Make IT Cost Optimization a Key Component of Successful M&A

CIOs have a role to play at every stage of M&A by identifying, managing and executing cost optimization initiatives that protect and drive deal value.

Mergers and acquisitions are similar to home renovation projects. Even the most exact planning, budgeting and scheduling will often fail to anticipate every delay, expense or hidden problem.

Nonetheless, these highly disruptive events are on the rise. When Gartner asked CEOs about their approach to mergers, acquisitions and divestitures in its 2019 CEO Survey, more than half said acquisitions are the bigger focus this year. Only 9% of respondents said their focus was more about divesting assets.

When CIOs focus on cost in all stages of a deal, organizations stand a better chance of achieving their M&A goals

“Acquisitions accumulate an increasingly diverse or duplicate set of IT capabilities, and integration costs can quickly mount up and degrade deal value,” says Chris Ganly, Senior Director Analyst at Gartner. “That means most CIOs should plan and architect IT to enable business integration.”

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Manage costs at every stage

M&A transactions are often aimed at generating significant business value by combining complementary assets. The CIO’s expertise is crucial for assessing the IT-related risks and opportunities and achieving the overall economic benefits. 

Gartner finds that when CIOs focus on cost optimization in all stages of a deal — and each deal has six — organizations stand a better chance of achieving their M&A goals.

Know the cost optimization challenges and opportunities of all six phases to better manage IT costs.

1. Scouting and screening

Investigate, for example, the technology maturity or innovative value of an acquisition candidate and help the business identify potential synergies and integration approaches.

2. Due diligence

During this time-consuming, complex but critical stage, the CIO and IT leadership will identify the target’s current IT infrastructure, applications and services, and evaluate how to eventually match the target entity’s components with the acquirer’s existing processes, applications and platforms. IT should also develop estimates of one-time IT integration costs and a post-deal IT operating budget for the new combined entity.

3. Integration planning

Although some pre-integration activities will occur, most integration work starts in earnest on Day 1, the legal close of the deal. During the due diligence phase, a number of cost optimization opportunities will have been identified. This is the time to revisit and prioritize those opportunities to simplify, standardize or centralize.

4. Welcome

Uncertainty about the future is high for IT personnel in the acquired organization. This can lead to unwanted staff attrition and, as a consequence, high workforce costs and risks. Develop a clear communication plan that addresses the needs of everyone affected by the deal, including internal staff, contractors, IT vendors and service providers.

5. Integration

Acquiring CIOs should work closely with CFOs to compare pre-integration IT costs to post-integration costs. This provides tangible evidence of how the IT organization has managed the IT integration budget and succeeded in folding two separate IT organizations into one.

“Of all deal phases, the integration of the entities represents the greatest opportunity for cost savings — and also the greatest likelihood of excess spend and delays,” says Ganly.

6. Reaping benefits

IT cost management must be an ongoing discipline. Continue to pay attention to costs so they are not allowed to creep back into the business. And don’t underestimate the amount of time and effort it takes to achieve cost savings from M&A.

Gartner clients can read more in Cost Optimization in Mergers and Acquisitions: An IT Perspective by Chris Ganly, James Anderson and Cesar Lozada.

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