down our implementation methodology to minimize the resource requirements on a lean core team that was still running the platform company’s business with no backfill
  • Training a workforce that included a significant number of new hires

Some interesting M&A Stats

I just took a look at a news item that arrived in my daily  PEHub Wire news roundup: Gotham Consulting Partners’ private equity survey on value creation.  While I’ve only had time for a quick read, three things jumped out at me immediately.

  • 6% of the time spent on due diligence is spent on IT systems. This seems low, especially in light of what the rest of the survey says about value creation. A figure of at least 10% would make much more sense for PE firms that are serious about driving operational value creation initiatives.
  • Post-merger integration does yield greater than expected results, according to survey respondents. A logical extension of this thought would be to begin integration planning early, to achieve those results as quickly as possible after the close.
  • Most firms are relying on standard financial and operational reporting as tools for managing their portfolios.  However, among the more active methods of portfolio management cited, shared purchasing /shared services is the least used among the respondents.  However, a followup question listed shared purchasing/shared services as one of the two active management techniques that yielded better than expected results.

There is a lot of great information in this survey, but at a high level, it points to the need for further changes in approach both before and after deals close. More time spent vetting out risks at a deep level within operations and IT, rapid integration, and new approaches to active portfolio company management could drive these results in a different direction when the 2010 survey rolls around.

“The Trouble with the Future…

fortune_teller…Is that it arrives before we are ready for it.”  A bit of plainspoken wisdom from American humorist Arnold H. Glasow. Thanks to the miracle of google, it becomes our intro quote for today’s topic of acquisition integration readiness.

In an earlier post, we talked about data integration readiness, but that’s only one task on a list of things you should be doing now if you plan to acquire a company in 09. Readiness is the word of the day, and the best way to sum it up is you have to have a documented platform to integrate with across the board, or you will lose time during your integration period. Lost time means revenue drag–you won’t hit your projections.

So, let’s make a list.

1. Data integration readiness, already covered in detail here.

2. Process readiness – are your procedures for key business areas up to date? You will need to walk through them with business team leads on the acquisition side to rapidly understand the gaps between the way they do business and the way you do business. Can you rapidly train the influx of people you will be onboarding with the acquisition? An effective training plan is a solid way to minimize post-close chaos.

3. Collaboration readiness – don’t underestimate the amount of time those new employees will take up with endless “How do I?” questions. Hopefully, you have a corporate knowledge portal in place already and you can give them access and a navigation walkthrough on Day 1. Make sure it includes discussion groups, so that the answers to their common questions can be searchable and institutionalized. There was a great post on this recently describing how IBM is using collaboration tools to help with acquisitions, and Edgewater’s Ori Fishler and Peter Mularien have posted extensively on Web 2.0 tools for corporate collaboration.

While we are on the subject of collaboration tools, let me tip you off to an important secondary benefit. The people that use them and participate actively in discussions are your change agents, the people that can help lead the rest of the acquired workforce through the integration. The people that don’t participate, well, they are your change resistors. They need to be watched, because they may have emotionally detached from this whole acquisition thing. If they are key employees, you want to make sure they don’t have one foot out the door.

4. System integration readiness – It’s oh-so-much-more-challenging (meaning time consuming and costly) to integrate into an undocumented or underdocumented architecture. Get your data flow diagrams and infrastructure diagrams, as well as your hardware and software inventories up to date before you close.

That first quarter after you close will still be a wild ride, but you can be sure you’ve cut the stress level down significantly if you make these readiness tasks a priority before closing day.

Designed to Sell, Corporate Edition

When contemplating which business units or product lines to put up for sale in today’s challenging market, it might be wise to borrow some tactics from  the real estate market. It really comes down to three important guiding principles in planning a divestiture as part of your deleveraging strategy:

1. Know your market – cultivate target buyers to avoid a fire sale. Identify players looking for complementiarity in products, services or customer base.

2. Model the outcome on your going-forward financials – freeing up cash may be top of mind for everyone, but we all need to think past the current crisis and understand what the impact will be on sales and profitability going forward. If you don’t have a business intelligence toolset in place already, you may have difficulty in achieving the type of agile scenario modelling that is necessary here. Infoworld is reporting BI as a key spending area in the recession, specifically for determining profitability.

3. Know where to invest, or “design to sell.”basement – there may be secondary benefits, above and beyond a divestiture’s products, services, and customer base. Specifically in the technology architecture, especially if the business unit is on its own (instead of shared corporate) platforms. Ancient mainframe technology is like the walnut panelling and avocado shag carpeting lurking in the basement. Customized applications with their big in-house support teams are like the pink stucco patio and poolhouse a proud homeowner showcases, causing the buyer to race down the road to the next listing. Call in the design team, these could be good spots to begin a corporate makeover, as they are very likely to increase the value of the sale.

On the flip side, things like collaboration tools and  business process management suites are like the well-appointed master suites and media rooms that can help a buyer warm up to the sale. In addition to things like a lean operating architecture, these technologies help make a divestiture an attractive asset for buyers looking to build out a platform company.

Is this the end of M&A as we know it?


Part of me says, “Oh please, let’s hope so!” — for more than a decade we’ve heard constant complaints about deals that don’t reach their full potential, and watched the same sort of mistakes being made over and over:

  • the hoped-for synergies that are never really defined
  • the integration or transition plan that’s 3000 lines long but gives no one a clue about where the effort actually stands
  • no coordination of business and technology plans during integration or transition
  • the blanket assumption that a move of the acquiree’s business to the acquirer’s systems and processes are always the right choice

There’s no doubt about it—deal volume and total deal value is down year over year from 2007. Credit market woes are pushing buyers to move away from senior debt toward riskier mezzanine capital. Common sense would tell you that if you’re taking on more risk, you’d better be vetting out risks earlier in the deal timeline, yes? Valuations are coming into line due to market conditions, so there’s not so much need to use due diligence to position for negotiating advantage during valuation discussions (but hey, it never hurts to strengthen your position during negotiations, right?) But, given the additional risk you’re taking on with the mezz financing, you’d better have a clear idea about what your IT spend needs to be in year 1. Pre-close is the time to ferret out those orphaned releases, costly overly-customized environments and low-productivity in-house custom IT development shops. Find them, redefine them, and build a tight cost model so you don’t take on any more risky debt than necessary.

dagr_by_arboGloom and doom, we can’t shake it these days—it feels a little like we’re living through Ragnarok or at least Fimbulvetr, the winter of winters that precedes that Destruction of the Powers, doesn’t it? Many assets are being put on the block these days as part of a vast global deleveraging battle. Who couldn’t use a few valkyries on the team, to help choose among these slain assets the most worthy and heroic and carry them off to the Valhalla of value creation?

Difficult days for all of us, these. Let’s remember the great Norse legend does end on an up-note, though — after the great battle, the world resurfaces anew, fertile, with a bright future. Even in these uncertain times, there’s much you can do to either position the assets you plan to put on the block, or to prepare for the success of future acquisitions. More about both topics in future posts.

Reducing IT Costs for New Acquisitions

Over at CIO magazine, Bernard Golden recently published an update on Cloud Computing. In his list of the types of companies that can benefit substantially from computing in the cloud, he left off one situation that can reap tremendous benefits from this approach: newly acquired private equity portfolio companies that are being carved out from larger businesses.

For these companies, cloud computing offers the following benefits:

  • Accelerated implementation timeline that dramatically reduces implementation costs
  • Significant savings on support costs, which typically represent 60% of the IT budget
  • Eliminates the dependency on staffing and retaining IT support staff
  • Costs scale with number of users
  • Repeatable implementation playbook
  • Easily extensible for tuck-in acquisition

One of our senior architects, Martin Sizemore, has laid out the broad strokes of this approach in a short slide show.

It’s an especially attractive M&A technology approach in the middle market, where it can help drive annual IT budgets down under 4% of revenue. While it is most advantageous for creating a new operating platform to accelerate transition services (TSA) migrations, the transition to cloud computing makes sense as a value driver at any point in the asset lifecycle.

Platform Company Integration Pitfalls

cookie cutter integrationCookie-cutter approaches to integrating platform companies are a surefire way to limit your abilities to achieve acquisition goals. There are many ways to do it wrong, and no single, one-size-fits-all approach to doing it right. Some of the more common mistakes include:

  1. Letting earnout terms play out in the operating infrastructure for too long. If it’s hands-off during the earnout period, you need to evaluate whether keeping the acquisition on a separate P&L really makes sense after the earnout ends. Too often, these structures persist and limit the company’s ability to achieve full economies of scale by centralizing key functions such as accounting or call centers.  Instead of compensating former owners on full P&L, it may actually make more sense to move key functions such as AR and collections into a centralized service model before the earnout ends. It’s important to get these considerations on the table during IT due diligence.
  2. Assuming that it always makes sense to integrate all of the acquisition’s business functions into the parent company’s model. Evaluate each functional area on a case by case basis. Leverage better and newer technology and business processes within the acquisition. Remember that the most successful mergers are transformative of both the acquirer and the acquired company.
  3. Assuming that you can just dust off the m&a integration plan for your last acquisition, adjust the dates, and march to the same tune. Every acquisition is unique, and while it makes sense to follow a common integration approach and methodology, flexibility and agility are keys to success.
  4. On the tactical level, one big mistake we often see is trying to integrate a new business into a business operating architecture that is not adequately documented. Every implementation or transition date for a particular business function/system has impacts that must be defined and communicated to multiple stakeholder groups within and outside the company. Put your entire business platform (people+process+technology) under change control and understand and communicate the changes appropriately.

IT Due Diligence: Human Factors

A key task during IT Due Diligence is assessing the strength of the IT leadership team. Martha Heller, in her recent article in CIO, defines the SVP of Technology and Operations as a cool new role and career path for CIOs. 

We’re always a bit relieved when we see this role on the org chart as we begin an IT Due Diligence investigation, but of course we do a bit of probing to determine if the wearer of the title truly has what it takes to lead the organization through the 12-18 months of rapid business change that should follow any M&A deal.

Several clues to the real quality of the SVP of Tech and Ops leadership can be found by:

  1. Asking for and reviewing the business case or strategy document for any recent significant technology initiative. Big red flag if they can’t produce one at all.
  2. Determining if the overall architecture is documented, and under change control from all required perspectives: software, hardware, information, and business process perspectives.  The SVP loses points if the documentation doesn’t exist or doesn’t account for planned future implementations of business and technology changes.
  3. Snooping around for departmental application or information silos. This usually takes some field work, as the IT leadership’s architecture documentation may not reveal what all the business units are hiding in remote offices.

Other factors come into play as well, but these are the top three, because they are the most important ways an effective technology and operations leader can turn IT from a cost center into a true business asset and an engine of growth.

Convergence

Over at The Enterprise, there is an interesting report on the recent Alliance of Mergers & Acquisition Advisors Summer Conference. It brings into convergence two categories of interest here at the Edgewater blog.

On the M&A side, the summary points to a current climate that demands more rigorous due diligence. It has a caveat for buyers concerning deffered capital expenditures, and this is certainly something we look for (and found on some of our recent IT due diligence engagements) when analyzing the IT landscape for hidden risks.

The more interesting content in this article concerns the convergence of M&A and Web 2.0, however. The post cites Web 2.0 and social networks as a means to bring together buyers and sellers and reduce transaction costs by making it easier to find specific talent to work on an acquisition. We’ve certainly noticed this trend on sites like LinkedIn, where buyers and sellers are trying to connect on the M&A Answers forum.