The final installment in our mini-series on getting the riskiest days right deals with getting your combined, post-close organization through a timely, effectively and business-focused operational cut-over. If you are just now joining this series, here are the links to the previous issues so you can catch up on what we believe are the riskiest days in M&A integration and why: The Riskiest Day, Getting Announcement Day Right and Getting Day 1 Right.
To coach us through this mission-critical integration milestone, it’s an honor to tap into the expertise and insights of my friend, mentor and colleague, Jack Prouty. Many of you know Jack as the President of the M&A Leadership Council. If you’ve attended one or more of the organization's Art of M&A Executive Training Workshops, you already know why I wanted to leverage Jack’s experience on this topic.
Quite frankly, Jack has more integration experience than just about anyone else on the planet. He has assisted on well over 70 pre- and post-acquisition integration planning and implementation projects. Prior to his association with the M&A Leadership Council and M&A Partners, he was the Partner-in-Charge of the Business Integration practice at KPMG, a practice he founded and managed. In addition to his consulting expertise, Jack has served as a COO, CFO and CIO of various corporations and has over seven years of line-management experience in retail.
"Steady state operations usually does not mean 'integration complete.'"
The following comments summarize a recent conversation with Jack on getting operational cut-over right.
MH: Jack, let’s start by defining what we mean by operational cut-over and why it’s so important to get this right.
JP: In our view, operational cut-over describes the collective integration planning processes and implementation events required to successfully “go live” as one integrated company. So long as you are operating with transition management in place, parallel operations, separate systems and separate go-to-market approaches, there will be disproportionate risks and obstacles to both the core business and the overall value proposition of the deal.
Your goal is to consolidate as soon as you can – especially the core administrative functions – onto common systems, platforms, processes, management and facilities. Generally speaking, the more you can accelerate completion of this transition state, the more effective you will be in minimizing and mitigating the risks and the faster you will be able to capture synergies and create the long-term value anticipated by the deal.
MH: We tend to see a lot of confusion out there about when and how to achieve operational cut-over. What’s your advice?
JP: Information Technology is clearly the critical path and impacts all functional integration efforts. But time is our enemy, and the longer it takes before operational cut-over, the higher the costs and the greater the business operational risks. We like to think about operational cut-over in distinct phases or waves. Even though a large ERP integration could easily take 18 to 36 months to complete depending on a variety of factors, the near-term drive should be on achieving consolidated interim systems, processes, reporting and practices, usually within the first few months post-closing. We generally suggest defining this interim milestone, sometimes called “steady-state operations,” ideally within the first six months post-closing (and longer, of course, for larger, more complex and more global deals).
Depending on the deal complexity and overall “integration-complete” objectives, upon achieving this interim milestone, most organizations will then re-scope and re-launch the next phase of integration with responsibility for longer-term requirements shifting permanently back to the business unit and IT, perhaps with continuing support provided by the Integration Management Office (IMO). During the entire pre-close and post-close workflow, the principal deal sponsor, integration leader and CIO must be actively collaborating to phase in high-priority requirements and accelerate the overall process.
MH: Talk to us about what should take place after the interim milestone you describe as steady-state operations.
JP: Most deals still fail to achieve their full, anticipated pre-deal strategic or financial value proposition. Until you reach the point of steady-state operations, integration is often more tactically focused than strategically focused. A common mistake we see is that organizations declare victory when they reach some interim level of integration, but whether due to exhaustion, distraction, resource deficits or other factors, they fail to address the long-term value creation objectives of the deal. It is extremely important to emphasize that steady state operations usually does not mean “integration complete.” To paraphrase Churchill, “This is not the end or the beginning of the end, but the end of the beginning.”
For example, beginning on Day 1 the initial focus is usually on launching the immediate integration activities and consolidation “quick wins” through a transition management structure to coordinate among and between two different day-to-day operational models. The emphasis then can shift more toward further stabilizing the combined business by establishing interim processes that will be used until full operational cut-over is achieved.
Steady-state operations does, however, serve as a very important pivot-point to longer-term integration planning and execution to address what matters most: rationalizing IT infrastructure and applications; transformation of the sales function; using technology as a competitive differentiator; building high-performance cultural attributes; developing new products or services that meld the best practices of the two companies in a unique and distinctive way; and other specific elements as may be required to deliver on the full value proposition of the deal and achieve the desired degree of operational integration.
MH: What are a few other “lessons learned” to consider when planning a successful operational cut-over?
JP: Even experienced acquirers have to consciously adapt and apply their prior lessons learned to each new situation. Here are a few things to watch out for.
- Consider “Deal-type DNA” when determining your integration strategy framework. The desired degree of operational integration will vary widely with different deal-types and strategic objectives. (For more on these concepts, please refer to Avoiding Integration Disaster Through Deal-Type DNA, and, Determining the Degree and Timing of Integration.)
- Don't fail to install effective transition management and staff. Many acquirers are too hasty in terminating the acquired company's senior management and lose critical context expertise that is difficult to replace in the short term. Others fail to lock in key functional staff and subject experts with adequate retention or severance agreements, resulting in delays or an inability to execute in a timely fashion. The flip-side of this is trying to maintain acquired company executives too long if there are known capability deficits to get to the next level or a lack of willingness to adapt to the buyer’s processes or approach.
- Avoid trying to re-engineer processes or transform a business while you are integrating. This is like trying to change a tire on a moving truck. We generally advise integrating on an “as-is, where-is” basis to the greatest extent possible. It may sound counterintuitive, but results are generally better when you integrate first, and optimize later.
- Effectively manage communications, training, change management and employee onboarding. Most organizations fail to maintain an adequate level of communications, training, change and onboarding requirements after the initial push. Instead, these strategies should be viewed as ongoing campaigns, with distinct phases supporting each of the major components of operational cut-over.
- Update your M&A processes to reflect this phased approach. As illustrated in this downloadable resource, Getting Operational Cut-over Right, this high-level workflow model, adapted from the much more comprehensive M&A Partners MergerMax Value Creation Map, suggests some basic priorities by phase to help guide your internal discussions.
MH: Thank you, Jack, for your outstanding coaching on how to get operational cut-over right!