Monday, 23 November 2015

4 reasons why acquisition without integration is expensive

Acquisition is an important strategic tool. Typically it is used to acquire a specific asset or capability which has strategic value, or to increase scale, driving down relative costs.

Both require some level of post-acquisition integration, albeit of different sorts. However, in my experience within the financial services sector, that integration is often not fully delivered.

This failure to integrate imposes significant costs on the acquirer.

1. Without integration, the benefits of scale are not achieved.

For example, you're still running two technology platforms with all the associated costs. You're still having to run two separate administration and servicing teams as the skills and knowledge are not easily transferable between the different parts of the operation.

2. Inevitably, the central costs of co-ordination go up.

I worked in an asset management business which had integrated it's front office, but not its back office processes and systems. As a result there was an entire department who spent most of its time trying (and failing, which is why I was there) to reconcile the subtle differences between how business was processed and performance was calculated within the different parts of the operation so that they could provide consistent and meaningful performance metrics to the front office and its customers. It was an expensive exercise designed to disappoint.

This is a great example of failure demand: work performed to compensate for failures in the operating model rather than to deliver direct benefits to customers or other stakeholders.

3. Lack of integration leaves costs trapped within specific pockets of the business.

The cost structure of the business remains determined by historical factors to do with how the business was assembled over time, rather than according to a design suited to the organisation's strategic intent. Small and shrinking areas of the business become crushed by fixed costs, and can't perform well as cash cows which fund the growth areas of the business.

New business opportunities struggle to leverage the fixed costs capabilities of legacy parts of the business. Decisions become distorted and mired in historical irrelevancies.

4. Finally, management bandwidth is eroded.

Almost every major decision must separately consider its impacts and unintended consequences for each of the different operating environments. Fragmented operating environments produce inconsistent management information, which must either be reconciled (an expensive, time consuming and error-prone process), or which reduces the quality of information on which to base decisions (or both).

If true operational integration cannot be achieved, then the integration of data and management information systems is at least a minimal requirement to give management proper control of the business. I suspect however, that such insight and control would only lead to the conclusion that further integration of the operations was required anyway, for all the reasons mentioned above.