Recent notable headline mergers & acquisitions (M&As) such as Sainsbury’s agreeing a £1.3 billion takeover of Argos owner Home Retail Group, Starwood Hotel & Resorts merger with Marriott International for £9 billion and most recently the merge agreement between London Stock Exchange and Deutsche Bӧrse, have drawn attention to the implications of failing IT systems when companies merge.
M&A activity inevitably continues to be driven by ‘The Big Four’ looking to boost their consultancy offerings, with recent acquisitions including: PwC’s 2016 acquisition of Outbox Group and Booz & Company in 2014, and EY acquiring tech companies Seren and Integrc. However, not all M&As succeed.
According to a recent Harvard Business Review report, the failure rate for M&As is between 70 and 90 percent. This may seem a remarkably high figure, but when you consider the range of business and cultural factors that occur during an M&A, it’s hardly surprising. Integrating the IT operations of two companies often proves to be much more complicated in practice than in theory.
Where does it all go wrong?
M&As are typically driven by ‘synergies’ or competitive advantages through cost-savings, with technology playing a prominent role in the process. If there is an evaporation of synergy, the results can mean the combined company are unable to reach the anticipated targets in terms of cost-savings from ‘synergies’ and economies of scale. If there is no common technology estate there will be fewer common practices.
The technology estate of an organisation is made up of three layers:
- Business process Operations
- Application Portfolio
The middle layer, the application portfolio, plays the most crucial role because it drives the other two layers. This is where the challenge lies, due to the lack of awareness of code quality of applications. Faults in the application layer impact the quality of the technology at the merged organisation.
One of the main reasons for the failure of M&As is predominantly due to a lack of awareness and understanding of the application portfolio. Analysing the application portfolio allows for “bad patterns” in the software not necessarily bugs, but typically related to bugs, need to be highlighted and fixed before they cause or contribute to a glitch or outage in the merged system.
The application portfolio analysis
Carrying out the portfolio analysis allows IT professionals to address the issue of software quality across every application. One of the more important tasks in application portfolio analysis is raising the issue of software quality across applications. Without this analysis there is no way of seeing clearly which applications pose the greatest risk and benchmarking them.
Carrying out detailed application portfolio analysis allows IT pros to identify the potential risk and cost saving opportunities across distributed application portfolios. By delivering data and insights on the health of the application portfolios, it provides IT leaders with objectivity and clarity to make more informed business decisions, as to how much ‘technical debt’ each application is carrying. This gives clear guidance on which applications are worth investing in and which should be diverted.
Health factor analysis searches for hundreds of problematic code patterns and bad programming practices which would increase the risk and costs in the software. Key portfolio metrics include performance, reliability and robustness, and provide facts about the portfolio that can then be compared to industry peers to determine whether they are riskier or more complex than the average.
Benchmarking against dimensions such as technology application type or exposure, team skills, turnover ratio, and total end-users gives an overall objective view of the portfolio and provides the confidence to bid (pre-merger) or integrate (post-merger) appropriately.
Being able pull the relevant data fast is essential for M&A transactions. The more information available sooner, the quicker faults and risks in systems and applications can be identified. This all plays an important part in enabling financial organisations, such as banks, to operate securely and reliably throughout and after the transaction.
When there is no IT synergy, usually because it didn’t receive the adequate due-diligence, organisations are a greater risk of encountering faults to their system. Financial professionals need to understand the strategic value that IT plays in the M&A process, particularly with acquisitions continuing to play a big part in business growth. Many M&As fail to live up to the hype due to stumbling blocks when it comes to technology integration. Application portfolio analysis is not just a technical exercise; it is smart business practice.