Know Thyself and Thy Partner -- and Keep It Simple.
This same complexity can be a major obstacle to any successful merger or acquisition. It will certainly be one of the first dragons the combined America Online/Time Warner organization will have to slay. The more functional -- or dysfunctional -- complexity an entity has, the more cost it will incur up and down the value chain. When two companies agree to integrate operations, many times the biggest threat to their collective success is what each brings to the table in terms of egregious complexity. Look closely at some of the major mergers that have failed during the past decade; repeatedly you'll find complexity proved too much for either side to overcome.
An exacting look at best-practice finance organizations clearly outlines the problems -- not to mention the costs -- that stem from complexity. World-class companies have successfully standardized and simplified their systems and processes to turn around management reports faster, causing a ripple effect throughout the organization -- from vastly improved speed to the quality of managerial decision-making.
For example, the number of budget line items can hamper management reporting cycle times. The typical company, according to Hackett Benchmarking solutions, budgets for 230 line items, vs. 40 at first-quartile companies -- and as few as 15 at world-class companies. Too much detail in a report not only slows the process, but increases the probability of error, affecting the speed and quality of decision-making. By having better standards, managers at world-class companies spend less time searching for data and more time focusing on value-added initiatives.
Management reporting cycle times largely depend on the closing of the accounting books, since most companies use the general ledger as their key information source. World-class companies like Cisco Systems have automated processes and streamlined systems to close their books and produce reports in no more than 48 hours. The average company, on the other hand, takes nine days to close and report. Considering that most companies are organized to close their books only monthly, a problem can fester for 40 days before it shows up on a manager's radar screen. By comparison, world-class companies facing the same problem tackle a solution after only two days. Wouldn't a head start of over a month on potential problems seem a key competitive differentiator?
That said, how can management teams eliminate complexity and its associated costs to realize the promises of an M&A? An essential first step is establishing a baseline of knowledge, typically via benchmarking. A detailed diagnostic of people, processes and technology can determine which best practices exist at each company, shedding light on how to capture potential synergies and providing a foundation for future evaluations.
Too often, when two companies hammer out an integration strategy and audit their strengths and weaknesses, emotions will blind them. Benchmarking removes emotion. It gives both parties an objective assessment and highlights the best practices of each. It also identifies under-performing areas to ensure anticipated savings will be realized, not diluted, when integration is complete.
Once two companies combine back-office operations, they'll inevitably invest considerable resources in figuring out how to take their combined integration strategy from paper to policy as seamlessly as possible. Most are understandably cautious. But caution slows business transformations and ultimately stifles progress. In today's technology-driven marketplace, where speed is of the essence and shareholders and analysts expect immediate feedback, a tendency toward the status quo can be a potential death knell. The impetus and mandate are clear: Make the right decisions, based on the right information, and do it quickly.
As marketplace demand for speed and rapid-fire change continues for most companies, finance is in the best position to shed light on how to optimize any business integration. Why? Its staff holds the knowledge and metrics of the entire organization's processes, in addition to insights from its own business transformations. Its expertise, combined with the intelligence from benchmarking its best practices, gives finance the tools to standardize and simplify operations to improve managerial focus and ultimately realize the full benefits of an M&A.
Jeff Rosengard is managing director of the [CFO\solutions.sup.SM] practice at AnswerThink. All the above statistics are from the ongoing finance benchmark sponsored jointly by Financial Executives Institute and Hackett [Benchmarking\solutions.sup.SM], the best-practices research arm of AnswerThink. Visit www.fei.org for more information about the study.
Watch Out for Complexity
Top-performing IT organizations attain a lower cost per end user ($5385 vs. $9,167 at the average company) by reducing complexity by implementing company-wide standards and eliminating some suppliers.
The following accounting of systems and contracts per billion dollars of revenue illuminates the consequences of inconsistent data definitions, disparate operating systems and redundant processes:
Avg. First-Quartile Operating systems 9.4 6.0 Programming languages 12.0 5.0 Hardware suppliers 17.3 7.0 Software suppliers 41.5 10.0 Suppliers of contracted 24.2 6.0 services Source: Hackett Benchmarking\solutions
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|Date:||Mar 1, 2000|
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