Lessons from M&A IT: How to use a value creation approach to drive your IT agenda

In most cases, CIOs rightly focus on aligning IT strategy with the overall strategy for the business, and they attempt to meet those objectives in the most efficient manner possible. However, management’s short-term financial targets (eg. quarterly earnings) often force IT leaders to look for quick solutions to meet specific problems, as opposed to building a longer-term vision and executing upon it. 

Once the “short-term” solution is applied, however, it frequently becomes part of the permanent systems landscape, because IT is required to move onto other urgent issues. 

This issue becomes even more prevalent after a series of strategic acquisitions. CIOs are nearly always forced to meet the immediate financial goals of the transaction and must make difficult decisions that pit short-term financial success at odds with long-term strategy. 

We are often asked to assess environments where acquiring companies have significant challenges with their IT environment — the result of failing to integrate IT applications, infrastructure, and processes from their previous acquisitions (in some cases dozens or more). They have been left with manual consolidation platforms to complete financial reporting, while the bulk of the infrastructure and applications remain “as-is.”

Eventually, the inefficiencies of this approach become apparent beyond the IT team, as business leaders and system users are left with an unnecessarily complex environment that is expensive to support, and generally unable to grow or adopt with the changing needs of the business. 

At this point, executives turn to the CIO, and ask “What are you going to do about this mess?”

How do we break the paradigm?

CIOs need to embrace a value-creation mindset to build a more sustainable IT strategy and project portfolio. CIOs must change the lexicon from “business case” to “strategic value” to drive a dramatic shift in thinking in the C-suite as it relates to the perception of IT. Focusing on the long-term can enable the enterprise to gain strategic advantages over competitors either unwilling or too afraid to make similar investments.

How does IT create value?

In short, IT creates value by improving real business performance, beyond simple IT cost reductions. Too often, IT is reacting to the needs of the business and building a project or investment portfolio that merely follows the lead of the business.  While alignment is critical, the dynamic needs to be changed or, in some cases, completely reversed. Instead of merely reacting to business imperatives with strong alignment, IT leaders should drive the imperatives themselves. 

The digital economy is demanding ever-increasing technological solutions to business issues. For example, instead of looking at tactical benchmarks or individual systems, IT leaders need to be asking:

• Which competitors are utilizing the latest technology to their advantage?
• How do we compare to those competitors operationally?
• Where will our competitors be in 3 or 5 years, and where will we be?
• Most importantly, they need to articulate that difference to the executive team, to gain buy-in for their plan to take the enterprise to the next level of performance.

Here are the steps to drive enterprise value:

1. Complete an honest assessment of your current environment. This should include a spending assessment against benchmarks, as well as a review of leadership roles and capabilities, organizational structure, applications and versions (are they current?), infrastructure environment and performance, and overall satisfaction across the business with IT. The assessment should also include whether “shadow IT” is prevalent in the organization, as a means to subvert IT policies and procedures.
2. With the assessment complete, clearly articulate the problem statement, and the impact it is having on business results. How does your landscape negatively impact business (not just IT) performance? What areas of the business are being negatively impacted?
3. Show where you are compared to your competitors – not in IT terms, but business terms. What are their financial results? How do they compare to yours?
4. Finally, paint the picture of the actual operational benefits, by contrasting it against the current operational issues. For example, how could you reduce procurement cost by consolidating the vendor master list and consolidating spend with improved contacts?

In short, stop focusing on how you can reduce IT spend. Instead, prove that investments in better digital capability will drive better business results.

Where can IT drive business results through strong investment?  Just a few examples include the following:

Procurement spend

Get better consolidated procurement data to leverage full spending capability and utilize the best pricing across contracts with the same vendor.

Reduced spend on non-essential IT projects

Stop spending precious resources and dollars on projects that do not advance the long-term objective of environment rationalization. Projects that perpetuate the proliferation of systems should be the first ones eliminated, freeing up budget dollars for more strategic endeavors.

Organization rationalization within IT

IT should be able to reduce support costs if the landscape is rationalized. Demonstrate that this can be done, so that you have a stronger case for the next item below.

Organization rationalization beyond IT

While we would certainly encourage users to become more self-sufficient and develop self-service capabilities where it makes sense, having IT-type groups outside of IT rarely improves efficiency or reduces risk. Look for places where development or support is occurring and design a rationale to bring them under the IT tent. The political challenge will be daunting, but the results are usually worth the effort if done correctly.

Reduced risk through improved IT process compliance

Show your CFO the system landscape and ask if they are comfortable signing off on SOX compliance or financial reports.  This can lead to an insightful discussion about risk, and how IT plays a critical part in reducing it.

Contracts

As you improve visibility and consolidate spending in procurement, look for improvements in rates, terms, transition time, and potential leverage when switching, because vendors don’t want to lose clients.

Finally, after considering the improvements that can be made outside of IT, calculate the ROI in real equity value creation. What does that look like? Compare one-time against recurring costs and use the company’s PE ratio or EBITDA multiple to show the final impact on the overall valuation of the company.   While almost any CIO can explain the dynamics and importance of a business case, far fewer can articulate how an IT project can impact the balance sheet, income statement, and equity valuation of the entire company. 

In general, while it is critical to show the immediate operational and financial impacts of a given project, there is often a significant opportunity to demonstrate value creation as an additional incentive to drive the IT investment portfolio. The ultimate goal is to create value for shareholders, and IT leaders should use that objective as leverage to move past short-term projects to longer-term strategic initiatives.

The M&A IT world has many key examples that can be leveraged by CIOs to help them shift investment priorities from a short-term focus to a long-term view across the executive team. Instead of utilizing short-term fixes that become permanent additions to the IT landscape, IT leaders should articulate the long-term cost of this approach and explain how this impacts results against competitors.  

CIOs need to articulate cost reduction and value creation outside of IT and show real financial statement impact over the long-term.  In so doing, the best CIOs will be able to help broker better outcomes for themselves, their teams and their company.