Utility M&A: Betting on the CIO

Deck: 

Presenting 5 critical factors in realizing merger-related savings.

Fortnightly Magazine - March 2007

The utility industry has seen a large jump in merger and acquisition activity over the last couple of years. Intensifying pressures to achieve scale and lower costs have driven much of this activity. And with more than 3,000 utilities still operating in the United States, the industry can expect M&A to thrive for the foreseeable future, with deals growing in scale and complexity.

While estimates vary, a high percentage of all persons executing mergers have difficulty effectively executing the integration. The IT expense alone of utility mergers can cost a quarter of a billion dollars or more. So what makes the risks worth taking? What are the barriers to success? And how can these barriers be overcome?

One of the single greatest challenges is the integration of information technology (IT). IT touches almost every aspect of a utility’s daily activities, from basic hardware and software to business processes and security practices.

Simply put, poor execution in IT can delay the integration of processes/operations, consume a lot of time and effort in platform standardization, and lead to tremendous cost overruns, resulting in inflated cost to achieve (CTA), lost value, and lengthy delays. Handled well, however, IT is an opportunity that can save a utility and its stakeholders millions of dollars, valuable resources, and countless manhours while establishing a platform for future growth.

Critical Factors to Achieving Success

How can the IT team realize the expected cost savings, manage its CTA, support the business teams’ targets and daily activities, and support a smooth integration? We have found that successful utility M&A IT integration incorporates five factors:

• Structured Approach
• Process Discipline for the Business
• Achievable Vision
• Realistic Targets
• Capacity to Manage Change and Communication.

Critical Factor #1: Adopt A Structured Approach

Implementing an IT integration is as much about following a proven, structured process—consisting of a program management office and supporting processes, tools, and accelerators—as it is about achieving synergies. Such a process can accelerate the integration and subsequent synergy capture significantly. Since mergers are not an everyday activity, very few companies have in-house expertise to do this. Nor can they rely on existing IT service providers.

Establishing a strong framework with tools and templates at the very beginning will ensure that all of the integration components are up and running and able to adapt to changes.

A strong IT Program Management Office (PMO) is an essential part of implementing and enforcing any structured approach. A post-merger integration can span several years; therefore potential risk occurs when company management becomes distracted with other priorities and turns their attention away from the IT integration. To avoid this, the IT PMO must provide strong, long-term management, continuity and maintain a cross-initiative focus that enables the IT team to continue hitting its targets.

Critical Factor #2: Insist on Process Discipline

The IT and business teams depend upon each other to achieve their integration targets. However, the IT team’s job is usually more complex, requiring far more parts and a multi-year effort. This requires extensive planning and well-defined implementation plans, as part of a well-defined and enforced process.

The business team’s transformation mainly involves process and organization. As a result, they often assume the need to follow a rigorous integration process is less important. This leads to a snowball effect. By de-emphasizing the integration process, they deliver their business requirements to IT too late, which leads to implementation challenges downstream, which in turn causes delays and added costs. For the business and IT teams to deliver value, they must work together to approach the integration process with the same rigor and commitment.

One strategy is the creation of a strong, business-savvy IT team led by senior people with experience and credibility. This kind of leadership enables IT to partner with the business teams effectively and encourages the use of integration planning tools. The resulting collaboration ensures that expectations are aligned, process discipline is maintained and expected results are achieved.

Critical Factor #3: Develop an Achievable Vision

Normally, the CIO is responsible for creating the IT vision. By laying out an unachievable set of objectives, the CIO and the IT team are set up for failure.

A case in point, when developing the IT vision, CIOs might identify high levels of outsourcing as a desired integration outcome. Unfortunately, they typically underestimate the level of effort and the widespread changes associated with wholesale outsourcing.

When setting the vision, CIOs should keep in mind the ability of the organization to absorb change and maintain focus and its appetite for technology investment. The vision should clearly identify the role of the IT organization in the new company. It should be focused on enabling the future direction of the company, whether its focus is on operational excellence, customer intimacy, or the development of a platform for growth. And last the vision is one in which the CIO can get the IT resources of the new organization rallied around a common goal.

Critical Factor #4: Set Realistic Targets

During due diligence, senior management develops targets that are handed down to the IT integration team for execution. As with any major transactional process, the IT team is given dollar savings, CTA, and headcount reduction goals.

The complexity of IT integration, the short timeframe and the lack of complete information during due diligence makes providing target estimates especially difficult. Platform choices and other decisions can lead to vastly different cost realities. As a result, actual costs often deviate from initial due diligence estimates.

To achieve successful integration, the company must develop realistic IT targets. To ensure they are realistic, targets developed during due diligence should be developed by experienced personnel utilizing a proven methodology and should be refined during the actual integration when a more detailed analysis of the facts is available.

Critical Factor #5: Manage Change and Communication

The changes that IT makes during a merger fundamentally alter the way people do their work, yet rarely is a comprehensive plan in place to communicate with employees and stakeholders and to address impending changes.

In a communication vacuum, rumors and inaccurate information spread quickly, adding to merger stress. Frequent, coordinated communication is the only remedy. This demands a thorough communication plan that employs a range of medium, including weekly meetings, and newsletters. “Report out” sessions at the completion of each phase of the integration and collaborative tools, such as portals.

With this plan in place, employees receive accurate information when they need it, including notices about training opportunities, so they can fully prepare for the new processes and systems. The IT team should never be afraid to over-communicate, since repetition ensures that the message reaches people throughout the organization. And when you don’t have all the answers, saying that you don’t know is better than failing to communicate.

Mergers are grassroots-level transformations that affect every part of a company and every employee. Senior management or a transition team must develop a robust, start-to-finish integration methodology and see it through to the end. By leveraging this proven, experience-based approach, utilities can integrate their IT assets smoothly and gain the full value they expect.