According to Thomson Reuters, global mergers and acquisitions activity for Q1 2011 is $717 billion, up 58 percent over the same period in 2008, and is only 25 percent off for the same period during the record breaking 2007.

Similarly, a Bloomberg/Businessweek story recently said that conditions are ripe for an M&A boom in 2011. Corporations have the cash and motivation to go back on the hunt for acquisitions after a long drought as they seek to increase market share, enter new markets or add new product lines by acquiring other companies. In the post-merger integration planning process, IT executives have traditionally focused on two things:

  1. Achieving cost reductions in the IT organization by eliminating redundant processes and systems, and
  2. Integrating the remaining systems to streamline the processes of the combined company.

However, there is a third critical area that they must focus on, but that typically gets overlooked in the due diligence or integration planning process: risk and compliance issues from small subsidiaries with legacy systems (and even spreadsheet-based systems) that don’t enforce policies and processes in the same way the corporate systems do. These potentially weak links can trip up an otherwise well-planned M&A integration process with negative operational and regulatory surprises. As an IT executive, you have an opportunity during the integration process to identify the weakest links and then help subsidiaries choose a system that meets their business and budget needs and also addresses your risk and compliance requirements. But how do you identify these subsidiaries and what type of system do you recommend?  
You start by first assessing the existing systems and processes at each subsidiary of the acquired company to identify if:

  1. Adequate financial or regulatory controls exist at the subsidiaries, so any unpleasant surprises in the future can be avoided. If adequate regulatory or financial controls do not exist, the risk of fines and revenue loss from non-compliance can easily erode any planned benefits from the merger/acquisition. A new system is needed at the subsidiary with updated processes and controls so you can nip issues from lack-of-controls very early.
  2. The corporate office has adequate visibility into key operational metrics of the subsidiary, so it can monitor its performance to see if it is executing in accordance with the operational plan, (specifics about granularity of metrics depends upon the governance model). Without such visibility into subsidiary operations, it becomes difficult to predict delivery on the promised synergy and/or revenue growth. This issue should be addressed in a timely manner by implementing a new system at the subsidiary.
  3. A mechanism exists to drive sustainable operational efficiency at subsidiaries, so medium term cost savings targets can be met. If the processes at a subsidiary are manual and the potential cost savings from the subsidiary are an important part of the overall cost savings plan, then a new system that automates the updated processes and controls is essential.

Once new systems have been identified, the next step is to explore if the existing corporate ERP system can be implemented at these subsidiaries. Your governance model, together with the business requirements of the subsidiaries, should drive this decision. If the governance model calls for more autonomy in the decision-making and execution at the subsidiary level, then these subsidiaries should not implement the same business processes as corporate, because they may get smothered by process overload. In addition, some of these subsidiary sites such as manufacturing plants or distribution centers may have unique industry, functional and regulatory requirements that may differ widely from the rest of the organization.   
Finally, the IT budgets at these subsidiaries are much smaller. As a result of these factors, implementing the corporate enterprise resource planning system at these subsidiaries in an autonomous/semi-autonomous governance model may not be a viable option. Such a deployment model is called a two-tier ERP model, where corporate and subsidiaries have different ERP systems by design. Once a two-tier model is established, ERP systems that meet the budget, as well as functional and regulatory requirements of the subsidiary, can be shortlisted. However, that is not enough – another selection criterion should be evaluated before the subsidiary ERP system is selected.

In some situations the subsidiaries of merged companies run their operations at an arm’s length from headquarters. Sometimes the acquiring company is a holding company, with several independent and autonomous entities, each with their own business model. In such situations, for example, the subsidiary needs to primarily provide rollup of financial data from the subsidiary system to the corporate ERP system in order to enable financial consolidation for fiduciary and management reporting at headquarters. 

In such scenarios, the ERP system at the subsidiary just needs to have light data level integration with the corporate system. Most ERP systems that are shortlisted because they can meet the functional and regulatory requirements and the IT budget requirements of the subsidiary will suffice. However, this approach is not sufficient if the resources and activities across the merged operations need also to deliver on growth targets by tapping into the synergies of the merging companies.

When headquarters and subsidiaries need to coordinate activities or collaborate with each other, a two-tier ERP model with process-level integration between the two ERP systems is the right approach. For example, if headquarters and subsidiaries want to coordinate purchasing activities to benefit from lower purchasing prices, better payment terms and higher quality levels that corporate has negotiated and which they would not be able to negotiate themselves.

In corporate governance models where headquarters and subsidiaries collaborate around activities (such as budget planning), have common functions (such as shared finance or HR services) or have common processes which require coordination, then only that subsidiary ERP system should be selected that has process-level integration with headquarters.  

To ensure that your M&A integration is not tripped by lack of controls in subsidiary operations or lack of visibility into operational performance at the headquarters, you need to identify the subsidiary operations which can introduce risk and compliance issues and then evaluate a new ERP system for them. Deploying the corporate ERP system at subsidiaries may not always be the best approach, especially if subsidiaries have very different business models or other requirements. Many ERP systems may allow you to implement a two-tier ERP model for subsidiaries that operate very independently or only need to provide rolled-up data for consolidation at headquarters. 

However, if some level of cooperation between headquarters and subsidiaries is needed in their supply chain operations, shared services or collaborative planning activities, then two-tier ERP with process level integration is the best approach.

With process level integration between the two systems, subsidiaries get a system that meets their business and budget requirements and provides them the flexibility to innovate and compete effectively in their local markets while meeting the compliance and coordination requirements of headquarters.

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