Make or Break

The critical role of IT in post-merger integration

A
gradual recovery in the stock and credit markets is spurring some
stable, cash-rich companies out of their defensive positions and
back into mergers and acquisitions. But unlike past M&A envi-
ronments, there is less margin for error today as analysts and industry
experts are expecting strong, consistent results in ever-shorter time-
frames. IT will play a vital role in creating a smooth transition within the
newly merged company—and delivering quick, reliable value. In short,
IT can make or break post-merger prospects.

Amid signs of an economic recovery — though The Wave of the Future

tentative and fitful—more companies are once
again testing the M&A waters. The year kicked off
with a bang as Kraft Foods acquired Cadbury,
Tyco purchased Brink’s Home Security, and
United and Continental Airlines agreed to merge
and create the world’s largest carrier. But scrutiny
of these deals is higher than ever, as board mem-
bers, stock holders and industry analysts want
to see speedy returns from a merger or acquisition
and are keeping a close eye on the integration
process. The focus is increasingly on IT. As the
margin for error shrinks, the role of IT depart-
ments in integrating merged companies is taking
more of the spotlight.
In the best mergers, IT brings short- and long-
term benefits that cannot be ignored, by enabling
business synergies, providing business continuity
and creating cost savings for the new organization
(see figure 1 on page 2). IT’s role in post-merger
integration not only brings real results—it is often
the difference between a successful merger and one
that never meets expectations.
How does IT play a prominent role in post-
merger integration? Savings come from reducing
duplicate software applications and licenses,
maintenance and network contracts, consolidat-
ing data centers, and eliminating telecom con-
tracts. Organizational and support costs go down
as duplicate applications and technologies are
retired, while unneeded roles are eliminated as
skills and competencies are better defined (see
figure 2 on page 2).
But how important are these tasks? Will
companies lose customers and market capitaliza-
tion due to IT failures after mergers? Of course,
companies of all sizes face the potential for IT
disasters. But after a merger, when disparate sys-
tems, applications and resources are combined
together, the likelihood of trouble increases greatly
after a merger. Some merged companies will sur-
vive, yet many others may fail as poorly executed
IT integrations bring sales and operations to a halt,
and anxious investors offer little extra time to
start seeing results. Rather than realizing the great

MAKE OR BREAK | A.T. Kearney 1

 Figure 1
IT’s role in post-merger integration

Short-term role Long-term role

Synergies • Integrate major business functions
and communications
• Ensure uninterrupted customer
experience
• Enable broader business functions
Capabilities and • Develop capabilities to support
operational model integrated business model
• Build capacity for planned business
growth
• Maintain cost-effective technology
infrastructure

Cost • Deliver IT cost savings

savings • Define IT projects to support cost-
cutting initiatives
• Minimize cost and risk Source: A.T. Kearney analysis

Figure 2
IT integration can result in significant savings Illustrative

Internal IT staff $875 $350

Other (real estate, training) $112 $17
Telecom
$280 $31 $14
Software
$70
Application development
and maintenance $43 $106 $1,275
$35
Hardware and infrastructure $79

$175
$408

$263
$64
$750
$51

$115
$240

$38
$30 $255
$67

$150

$382
$225

Company A Company B Integration Merged

savings company A-B
Note: Figures are in millions. Source: A.T. Kearney analysis

2 MAKE OR BREAK | A.T. Kearney

potential benefits of their merger, executives and long-term. IT ushers these in by combining the
board members will instead have millions of dis- two companies’ IT cost structures, thus driving
satisfied customers, damaged brand equity and future cost savings and reducing operational risks.
shareholders left in the dust. Reducing overlap. Merged firms often find
Today, senior executives, boards of directors that they have many similarities between their
and shareholders are demanding more of their IT functions — even when there are seemingly
IT organizations during M&A. IT will not only few geographic, industry or product overlaps.
help create the foundation of the new company, Companies can save between 10 and 30 percent
but it will also help to maintain the business by reducing portfolios and outlining the skills and
operations and customer relationships that are so competencies needed for the future IT model (see
vital for any organization. At a time when profits figure 3). The business plan must clearly articu-
are down and some companies are struggling just late the longer-term costs. For example, it can
to survive, an IT disaster can threaten the merged take a year to 18 months to capitalize on some of
entity's existence. Restoring customer confidence the upfront costs, such as customized data man-
and brand loyalty can take years and costs mil- agement, business integration and transaction
lions of dollars.
Recent M&A activity highlights the role of
IT. In the banking sector, where M&A greatly Figure 3
increased during the economic downturn, IT Value categories in IT integration
integration is front and center. According to
Banking Technology magazine, HSBC has imple-
mented its “One HSBC” strategy for global Potential
Strategy savings
IT in post-merger integration. Now, the IT out-
come for any HSBC acquisition is a foregone • Rationalize applications
and projects
conclusion: that company will rapidly become • Integrate enterprise
Applications 15%–30%
part of HSBC’s global IT platform, and its exist- resource planning systems
• Reduce maintenance
ing technologies will be absorbed and redeployed. contract duplication
By quickly addressing technology, HSBC’s man-
agers can plan with certainty and ensure that
• Consolidate data centers
the company maintains a competitive advantage • Rationalize maintenance
after the merger. Technology agreements and telecom
and network contracts
10%–20%
• Retire hardware
The Anchor of Post-Merger Integration
As the anchor of the post-merger integration pro-
cess, IT delivers a sizeable portion of post-merger • Reduce duplicate workers
and roles
value. There are several areas where IT plays a IT • Rationalize development
organization 15%–25%
major role: and support resources
• Outline key skills and
Supporting the business case. The business competencies
case that drives a merger almost certainly depends
Note: Savings for each category are based on incremental spending in the merger.
on significant cost savings—both immediate and Source: A.T. Kearney analysis

MAKE OR BREAK | A.T. Kearney 3

 systems, and leading-edge technologies (see figure
4). These must be included in the business plan so
analysts have an accurate view of whether or not
the company is on target to meet its projections.
Enabling other synergies. While investors
watch for signs of success or failure in a merger, IT
is the “glue” that binds the business together, inte-
grating major business functions, improving com-
munications, enhancing processes, and ensuring
that customers receive uninterrupted service. This
last point is vital: At the end of the day, a compa-
ny’s customers will decide whether to accept or
reject the merged company.
Building long-term capabilities. IT will help
build the combined company’s capabilities and
operational model. Once the short-term inte-
gration work is complete, IT can devote its energy
to support the planned business growth of the
Figure 4
Up-front investment will lead to savings over time
Now
IT savings
Source: A.T. Kearney analysis
4 MAKE OR BREAK | A.T. Kearney
new company. A cost-effective technology infra-
structure is a prerequisite for success.
Providing operational visibility. Post-merger
integration is a period of uncertainty for those who
work in the combining organizations. Reporting
infrastructures, social networking, wikis and dedi-
cated portals can allow leadership to communi-
cate plans and progress to the organization and
halt the inevitable rumors. In this way, IT facili-
tates the integration of the companies, preserves
employee morale and ensures productivity in an
otherwise turbulent environment.
Your IT? My IT? New IT? Outsource IT?
The right way to integrate IT systems depends on
the type of merger and the combined business
objectives of the merged organization. Companies
merge for a host of reasons — cut costs, growth,
Combined IT costs
Realized savings
Planned savings
12–18 months
enter new markets, capture synergies. In our expe-
rience there are five general approaches to integra-
tion that offer the best results for the right
situation (see figure 5).
Loosely coupled. In a loosely coupled merger,
IT systems and organizations undergo only mini-
mal integration. This is a viable option when there
are different businesses to support, such as within
a holding company, and when there is pressure
to complete the integration quickly, as it limits
disruptions to critical activities and staffing con-
cerns. However, this approach may not produce
the savings or synergies that the company could
get by combining IT operations.
Select one. In this scenario, leaders pick the
existing IT configuration that best supports the
combined firm’s new business strategy. The “select-
one” approach works best when the merging enti-
ties are sharply different in size; in this case, the
new company typically selects the larger company’s
architecture. This approach offers the fastest cost
savings, yet its nature presents some risks. It
requires the merging companies to migrate data,
which is more complex than developing new
applications. The rapid selection process may also
lead to the elimination of highly valuable appli-
cations, features and key personnel, or penalties
from terminated contracts.
Best of breed. With this method, a company
goes through a case-by-case process to select
the best applications and people from the avail-
able IT portfolios, based on the firm’s planned
architecture. The integration strategy is best for
merging organizations of comparable size and
complexity, and when the merging companies
have quite different business models. This

Figure 5
Five approaches to IT integration

Approach Description

1. Loosely coupled • Remain separate and fragmented; modify reporting for consolidation purposes. This approach is appropriate
when companies are independent entities within a larger conglomerate, and most viable when there is
extreme time pressure.

2. Select one • Select one of many IT setups that is most aligned with combined business strategy. This approach works
best if there is significant discrepancy in sizes. It is the fastest method for reducing costs. The architecture
direction defaults to Company X as a day-one solution.

3. Best of breed • Choose the best of available setups with an eye on architectural direction. This is the best approach
in a large-scale “merger of equals” or with entities with different business models across the combined
organization. It can be time consuming but functional.

4. Replace all • Phase out “legacy” systems and setups. This approach works best when point-specific solutions are
poor in both companies and new software is easily integrated. It can be time-consuming in selection
and implementation.

5. Outsource • Spin out systems issues to third-party that is aligned with architectural direction. This approach is
advantageous in mergers where there are large size discrepancies, repeated acquisitions and poor internal
IT skills. Here, “economies of learning” from several mergers reduce integration time.

Source: A.T. Kearney analysis

MAKE OR BREAK | A.T. Kearney 5

 approach in particular requires organizational
backing in determining what exactly is “best in
breed.” It works well when IT staff perceives it to
be equitable; organizational distrust could lead
to disruptive turf wars that would imperil the
whole integration process.
Replace all. When neither side has a strong
IT suite, the replace-all integration strategy is
most effective, as it swaps all systems for higher-
performing IT. Implementation can take a long
time, the application selection process can be
arduous, and the firm will absorb a high amount
of risk due to unfamiliarity. This approach is
rarely selected in large mergers, given the scale and
importance of the legacy systems. However, they
do occur with smaller companies and mergers.
Outsource. When both companies have
weak organizations and the M&A process is
quick, the new organization can benefit from
outsourcing IT operations. The outsourcers’ prior
experience will speed up the integration, and with
well-written contracts much of the integration
risk can be passed on to the outsourcers. The true
costs of outsourcing, however, are hard to gauge.
Additionally, a vendor will never have the same
deep insights into its clients’ core business opera-
tions that an internal unit will have (see sidebar:
Procurement in Post-Merger IT Integration).
IT + Business Strategy = Merger Success
Our five-step approach to integrating IT requires
aligning IT with the newly merged company’s
business strategy. We used this approach to help
several companies save millions of dollars in
IT costs while smoothing out often-rocky post-
merger transitions (see sidebar: Making the Case for
Make-or-Break IT). The following outlines the
five steps in detail.
Launching day-one activities. The goal on
day one is to minimize near-term disruptions,
a particularly big concern for any company with
customers and transactions. At the start, the long-
term vision of the company’s IT function and the
business’s short-term viability are woven together

Procurement and Post-Merger IT Integration

Post-merger integration is the perfect
time to save money by reevaluating
with an eye toward improving pro-
curement contracts. Let’s look at
five major areas of savings:
Comparing prices. A first step
post-merger is to assess similar con-
tracts within the new organization.
Discrepancies in prices are a chance
to reap concessions from vendors.
Later, after cutting applications
and reducing infrastructure, more
savings may be identified.
Concentrating volume. The
combination of existing contracts
may lead to more volume savings,
so reopening contract negotiations
may be the right step.
Rationalizing applications. The
combined IT footprint will identify
redundant applications, which will
lead to areas of rationalization. Lead-
ing companies start by identifying
applications that do not meet busi-
ness needs or are weak technically
or functionally.
Reducing infrastructure. Head-
count and IT computing infrastruc-
ture reductions should lead to reduced
IT spending in all areas, including
hardware, software, labor, managed
services and telecom.
Slimming down the IT function.
The post-merger integration period
is an opportunity to cut unnecessary
or excessive functions. For example,
the new company may be able to cut
help desks and data centers by shift-
ing work to the acquiring firm’s
infrastructure.

6 MAKE OR BREAK | A.T. Kearney

Making the Case for Make-or-Break IT
Several companies have used our
IT integration approach to gener-
ate great benefits in their M&A
activities. Let’s look at a few of
these examples:
Belgian financial services firm.
At the start of a merger of two large
insurance companies and two small
banks, IT in all areas was under-
performing in terms of costs and
services. The firm built a new, con-
solidated IT organization based on
new performance management mea-
sures and reporting systems, major
infrastructure changes and combined
operations and service desks.
A more reliable IT environment
reduced downtime by 50 percent,
and direct and indirect headcount
reductions cut costs by 15 percent.
Global consumer goods com-
pany. After this leader in the food
and beverage industry made its
largest-ever acquisition, its first
move was to absorb more than
20 different IT operations into
three regional IT setups—jump-
starting the integration by examin-
ing infrastructure, data center and
applications to design a new IT
organization and find cost-cutting
opportunities. New governance
structures managed all ongoing IT
integration efforts, while a two-year
IT plan outlined the organization,
technology platforms and budget.
IT operations costs were cut by
10 to 30 percent, leaving the com-
pany free to pursue its longer-term
growth agenda and the reason for the
acquisition—to increase revenues by
30 percent.
European utility. This large
European utility —which owned
majority stakes in several utilities —
had to combine diverse IT functions
into a single IT organization. When
the firm evaluated its options, includ-
ing analyzing its current IT infra-
structure and broader IT trends, it
found that it could realize $135 mil-
lion in cost savings by standardizing
its application portfolio, harmonizing
business processes, improving service
levels and minimizing running costs.

as potential risks and risk mitigation strategies
are assessed.
The implementation plan examines immedi-
ate IT requirements and initiatives in order to
offer interim guidance for the merger, before
undertaking deeper analysis of the merger plan.
This phase is also an opportunity to take stock of
each merging entity’s current IT systems and orga-
nizations and setting the baselines that will form
the foundation of the future IT organization. An
analysis of current costs will allow the merged
company to estimate potential savings and desired
results of the integration, which can be shared
with and approved by major stakeholders.
Evaluating integration approaches. Deter-
mining the merger approach that is most appli-
cable to your company is essential to a successful
IT merger integration. Detailed maps and evalua-
tions of the current state of the merging IT
functions — applications, organizations, regions,
footprints and infrastructure — along with an
assessment of the merging organizations’ prepared-
ness for change will help answer this question.
The goal is not only to list current IT capabilities
but also to develop an understanding of the major
business capabilities of the new combined IT
setup, augmented by a plan for migrating and
integrating applications.
Enabling synergies. By reviewing and priori-
tizing IT initiatives prior to day one, the com-
bined IT organization can get a leg up on
generating expected revenue and cost synergies.
While examining the major opportunities of the
merged IT functions, we can also identify and
address the associated risks, offering guidance in
designing the combined IT setup.

MAKE OR BREAK | A.T. Kearney 7

 Designing the future IT function. Now the
merged company can begin the full design of its
new IT function in terms of near-term, interme-
diate and final states. Identifying major elements
of the IT organization, and aligning them with
the company’s business objectives, will help IT
support all evolving functions in all geographic
regions and business areas. A final plan is then set
for implementing the IT architecture and achiev-
ing the targeted cost savings.
Developing the IT roadmap. In this final
phase, integration begins with a transition plan that
estimates the investments needed and potential
cost savings, taking into account data, application,
infrastructure and staffing needs and identifying
negotiation opportunities with suppliers and part-
ners. This will help identify the “quick wins” that
can generate great savings. Program management
is a major part of this phase, including outlining
communications plans and risk management strat-
egies that will help mitigate threats and manage
stakeholder behavior.
A Make-or-Break Imperative
The IT function’s role in post-merger strategy is
clear: to ensure that all technology, applications
and practices drive short- and long-term success—
meaning operational stability, business function-
ality and economic benefits. While IT will not be
alone in driving success, its contribution cannot
be overlooked — as IT can make or break post-
merger prospects.

Authors
Sumit Chandra is a partner in the Chicago office and can be reached at sumit.chandra@atkearney.com.
Christian Hagen is a principal in the Chicago office and can be reached at christian.hagen@atkearney.com.
Jason Miller is a consultant in the Chicago office and can be reached at jason.miller@atkearney.com.
Tejal Thakkar is a consultant in the San Francisco office and can be reached at tejal.thakkar@atkearney.com.
Abha Thakur is a consultant in the San Francisco office and can be reached at abha.thakur@atkearney.com.

8 MAKE OR BREAK | A.T. Kearney

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