Mergers and acquisitions (M&A) have become a key strategic action for many companies attempting to mitigate the uncertainties of the global economy of the last several years. However, from an operational perspective, they can present serious challenges to the surviving organization after the merger. This point is supported by numerous industry surveys that confirm that, on average, 75% of acquisitions are negatively impacted by low performance results post-merger.
Further investigation reveals that one of the most significant operational pain points is information systems (IS) integration, and topping this list is enterprise resource planning (ERP) integration. Most business processes are embedded in the ERP system, so if the merger is to succeed, this process, knowledge and skills must be transferred to the merged entity. Without this crucial step, all the expected benefits that should result from the synergy of the merger — cost savings, economies of scale and revenue enhancements — are at risk.
Consider questions such as:
- Can operations be standardized on one platform without the loss of functionality and productivity?
- What types of strategic capabilities can be transferred?
- How do you undertake data migration with the least disruption to the business and the greatest overall efficiency?
The answers to questions such as these should initiate a process that closely aligns the ERP integration strategy with the overall business strategy of the newly formed company. In so doing, operational gaps in the system will come to the surface, and new areas of improvement and opportunity will likewise be identified.
Some of the Steepest Challenges for ERP Integration
Given the increasing frequency of M&A in the global and domestic economies, the scarcity of research information on the integration of ERP systems is surprising. Existing research indicates that two-thirds of all M&A initiatives end in failure, which only reinforces the need for additional research and study. While cultural problems contribute to many merger failures, the larger number of failures are attributed to the lack of an effective integration strategy for ERP systems.
During the merger and acquisition process, most decisions are made at the management level, scarcely including the involvement of Information Technology (IT). But these decisions directly impact how successful the IT department will be in executing all of the operational changes required to make the merger a success. Mergers and acquisitions can set in motion a high degree of disruption, uncertainty and stress for all of those affected by the changes. Having some form of representation from every unit of the company, especially ones as critical as the IT department, would help to settle some of the anxiety in the work environment. Better communication and openness can go a long way towards decreasing the resistance from the merging staff, who might otherwise feel little, if any, sense of loyalty or ownership in the merger.
But it’s during integration that the future well-being of the company is at its most vulnerable. Therefore, it makes good business sense to introduce a thorough and well-reasoned change management strategy that supports the staff as they undertake some of the most critical functions that contribute to the restructure of the company’s entire business environment.
Below are just a few of the operational issues that should be defined and addressed in order to initiate the process that will lead to a successful ERP integration:
IT Integration Needs the Support of a Coherent Strategy
Deciding which ERP system to keep and which one to retire is an important strategic decision. But in order to determine which system or systems will be most effective for the merged organization, it’s important to first consider how the new business will operate going forward and align ERP with the goals of the business. The decision of which system to keep should be based on business needs; not driven by internal politics. The first steps should include defining the ERP strategy for the new organization. Answering the following questions will begin the discussion that’ll address many of the technical issues that need to be clarified before an effective ERP integration strategy can be put in place:
- Will or can all operations be standardized on one platform without sacrificing functionality? Or will some operations remain independently operated?
- Will there be any shared areas across both organizations, such as HR or finance? Or will they retain their independence?
Data Integration and Data Migration
Without the proper handling of data, the likelihood of failure for mergers and acquisitions is very high. In fact, according to a 2007 Hay Group study, 75% of managers don’t even consider the question of how integrating IT systems will impact operations after the merger. When different information systems require integration after a merger or acquisition, migrating data could present a challenge if different formats are involved. Data should be converted to a common format before migration, to make the process accurate. In addition, the information must be up to date and of good quality, meaning it should be standardized across systems and functional areas. Without these basic parameters, integration of data could result in interoperability and data quality issues. Data issues around ERP systems can be very costly problems to resolve, and therefore should play a significant part in any M&A.
ERP Integrations Involving Legacy Applications Might Look to Cloud Solutions as a More Cost-Effective Alternative
It can be difficult and costly to integrate legacy applications that were not designed to integrate with other platforms. There are middleware software solutions that can deal with some of the issues, but they can be costly and require customization and manual processes. Other options, like upgrades to on-premise systems, can also be extremely expensive. Cloud solutions that can integrate with many types of ERP might be a good alternative. They’re more affordable, more flexible and offer pay-as-you-go pricing that lowers the total cost of ownership. This doesn’t necessarily imply that companies would have to convert to an all-cloud ERP. But moving some functions to the cloud could prove advantageous to many companies. This hybrid approach that utilizes multiple solutions is often the best option for merged organizations. This option is becoming more feasible as many enterprise ERPs now support cloud applications on their on-premise systems, furthering the ultimate goal of meeting specific business needs.
Many market forces have aligned to bring about the growing volume of mergers and acquisitions in recent years. The success or failure of many of these deals hinges upon the execution of the integration strategy. This fact reinforces the necessity for IT to play a strategic part at all stages of the M&A, and to pay close attention to data issues, especially around ERP systems. Many organizations decide to leave the discussion about the alignment of IT systems and business needs to a very late stage in the post-merger process. This, however, requires reassessment, as the ability to deliver on the merger’s intended value is dependant upon the proper attention paid to this issue in a timely manner.
The benefits of a successful ERP integration to the business are clear, but the fact that they directly reinforce and operationalize the expected benefits of the merger make them indispensable.