Opportunities for Action in Information Technology. Clusters and Nuggets: Mastering Postmerger IT Integration

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1 Opportunities for Action in Information Technology Clusters and Nuggets: Mastering Postmerger IT Integration

2 Clusters and Nuggets: Mastering Postmerger IT Integration In an age when corporate mergers are increasingly redefining the landscapes of many industries, information technology too often presents a roadblock to a smooth merger process. While managers concern themselves with implementing new organizational structures, identifying quick wins, and developing the strategy of the new entity, defining a well-structured approach to IT integration can slip far down the priority list. Even when IT does get some attention, it is frequently addressed without the rigor and dedication applied to other major aspects of the merger. The result can be a scenario in which the new IT landscape ends up being a patchwork of applications that cannot communicate except for a few makeshift links that have been hurriedly set up to overcome specific operational constraints. Additional costs are usually incurred because of redundant applications, and business projects cannot be carried out because, for example, client or supplier databases have not been properly integrated. In such a situation, senior management can finally become so frustrated with the resulting inefficiencies that it calls for a complete overhaul of IT systems which of course leads to further costs, increasingly dissatisfied IT users, poorly served customers, and more delays in the overall fusion process. The Boston Consulting Group s research and client work clearly show that rapid and comprehensive integration of IT systems greatly enhances the chance that a merger will succeed. And the reverse is also true: poor execution in this area can derail a merger that is otherwise going well. But what is the best approach to postmerger IT integration?

3 In our view, the banking industry offers valuable lessons to companies in every sector. Banking mergers have been numerous in recent years, the IT learning curve has been steep, and, after all, successfully combining the businesses of two banks is largely dependent on marrying two IT systems. By learning from the experiences of large banks that have undergone mergers and by adopting appropriate initiatives, merging companies in any industry can improve their IT integration performance. Six Lessons from the Banking Industry The synthesis of two banks IT systems helps determine the calendar and significantly influences the success or failure of an entire merger. Recent successful integrations demonstrate that 25 to 30 percent of banking-merger synergies derive from IT. Moreover, a recent BCG benchmarking study shows that major banks spend roughly 10 percent of their total revenues on IT and that IT accounts for 20 percent of their total costs. 1 In the course of banking mergers that BCG has been involved in, we have identified six guiding principles that can help ensure the successful integration of IT systems in any industry. 1. Choose from the existing systems landscapes do not build a third. In the early stages of a merger, it is critical to define a transparent method for selecting the IT systems of the new entity. Doing so will minimize politically driven decisions, help avoid incurring additional costs at a later stage, and limit the inherent risks of the integration. It is equally important to 1. See IT Costs in Banks: Revisit Your Beliefs!, BCG report, May 2004.

4 select existing systems from the two merging companies as much as possible, thereby limiting the amount of overall systems integration required and the time and effort needed to complete the process. 2. Identify clusters of applications. When a large company takes over a competitor of significantly smaller size, the choice of IT systems for the merged entity is usually straightforward. The merged entity retains the entire landscape of the larger (or the acquiring) company and integrates only a few specific or absolutely necessary applications from the smaller one. In the case of a merger of equals, however, the situation is much more complex. Managers of each business line nearly always want to keep their own IT systems and are willing to fight for them. Under these circumstances, having a clear method to compare and select the final, or target, systems is crucial. There are two approaches that companies typically adopt. The first approach is choosing a systems landscape application by application. When merging companies take this option, most users feel satisfied, at least initially. They can choose the best solution for each application on the basis of their own operational and financial criteria. But this path has drawbacks. First, it s extremely difficult to coordinate all the various application choices. In the recent Crédit Agricole/ Crédit Lyonnais merger, for example, the banks had more than 3,000 IT applications to choose from. Second, the merged systems landscape can amount to a hodgepodge of applications running on different technical platforms, with most links having to be redeveloped. Third, the risk and cost of failure rise appreciably for the overall integration process. For instance, the main reason why the merger between Chemical Bank and Manufacturers Hanover incurred

5 an 18-month delay in the early 1990s was the IT integration s complexity, which resulted from cherry picking applications from both companies. The second approach is choosing one entire IT systems landscape. This is clearly the easier method for IT teams. Only one of the two existing landscapes remains, and all migrations occur along the same path. Users familiar with the chosen systems are typically satisfied, although the rest may feel that they will lose functionality and have to bear training costs. The advantages of this approach are simplicity, speed, and the ability to calculate a fairly accurate estimate of potential synergies. The issue, of course, lies in determining which landscape should be retained. This debate can often dominate the merger and can become confrontational because, in the minds of many, the IT landscape that is selected designates the winner of the merger. In BCG s view, the most effective way to design the target landscape is to perform the selection process at an intermediate level, somewhere between choosing one entire landscape and assembling a jumble of single applications. This involves identifying what we call a cluster: a set of applications and data that form a relatively autonomous unit. (See the exhibit Choosing Clusters of IT Applications. ) To ensure a more efficient integration, each company s IT team should break down its respective systems into clusters. The merging banks can then design the new landscape by choosing clusters from each side. The 3,000 applications involved in the Crédit Agricole/Crédit Lyonnais merger, for example, were grouped into a total of 63 clusters representing all business lines, including corporate and investment banking, asset management, insurance, specialized financing, international operations, and corporate functions.

6 Choosing Clusters of IT Applications High Potential for business alignment Approach 1 Choose the applications one by one Risk of low synergies A Better Approach Choose clusters of applications Approach 2 Choose the IT system of one entity Risk of limited functionality Limited High IT complexity Low SOURCE: BCG analysis. This sort of IT systems mapping has the advantage of being largely objective. IT teams group each company s applications into clusters on the basis of technical adherence and compatibility alone, regardless of any political stakes or disputes about areas of responsibility. Moreover, at the implementation stage, projects will be structured around these technical interdependencies. It is extremely important that managers of the various business lines validate and support the defined clusters. Moreover, the number of clusters should be limited to as few as possible. For instance, Chemical Bank, in its 1996 merger with Chase Manhattan, remembered the lessons it learned from its earlier fusion with Manufacturers Hanover. In the more recent merger, 2,500 applications were grouped into 70 clusters that served as a basis for the choice of the merged entity s IT system. Similarly, in a recent merger of two large European banks, BCG

7 helped the institutions define 70 clusters across six business divisions from a combined landscape of roughly 2,000 applications. Within three months, a target landscape for the new entity was formulated and supported by both banks. This initiative helped the overall merger process get off on the right foot, and the IT integration ultimately delivered approximately one-third of the merger s total cost synergies. 3. Follow a rigorous selection process. Once each merger partner has divided its IT landscape into clusters, the IT groups should make a technical evaluation of each cluster on the basis of such aspects as architecture, age, and flexibility. This helps business lines clearly understand the differences between the many cluster A s and cluster B s. Then end users can carry out functional comparisons and recommend final choices. A standardized framework to compare scenarios, provided by the IT teams and supported by the new senior management, is a key to success for this evaluation process. Five major criteria must be taken into account: The functionality within the context of the new business strategy and operating model. Which operations does cluster A support that cluster B does not? The quality, durability, and flexibility of each cluster s technical architecture. This is determined mostly by the IT groups evaluation of the clusters. The potential savings on operating costs related to both IT and the overall business. It is especially important that the suppression of any system lead to the removal of its costs, because synergies will not be realized if a discarded system shares a platform with another system that remains.

8 The feasibility of the migration project. This includes an assessment of migration costs and major risks, including business disruption. The speed of implementation. Clusters whose implementation appears to be particularly time consuming should be avoided. Each business line should carry out cluster projects using these criteria to determine the consequences of choosing cluster A over cluster B. In fact, a committee should be formed to oversee and help ensure the consistency of choices between clusters. It should be a high-level group, near the seniority of the executive committee (which can serve as an arbitration authority), and should include the CIOs of both entities. 4. Look for nuggets. Some isolated applications can prove to be absolutely necessary for continuing certain services, sustaining a specific competitive advantage, or generating productivity improvements within a support function. It is therefore important for IT teams and users to identify these nuggets. It is common to choose a cluster from company A while keeping a nugget application from a parallel cluster at company B. For example, in the recent merger of two European asset managers, a software package providing state-of-the-art functionalities for measuring and controlling counterparty risk which had just been acquired by one of the players was retained and consolidated into a Java-based integrated platform for all front- and middle-office applications developed by the other player. Such nuggets are typically few and far between, however, and a rigorous validation process is necessary to ensure that they are truly worth retaining. In the merger of equals between Bank Austria and

9 Creditanstalt in which the systems of the acquired bank (Creditanstalt) were found to be superior from both an IT and a business perspective roughly 2,000 IT change requests ensued from the acquirer s side, jeopardizing the integrity and efficiency of the integration project. As a result of a thorough screening, the requests for changes were reduced by more than half. Ultimately, the IT integration was achieved successfully and on schedule. 5. Balance integration speed with careful systems selection. It is absolutely critical to give deadlines to the business lines for their choices of clusters. Otherwise, discussions can drag on interminably, and synergies will be delayed. Such delays destroy value because the merged entity must continue to invest in two systems as long as migrations are not completed. Although speed is of the essence, however, it is important not to rush toward decisions too quickly. An overly hurried process without sufficient transparency often results in decisions being revisited later and possibly reversed wasting both time and resources. In our experience, merger partners that do not have a clearly defined selection approach often witness the process spinning out of control, lasting for many months, even years. Conversely, if a rigorous and transparent method is adopted, selection typically takes three to six months, as was the case in the Halifax/Bank of Scotland and BNP/Paribas mergers. 6. Monitor implementation closely. Once all systems choices have been made, the longest phase begins: implementation. A systems landscape that takes three to six months to choose will probably take 12 to 18 months to implement fully. The merged entity should monitor all IT implementation projects linked to the merger under a common framework. To this end, it is

10 vital to set up a tracking mechanism to help provide control over intermediary milestones and create the transparency needed to accurately inform the new board and external shareholders of the IT integration s progress. Of course, although each business line clearly must be responsible for the merger projects falling within its scope, projects are often interdependent and some tradeoffs may have to be made. The committee that has overseen the choices of IT clusters should be in charge of monitoring the implementation projects and deciding on these tradeoffs. During the successful integration of BNP and Paribas, for example, a rigorous and centralized IT-project monitoring system was established. Twenty programs across the bank involving several business lines, more than 1,000 projects, and 12,000 progress milestones were identified and monitored during the implementation phase. A Key to Merger Success Successful banking mergers such as Halifax/Bank of Scotland, BNP/Paribas, and The Royal Bank of Scotland/NatWest have exceeded their initial synergy targets. All were driven by a speedy selection of their target IT-systems landscape, followed by a focused implementation of integration projects. Ultimately, although the link between IT performance and shareholder value creation is not often emphasized, the quick and successful integration of IT systems in a merger situation in any industry will contribute significantly to the overall success of the merger. Analysts and equity markets recognize

11 this fact. Merging companies should be aware of it, too, and should be prepared to meet the challenge of IT integration. Christophe Duthoit Ralf Dreischmeier Antoine Gourevitch Mathieu Ménégaux Christophe Duthoit and Antoine Gourevitch are vice presidents and directors in the Paris office of The Boston Consulting Group. Ralf Dreischmeier is a vice president and director in the firm s London office. Mathieu Ménégaux is a project leader in BCG s Paris office. You may contact the authors by at: duthoit.christophe@bcg.com dreischmeier.ralf@bcg.com gourevitch.antoine@bcg.com menegaux.mathieu@bcg.com To receive future BCG publications in electronic form about this topic or others, please visit our subscription Web site at The Boston Consulting Group, Inc All rights reserved.

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