Time to Remodel the Kitchen?

Although determining full and realistic corporate valuation is a task I’ll leave to people of sterner stuff than I (since Facebook went public, not many could begin to speculate on the bigger picture of even small enterprise valuation), I’ve recently been working with a few clients whom have reminded me of why one sometimes needs to remodel.

Nowadays, information technology is often seen as a means to an end. It’s a necessary evil. It’s overhead to your real business. You joined the technological revolution, and your competitors who didn’t, well… sunk. Or… you entered the market with the proper technology in place, and, seatbelt fastened, have taken your place in the market. Good for you. You’ve got this… right?

I’m a software system architect. I envision and build out information technology. I often like to model ideas around analogies to communicate them, because it takes the tech jargon out of it. Now that I’ve painted the picture, let’s think about what’s cooking behind the office doors.

It’s been said that the kitchen is the heart of the home. When it comes to the enterprise (big and small) your company’s production might get done in the shop, but sooner or later, everyone gets fed business processes, which are often cooked in the kitchen of technology. In fact, technology is often so integral to what many companies do nowadays that it’s usually hard to tell where, in your technology stack, business and production processes begin. Indeed, processes all cycle back around, and they almost certainly end with information technology again.

Truly, we’ve come a long way since the ’70s, when implementing any form of “revolutionary” information technology was the basis of a competitive advantage. Nowadays, if you don’t have information technology in the process somewhere, you’re probably only toying with a hobby. It’s not news. Technology graduated from a revolutionary competitive advantage to the realm of commoditized overhead well over a decade ago.

Ok… ok… You have the obligatory kitchen in your home. So what?

If you think of the kitchen in your home as commoditized overhead, you probably are missing out on the even bigger value an update could bring you at appraisal time. Like a home assessment, due diligence as part of corporate valuation will turn up the rusty mouse traps behind the avocado refridgerator and under the porcelain sink:

• Still rocking 2000 Server with ActiveX?
• Cold Fusion skills are becoming a specialty, probably not a good talent pool in the area, might be expensive to find resources to maintain those components.
• Did you say you can spell iSeries? Great, can you administer it?
• No one’s even touched the SharePoint Team Services server since it was installed by folks from overseas.
• The community that supported your Open Source components… dried up?
• Cloud SLAs, Serviceability?
• Compliance?
• Disaster Management?
• Scalability?
• Security?
• Documentation…?
  • Don’t even go there.

As you can see… “Everything but the kitchen sink” no longer applies. The kitchen sink is transparently accounted for as well. A well designed information technology infrastructure needs to go beyond hardware and software. It considers redundancy/disaster management, security, operating conditions, such as room to operate and grow, and of course, if there are any undue risks or burdens placed on particular technologies, vendors, or even employees. Full valuation goes further, looking outside the walls to cloud providers and social media outlets. Finally, no inspection would be complete without a look at compliance, of course.

If your information technology does not serve your investors’ needs, your CEO’s needs, your VP of Marketing and Sales’ needs, as well as production’s… but most importantly your customers’, your information technology is detracting from the valuation of your company.

If the work has been done, due diligence will show off the working utility, maintainability, security, scalability, and superior added value of the well-designed enterprise IT infrastructure refresh.

To elaborate on that, a good information technology infrastructure provides a superior customer experience no matter how a customer chooses to interact with your company. Whether it’s at the concierge’s counter, in the drive-through, at a kiosk, on the phone, at your reseller’s office, in a browser or mobile app, your customers should be satisfied with their experience.

Don’t stop with simply tossing dated appliances and replacing them. Really think about how the technologies work together, and how people work with them. This is key… if you take replacement appliances off the shelf and simply plug them in, you are (at best) merely keeping up with your competitors. If you want the full value add, you need to specialize. You need to bend the components to your processes. It’s not just what you’ve got.  It’s how you use it.  It’s the critical difference between overhead and advantage.

Maybe the Augmented Reality Kitchen won’t provide a good return on investment (yet), but… there’s probably a lot that will.

Carving out a new company, aka “Just Add Water”

Earlier this month, our Google Alerts picked up a press release praising our role in a recent carve-out project. It was a nice surprise for us, and has generated some inquiries about our role. In this post, I’ll quickly scope out the project, and our role, for you.

Edgewater Technology was approached by one of our existing clients to assist with defining technology strategy for a “carve-out” that they were bidding on. Both parties sought a way to minimize or eliminate the need for a transition services agreement (TSA) and close the deal as quickly as possible. Our client, the buyer, intended to integrate the carve-out into one of their existing portfolio companies. This portfolio company was running well with a lean organizational model and homegrown ERP platform, but it was clear that it could not absorb the new acquisition with its existing enterprise technology architecture. Senior consultants from Edgewater Technology’s M&A and Infrastructure Services practices, with our colleagues from Edgewater Fullscope, our sister company with expertise in implementing Microsoft Dynamics AX, quickly put together a strategy based on:

• Migration of the acquisition onto Microsoft Dynamics AX
• A new corporate network  to link the parent company with 1 US and two international sites, providing for remote access for employees and contractors as well
• Hosted MS Exchange based email
• Hosted MS Sharepoint
• Virtualized application deployment in Edgewater’s Data Center

In addition to implementing the technologies described above, Edgewater rehosted a smaller ERP system in use at one of the international sites, to avoid having to take on two ERP application migrations at once. This business unit will eventually migrate onto AX after the initial  stabilization of the US business is completed.

Because of Edgewater’s 10+ years of experience with M&A integration, program management, business process definition and organizational change management, our team provided these wraparound services as well, spearheading a Program Management Office that embraced all US and International acquisition sites and members of both the Buyer’s and Seller’s transition teams.

In an intense 120 day transition, Edgewater successfully completed the implementation of all the technology described above, as well as definition of key business processes for a global organization that relies on international suppliers and domestic third party logistics providers.  Some of the challenges we addressed along the way included: 

• Bringing up a short-term web-based EDI solution to meet the aggressive timeline, while beginning to rollout integrated EDI processing in time for Day 1
• Reconciling numerous issues data migration issues
• Replanning exercises to address unforeseen obstacles without jeopardizing the timeline
• Scaling down our implementation methodology to minimize the resource requirements on a lean core team that was still running the platform company’s business with no backfill
• Training a workforce that included a significant number of new hires

Assessing an Acquisition’s IT Capabilities: “What’s in Your Portfolio”

Why do I need to think about assessing the IT capabilities of an acquisition?

So you just acquired a company as part of your growth, diversification, or some other strategy. The new company along with its LOB (line of business) expertise comes with an entire IT infrastructure that was thus far responsible for supporting the acquired company’s information needs only. While a great deal of due diligence goes into understanding the viability of the business and its value the same level of rigor is typically not applied to evaluating its IT infrastructure and support staff. In order for the two companies to work together well it is important to understand the capabilities of the two IT infrastructures and how to best integrate or not integrate them. If a detailed and careful plan is not put together to understand the capabilities and assets of the new acquisition you risk inheriting a vulnerability that can spread throughout the larger organization or risk stifling a capability that really should be promoted to the larger organization.

Why you need an independent perspective?

Sometimes companies use their own internal staff to assess the target or recent acquisition. The problem with this approach is that these assessments can be tainted by hidden agendas, lack of impartiality, and departmental politics. Entrenched interests can also slant information one way or the other as it passes up and down various departmental hierarchies.  I was part of a software company which wanted to acquire another software company with similar technology. Our own internal research and development department was tasked with the assessment of the company’s technology. Quite understandably the leaders in the R&D group thought it was inferior to what was developed in-house even though that was far from the reality. The key decision makers involved in the deal, including the CEO and the board of directors, were getting conflicting accounts of the reality and did not know whose version of truth to trust. This is where an independent perspective from external consultants can come in handy. They often face less resistance when digging around and are able to see beyond the personal bias and the “ugly baby” syndrome. A fresh perspective can also help see the forest from the trees which can sometimes be missed by the people who are working on the trees on daily basis. I came across another post acquisition assessment where the management was told that acquired company’s technology and custom developed software was topnotch. Upon further investigation we discovered that the most of the custom software was developed in a little known RAD development environment and less than a handful of people in the company knew how to maintain it. While this creates tremendous job security for some it creates a significant risk for the company. In another situation credit card numbers and all other consumer related information was stored in a database unencrypted!  Stories like these are all too common and point to the need for an independent perspective.

Is it too late to do an assessment after the deal has been signed?

During my days as a consultant I have primarily come across two types of assessments: pre-acquisition and post-acquisition. Pre-acquisition assessments are important where IT infrastructure is a primary part of the value of the business being acquired (software companies, online businesses, etc.). The focus of a pre-acquisition IT due diligence assessment is primarily on ensuring that the IT assets are as good as they have been portrayed,  that they are capable of supporting the business objectives associated with the acquisition, and that there are no hidden risks that will require significant expense to remedy after the buyer takes ownership. For example can a wildly successful but local online service be introduced in a new geographic region with a new language, currency, tax and privacy laws, etc? Post-acquisition assessments are important when the prime value of the acquisition is derived from the LOB (e.g. selling insurance policies, financial management, etc.). The focus of this type of assessment is typically ensuring that IT infrastructure is solid enough to continue to support the business; there are no vulnerabilities that can jeopardize the combined entity, finding areas of excellence to propagate, finding redundancies, and figuring out an integration plan. It is always good to get an outside assessment done before the deal is inked however, if that doesn’t happen it is still very important to at least get the post-acquisition assessment and planning done.

What kind of acquisitions can benefit from an assessment?

These days even small companies whose business does not directly intersect with information technology rely on some sort of back-office IT infrastructure to run their day to day operations. A back-office infrastructure may contain email servers, phone/fax servers, internet gateways, website servers, database servers, LOB applications, etc. A front-office infrastructure may contain client facing applications, online portals, CRM applications, LOB applications, etc. As the number of servers and employees grow the need for proper management and use of sound practices to manage them become more important. If access to IT infrastructure such as LOB applications, databases, email, website, etc. is essential to the daily operations of your business it is vital to ensure that proper assessment of the potential risks is done and the IT assets are managed properly.

What are some of the key aspects that should be examined during an assessment?

Start with creating an overall blueprint of the IT assets and how they interact with each. You would be surprised to learn how often such a fundamental document does not exist. Look at the hardware/software redundancy needs to provide the needed uptime to the business. Determine what disaster recovery plans exist, when they were last tested, and what kind of situations they can handle. Examine the security risks and ensure that the security practices match or exceed the required level of protection warrant by the business. Does the infrastructure have the capacity meet or exceed the demands placed by the peak loads and growth in the business? Examine the hosting environment for security, redundant power, redundant internet, redundant cooling, proper fire suppression, etc. Ensure that hardware and software assets are not so old that they are longer supported and can’t be upgraded. Is the technology stack compatible with the umbrella company’s technology stack? Are they any strange or esoteric practices or standards that could introduce risk? And never forget to identify practices, technology, and people (centers of excellence) that can benefit the entire organization and should be propagated to the entire company.

Reviewing security policies and procedures is another key aspect of the assessment. The risks associated with a weak security structure are obvious and too numerous to describe here. You need to not only think about electronic and online security (firewalls, virus and spam filters, internet intrusion attacks, etc.) but also about physical security. Most companies tend to neglect one or the other and sometimes both. In today’s environment the physical as well the data security should be considered a top priority for any IT assessment. The risks are high no matter what business it is, including legal consequences and public embarrassment.    At a fortune 500 company where I once had the privilege to work became a victim when half the office noticed that there computers were running slower than usual. Upon further examination it was discovered that each computer was missing half the memory chips that they had. Someone had simply walked in after hours before the lock-down, removed memory, and walked away. At another client site we discovered that they have neatly documented their security policies and key passwords but the passwords for all the accounts were exactly the same!

Depending on the industry you work in you may also have to worry about compliance and regulatory issues. For health care industry you have to worry about HIPAA compliance. All personal information and medical records have to be protected according to the guidelines of the HIPAA act. All publicly traded companies have to be in compliance with Sarbanes-Oxley act (SOX). Even though the SOX act never mentions the word software the audit trails and record keeping required by the act ensures sizeable investment in IT infrastructure and processes to manage it. There are various other acts and standards like the Patriot act, DOD 5015.2, SEC regulations, ISO standards (9000, 15489), etc. that may apply based on the industry and business practices. Sometimes the process may be even more confusing and harder when acquiring companies in different countries or different states where the local laws are not the same. All of this means that you must ensure that your new acquisition does not expose you to compliance issues that you didn’t have to worry about before.

How do we plan for the joint future?

Now that you have good handle on what you just acquired you need to plan how you are going to move forward. You need to think about cost saving opportunities by consolidating sites, hardware, and other resources. You need to think about standardization of software, hardware, and operational practices. You will have to decide how want to handle common branding and identification issues such as email domain names, website, central call-in numbers, etc. You will need to examine what support contracts and license agreements exist and how they need to be modified as part of the larger organization. The integration with the umbrella organization needs to phased in and timing needs to be planned carefully to minimize impact to the business. A combined successful and seamless existence doesn’t happen on its own it needs to be planned and carefully executed. If your company is planning to grow through acquisitions you may want to create a process for assessing and integrating new acquisitions based on your current experience.

If the business you are acquiring is being carved out of a larger parent company, you also need to plan for a migration plan off of the services that the parent company is offering during the transition period.  There are further complications if you intend for your new acquisition to be platform company to which you will add other newly-acquired companies over time.

If you’re thinking of acquiring a software startup

IT due diligence on a software startup may seem unnecessary if the core product offering represents a significant new advancement.  It really can’t be overlooked, however, as there are many technology risks lurking within the product and within the company itself.

As far as the core technology offering(s), it’s important to conduct code reviews, architecture reviews, security audits, application performance assessments (especially in light of the projected growth in the business plan) and an assessment of the company’s software development lifecycle methodology.

There are other hidden risks, some of them far removed from the core product offering, that may impact your future acquisition’s ability to achieve its goals.  Many of them stem from the need to be both chief cook and bottle washer during the very earliest days of the company’s existence. Here are the top three:

1. Inappropriate software development practices: My favorite example here is a startup I was advising during its search for first round investors. They could not resist the urge to keep “improving” the code, so they never segmented or froze their brainchild into discrete releases. The night before I had scheduled a potential investor for a demo, they thought of four new “must-have” features to add, and were actually debugging during a demo that failed to execute.
2. Tendency to re-invent the wheel: Software entrepreneurs are often skeptical of packaged enterprise software to the extent that they will build their own backoffice, CRM, or other applications. The risk this imposes to potential investors is twofold: you are retaining dedicated staff to support those applications, and any migration off of these applications may be difficult because they are often built “on the side” without sufficient documentation.
3. Project management immaturity:  It’s unusual for a startup to hire real project managers very early on in their lifecycle. While PM discipline could certainly help them during the concept phase, it’s absolutely necessary as they are attempting their first deployments to clients.  Weaknesses in this area are easy to spot as you conduct due diligence interviews with their customers.

So even if the product has no competition in the market place, and you’re convinced it can sustain competitive advantage, please make sure you have qualified resources do some deep probing to help you understand where the hidden problems may lie.

“The Trouble with the Future…

…Is that it arrives before we are ready for it.”  A bit of plainspoken wisdom from American humorist Arnold H. Glasow. Thanks to the miracle of google, it becomes our intro quote for today’s topic of acquisition integration readiness.

In an earlier post, we talked about data integration readiness, but that’s only one task on a list of things you should be doing now if you plan to acquire a company in 09. Readiness is the word of the day, and the best way to sum it up is you have to have a documented platform to integrate with across the board, or you will lose time during your integration period. Lost time means revenue drag–you won’t hit your projections.

So, let’s make a list.

1. Data integration readiness, already covered in detail here.

2. Process readiness – are your procedures for key business areas up to date? You will need to walk through them with business team leads on the acquisition side to rapidly understand the gaps between the way they do business and the way you do business. Can you rapidly train the influx of people you will be onboarding with the acquisition? An effective training plan is a solid way to minimize post-close chaos.

3. Collaboration readiness – don’t underestimate the amount of time those new employees will take up with endless “How do I?” questions. Hopefully, you have a corporate knowledge portal in place already and you can give them access and a navigation walkthrough on Day 1. Make sure it includes discussion groups, so that the answers to their common questions can be searchable and institutionalized. There was a great post on this recently describing how IBM is using collaboration tools to help with acquisitions, and Edgewater’s Ori Fishler and Peter Mularien have posted extensively on Web 2.0 tools for corporate collaboration.

While we are on the subject of collaboration tools, let me tip you off to an important secondary benefit. The people that use them and participate actively in discussions are your change agents, the people that can help lead the rest of the acquired workforce through the integration. The people that don’t participate, well, they are your change resistors. They need to be watched, because they may have emotionally detached from this whole acquisition thing. If they are key employees, you want to make sure they don’t have one foot out the door.

4. System integration readiness – It’s oh-so-much-more-challenging (meaning time consuming and costly) to integrate into an undocumented or underdocumented architecture. Get your data flow diagrams and infrastructure diagrams, as well as your hardware and software inventories up to date before you close.

That first quarter after you close will still be a wild ride, but you can be sure you’ve cut the stress level down significantly if you make these readiness tasks a priority before closing day.

Designed to Sell, Corporate Edition

When contemplating which business units or product lines to put up for sale in today’s challenging market, it might be wise to borrow some tactics from  the real estate market. It really comes down to three important guiding principles in planning a divestiture as part of your deleveraging strategy:

1. Know your market – cultivate target buyers to avoid a fire sale. Identify players looking for complementiarity in products, services or customer base.

2. Model the outcome on your going-forward financials – freeing up cash may be top of mind for everyone, but we all need to think past the current crisis and understand what the impact will be on sales and profitability going forward. If you don’t have a business intelligence toolset in place already, you may have difficulty in achieving the type of agile scenario modelling that is necessary here. Infoworld is reporting BI as a key spending area in the recession, specifically for determining profitability.

3. Know where to invest, or “design to sell.” – there may be secondary benefits, above and beyond a divestiture’s products, services, and customer base. Specifically in the technology architecture, especially if the business unit is on its own (instead of shared corporate) platforms. Ancient mainframe technology is like the walnut panelling and avocado shag carpeting lurking in the basement. Customized applications with their big in-house support teams are like the pink stucco patio and poolhouse a proud homeowner showcases, causing the buyer to race down the road to the next listing. Call in the design team, these could be good spots to begin a corporate makeover, as they are very likely to increase the value of the sale.

On the flip side, things like collaboration tools and  business process management suites are like the well-appointed master suites and media rooms that can help a buyer warm up to the sale. In addition to things like a lean operating architecture, these technologies help make a divestiture an attractive asset for buyers looking to build out a platform company.

Is this the end of M&A as we know it?

Part of me says, “Oh please, let’s hope so!” — for more than a decade we’ve heard constant complaints about deals that don’t reach their full potential, and watched the same sort of mistakes being made over and over:

• the hoped-for synergies that are never really defined
• the integration or transition plan that’s 3000 lines long but gives no one a clue about where the effort actually stands
• no coordination of business and technology plans during integration or transition
• the blanket assumption that a move of the acquiree’s business to the acquirer’s systems and processes are always the right choice

There’s no doubt about it—deal volume and total deal value is down year over year from 2007. Credit market woes are pushing buyers to move away from senior debt toward riskier mezzanine capital. Common sense would tell you that if you’re taking on more risk, you’d better be vetting out risks earlier in the deal timeline, yes? Valuations are coming into line due to market conditions, so there’s not so much need to use due diligence to position for negotiating advantage during valuation discussions (but hey, it never hurts to strengthen your position during negotiations, right?) But, given the additional risk you’re taking on with the mezz financing, you’d better have a clear idea about what your IT spend needs to be in year 1. Pre-close is the time to ferret out those orphaned releases, costly overly-customized environments and low-productivity in-house custom IT development shops. Find them, redefine them, and build a tight cost model so you don’t take on any more risky debt than necessary.

Gloom and doom, we can’t shake it these days—it feels a little like we’re living through Ragnarok or at least Fimbulvetr, the winter of winters that precedes that Destruction of the Powers, doesn’t it? Many assets are being put on the block these days as part of a vast global deleveraging battle. Who couldn’t use a few valkyries on the team, to help choose among these slain assets the most worthy and heroic and carry them off to the Valhalla of value creation?

Difficult days for all of us, these. Let’s remember the great Norse legend does end on an up-note, though — after the great battle, the world resurfaces anew, fertile, with a bright future. Even in these uncertain times, there’s much you can do to either position the assets you plan to put on the block, or to prepare for the success of future acquisitions. More about both topics in future posts.

Keys to Successful Divestitures

There’s no doubt about it. A well-crafted TSA (Transition Services Agreement) can make or break a divestiture. In a recent review, Deloitte describes some of the key elements of making a fast break. Shrinking the interval between Day 1 (Financial Close) and Day 2 (Full Separation) is a priority goal of a successful transition. To achieve a short timeline, it’s crucial that IT decisions be made as soon as possible, even before Day Zero (the day the deal is publically announced).

While the Deloitte approach provides a reasonable framework, I think we can add some additional perspective based on our own experience in this area.

1. The acquiring company or PE firm should recognize the fact that the IT resources within the business unit to be carved out are not likely to possess the strategic vision and leadership to create a target architecture and craft an accelerated transition plan.

2. The internal transition team needs skilled coaching and leadership to effectively “turn the tables” on the former parent organization. Think  about it: the IT resources you are bringing over with the divestiture have been taking orders from corporate IT. During the transition they must quickly change the dynamic of power and manage their former bosses as service providers.

3. SLAs are important. The Deloitte article minimizes the need for formal SLAs, but it only stands to reason that service requests from divested assets will fall to the bottom of the priority list when there are more pressing internal service requests.

4. Make sure that the agreement specifies the level of involvement from the parent organization’s resources and access to data and information that you can expect during the transition.

5. Don’t pay for what you don’t need, and scrutinize TSA cost drivers diligently. For example, if the parent organization is making an allocation to maintain a highly customized, automated environment that you will not fully use during the transition period, you should negotiate for discounted fees for that particular TSA area.

6. Manage expectations within the carved out business appropriately. Sometimes a little more chaos and pain in the short term is worth it to achieve full separation and transition to a more efficient operating platform.

Experience, negotiation, coaching, strategic vision are all key elements of a successful transition team leader. If you can’t find the right combination of skills within the acquired asset, it’s well worth it to bring in an expert to lead the team during the short but intense transition team.

Reducing IT Costs for New Acquisitions

Over at CIO magazine, Bernard Golden recently published an update on Cloud Computing. In his list of the types of companies that can benefit substantially from computing in the cloud, he left off one situation that can reap tremendous benefits from this approach: newly acquired private equity portfolio companies that are being carved out from larger businesses.

For these companies, cloud computing offers the following benefits:

• Accelerated implementation timeline that dramatically reduces implementation costs
• Significant savings on support costs, which typically represent 60% of the IT budget
• Eliminates the dependency on staffing and retaining IT support staff
• Costs scale with number of users
• Repeatable implementation playbook
• Easily extensible for tuck-in acquisition

One of our senior architects, Martin Sizemore, has laid out the broad strokes of this approach in a short slide show.

It’s an especially attractive M&A technology approach in the middle market, where it can help drive annual IT budgets down under 4% of revenue. While it is most advantageous for creating a new operating platform to accelerate transition services (TSA) migrations, the transition to cloud computing makes sense as a value driver at any point in the asset lifecycle.