Ten foundational levers can help shape and guide an effective transformation effort during integration.
An acquirer or seller entering into a significant M&A transaction has many decisions to make, ranging from what brands to keep to what systems to adopt. One of the most important considerations is how transformation can be used to drive greater value from the transaction. In the face of digital disruption, rapid technology innovation, and accelerating industry convergence, M&A transactions can serve as a window of opportunity to capture and lock in value well beyond the transaction.
A common two-step approach to drive transformation through an acquisition can have drawbacks. In this approach, step one focuses on combining the organizations—or splitting them in the event of a divestiture or spin-off—and on stabilizing the business. Step two is transformation, the phase where the organization tries to reimagine, optimize, and right size the business, its operations, and its systems to drive growth and profitability.
This method, however, can prolong the timeline, sub-optimize the value realization potential, and create competing agendas and governance structures that may limit one another. In addition, having two separate steps can lead to fatigue, using up the original deal energy and excitement and leaving many parts of the organization wholly unchanged and far from optimized. According to Deloitte’s recent 2020 M&A Trends survey, 46% of respondents indicate that less than half of their deals over the past two years have generated the expected value.
A Different Approach: Transforming While Transacting
The pursuit of transformation simultaneously with a transaction disrupts the legacy, two-step approach. Companies “transforming while transacting” can redefine their operating model and their business through M&A, while driving revenue growth and sustainable margin improvement.
Organizations that embrace a transforming-while-transacting mindset begin thinking about and planning for transformation early in the life cycle of the deal—as early as when the strategy is set and the investment thesis defined. Due diligence can then help to validate the investment thesis, with a focus on the stand-alone value drivers, potential synergy benefits and potential benefits from applying transformation levers across the organization, as well as potential risks and mitigants.
As organizations develop their end-state vision, they can explore alternative models and approaches to applying transformation levers. In some cases, they define pilots to test the use of new technologies and capabilities. Finally, these organizations define, prioritize, and sequence key initiatives in the transformation roadmap to achieve the desired, risk-balanced acceleration of value realization. As a result, transforming while transacting can help establish a digitally-enabled organization with expanded market access and product offerings, positioning it to deliver revenue growth through a revamped commercial model, an operationally efficient operating model, and improved customer experience.
Challenges and Timing Considerations
Transforming-while-transacting decisions are not without risk. Timeline delays and the possible failure of business or operational model changes are among the challenges to consider. Risks can be exacerbated when planning and/or execution is rushed. Strategic clarity at the outset and effective prioritization of transformational initiatives can help mitigate these and other risks.
In addition, companies should not pursue transformation during every transaction. Transforming while transacting is appropriate where there is an opportunity to create value, a need to reshape and advance capabilities and operations, and an appropriate window to effect change. In such circumstances, companies should strongly consider how to best take advantage of the transformational opportunity—and make it count.
Financial considerations or performance commitments to the board or to investors may also come into play when deciding whether transforming while transacting is appropriate. The size of the organization matters, and so do the performance commitments that have been made to investors and analysts. The degree of change and disruption an organization can handle may also need to be weighed. Some companies are better equipped to handle change, although this can be difficult to measure.
Planning and executing a transformation can happen either in advance of the transaction, during the transaction, or post-transaction. The right timing is often informed by purchase price, speed of transaction close, whether the takeover is hostile, whether there’s a need for transitional service agreements, and the extent to which the organizations rely on digital capabilities.
When a deal is imminent and transformation has not been a part of the planning, post-transaction may be the necessary choice. In this situation, planning for transformation and planning for integration (or separation) should be run in parallel and tightly coordinated.
If possible, the best time to start a transformation process is before a deal has even been signed. Starting early can help foster an expanded view of value creation opportunities and possible transformational outcomes and benefits. In fact, pre-deal transformation can provide a soft landing to an integration or separation. Priority should be given to revenue and customer-facing processes and the operational support for these processes across the supply chain, IT, and finance.
Transformation Levers to Consider
While transformations can take many forms and derive a variety of outcomes, all transformations are composed of the same finite set of 10 levers or foundational processes and structures that can be examined and changed during transformation.
Process reengineering is the redesign of how work is executed to achieve intended outcomes with greater efficiency, lower cost, and improved effectiveness. Reengineering can simplify, standardize, or automate processes while enhancing controls and compliance policies.
Organization design is the effort to define the best organizational structure to deliver on an intended strategy. This can include evaluating and redefining leadership structures; aligning reporting hierarchies to strategic objectives; and clarifying role definitions, goals, and incentives.
Capability development focuses on enhancing the existing features of the revenue model and simplifying operations. Other considerations can include profitability analysis, market entry and capture abilities, and enhanced data analytics.
Talent development focuses on redefining models and processes for career progression, performance evaluation, compensation, and incentives. At its core, developing talent is about nurturing a culture that can reach a company’s human capital potential.
Business model design relates to how a company creates value, from product and service offerings, to value proposition and revenue model. The goal is to reshape a business to make it easier and faster to provide products and services to customers across global markets. Alignment of the product portfolio, supply chain, and finance will all be in service of that goal.
Operating model design focuses on changing how a company operates across the four operating motions of develop, sell, deliver, and support. Key areas for transformation include geographic footprint, legal entity structure, service delivery model design, use of outsourcing or offshoring, and evaluation of external spend.
Digital core upgrade is the shift from legacy systems to next-generation, digital-ready, cloud-capable enterprise resource planning (ERP) systems. While ERP upgrades are foundational to enabling the development of critical capabilities and the adoption of digital disruption, transformation involves a more thorough evaluation of core digital systems.
Data design is focused on enhancing the availability and use of structured and unstructured data to enhance decision-making, produce insights, and connect internal and external performance indicators. Advanced analytics include alignment to external and internal key performance indicators, data science and mining, data visualization, insight development, and predictive analytics.
Cloud architecture adoption sets the stage for an organization to realize the value from cost-efficient software-as-a-service offerings. A critical input is the organization’s overall architecture, infrastructure, and cybersecurity strategy.
Digital disruption adoption includes robotic process automation, cognitive technologies, AI, and blockchain. Embracing these digital capabilities can fundamentally change process execution, increase automation, and serve up timely, on-demand insights.
M&A continues to serve as a critical enabler of growth and value. By accessing new markets, developing new products and services, and developing new or enhancing existing capabilities, companies can capture new opportunities, as well as targeted revenue and cost synergies. However, in today’s dynamic economy, converging landscape, and heightened pace of technological evolution, M&A can and should serve as the catalyst that enables companies to rethink key aspects of their business and operating models―and to transform both to achieve greater value.
—by Raed Masoud, Will Engelbrecht, and Faisal Shaikh, all principals at Deloitte Consulting LLP