Avoid the M&A Uh Oh Moment! Have a Plan!

Avoiding the M&A ‘Uh-‐Oh’ Moment © 2012 Sutherland Global Services.

Authors: Steven Braud, Vice President, Finance & Accounting Stan Mejia, Assistant Vice President, Finance & Accounting

Avoiding the M&A ‘Uh-‐Oh’ Moment

Finance and Accounting Services

Table of Contents

Introduction 2

M&A: The Good, The Bad and The Ugly 3

How To Create a Plan for Your M&A Events 4

The Key to Standardization Success 5

7 Critical Questions 6

The Big Question: In or Out 6

Benefits of Standardization 8

A Working Example: Accounts Payable 9

How An Outsourcing Partner Can Help 11

How Sutherland Can Help You 11

About Sutherland Global Services 12

Sutherland FAO-‐ A Practical Overview 12

Contact Information 13


Introduction Many companies view mergers and acquisitions as a way to increase synergies through increased market share, broadened customer base and united corporate strength. While M&A does have the advantage of being the fast route to growth, too often these organizations do not achieve the predicted results. Numerous empirical studies show that a very high percentage of mergers and acquisitions fail to produce any benefits. Many times, the companies are weaker together than they were separately.

It’s no secret that mergers and acquisitions bring their own set of challenges. M&A events generally result in multiple process, disparate technologies and lots of questions from people on all sides. Frequently after a merger or acquisition, companies are not fully prepared for sheer scale that the integration and centralization of two distinct enterprises entails.

During integration, standardization is critical to M&A success; it enables the newly merged company to control costs and improves efficiencies across all departments. From IT to HR, and from Accounting to Sales & Marketing, a strategic plan and strong sponsor is required to ensure a smooth transition and capitalize on the combined synergies.

Savvy companies will centralize and standardize their F&A functions across their company, so they can reap the economies of scale that were intended in their acquisitions, and so they can have better cash efficiency.

This paper is intended as an introductory guide to preparing for an M&A event and building a plan, with a spotlight on F&A functions and activities.


M&A: The Good, The Bad And The Ugly Mid-‐market and larger organizations look to M&A activities to increase market share, diversify, lower operational costs, acquire knowledge and patents, improve profitability and EPS, or, quite simply, to survive in an increasingly competitive market. It’s easier to raise money as a larger corporate entity, and the merge can bring in fresh talent, specialized skills and new areas of expertise. While it may sound like a corporate match made in heaven, study after study puts M&A failure rates anywhere between 70% and 90%. In fact, according to a KPMG study "83% of all mergers and acquisitions (M&As) failed to produce any benefit for the shareholders and over half actually destroyed value." There are any number of explanations, however, commonly cited challenges and obstacles in achieving post-‐M&A expectations are: Poor Strategic Fit – Behavioral economist Richard Thaler coined the phrase The Winner’s Curse1, which refers to the fact that the average acquirer materially overestimates the synergies a merger will yield. Too often both parties indulge in an overly optimistic viewpoint, seeing greater opportunities than those supported by hard, cold data. Acquirers must take a good look at how the target company fits into their overall strategy, casting a gimlet eye over the proposed benefits and synergies. Lack of Thorough Due Diligence – Assessing financial statements, exploring the tax implications of a deal, and evaluating risk are, no doubt, key elements of due diligence. There are a wide variety of reasons that seller may provide inaccurate numbers about the financial health of their business. However, when operational due diligence factors like strategy, competencies, organizational structure, company culture, and leadership are ignored, it can result in disastrous consequences. Weak Leadership – Organizational transformation requires strong leadership. Leading the integration of two cultures requires engendering trust and collaboration between the two separate entities, as well as the ability to create the common values and visions that all employees embrace and aspire to achieve. Culture Clash – Different management styles, corporate culture, conflicting loyalties and linguistics can be overlooked as a “soft” issue or abstract. Yet, cultural differences and human capital integration are often mentioned as two of the most significant M&A challenges. And, all too few organizations bother to understand the cultural values of the seller before introducing change. Poor Communication – Ambiguity of message and lack of answers fan the flames of customer, stakeholder and employee uncertainty and nervousness. Positive, clear communication is key to quelling public and internal issues like layoff rumors and misinformation. Poor communication has a direct link to lost productivity, employee morale and turnover. Insufficient M&A Resource Allocation – M&A transactions, from the initial offer to the close of the deal and beyond through integration, require expertise at every stage of the process. Companies considering M&A must examine the resources required for due diligence, deal negotiations, post-‐merger human capital, process optimization and integration planning.

1 Richard H. Thaler, The Winner's Curse: Paradoxes and Anomalies in Economic Life, Princeton, New Jersey: Princeton University Press, 1992.


How To Create A Plan For Your M&A Events Strategic realignment, the inevitable layoffs and shutdowns, the creation of a single accounting system, integration of your top talent and human capital, audits and more audits… mergers are hugely complex and each step poses a high risk of error. The creation of a transition plan is required. This plan needs to consider all company divisions and end-‐to-‐end business processes, include best-‐practices for integration, and set out a fully accountable roadmap that reduces any missteps and vastly improves the success rate.

3 Critical Moments in the M&A Transition

To facilitate the successful centralization of the two, or more, companies after the M&A transaction, the work begins well before the deal is closed with a plan that encompasses all project management and process functions. The success of the plan hinges on three critical moments: 1.) Baseline Review As always, the old management adage of “You can’t manage what you don’t measure” is equally applicable to M&A integration. Discovery sessions and cross-‐enterprise process mapping provides a transparent method of documentation. It allows both key stakeholders across the organization as well as teams to see their part in whole. Inefficiencies become much clearer and the interrelationship among process is more easily understood. More than a simple document of process flows, this baseline review is an essential tool for leveraging the synergy of the combined operations.

Definition: Process Standardization Standardizing global processes is an important step in achieving world-‐class performance. It helps implement change and improvements, and allows organizations to be more flexible, transparent and realize organizational excellence. Process standardization is, essentially, a better set of controls that increases the efficiency of F&A operations.


2.) The Plan – Building & Executing Key stakeholders must review the end-‐to-‐end process map and prepare a plan for the integration of all core functions. It will cover hiring, training, quality assurance, IT infrastructure and the required facilities, and risk planning. Regions and countries are not homogenous. There will be differences in technology, process, compliance, language and local policies. You have to allow for some customization at the local level. However, all common points across the organization must be consistent. Change must be prioritized across the silos. Then, steadily and consistently, merger integration solutions must be rolled out according to the priority list. 3.) Integration Post-‐integration, cross training and job shadowing ensure a smooth transition before the integration process “goes live”. This will facilitate the teams to drive change without disruption to business and operations. To fully realize the M&A change management program across the various departments, each part of the transformation process must be reviewed, tracked and sustained. The ongoing governance of the newly integrated –and standardized– processes is critical to achieving efficiencies and to ensuring that redundancies are removed. Governance is simplified by employee buy-‐in and engagement across the enterprise.

The Key To Standardization Success: Your Sponsor Companies trying to standardize on their own often use a project manager. While a project manager may be essential to coordinating M&A standardization efforts, a strong sponsor is required to galvanize the various teams throughout the organization – from senior management to the working teams. Post-‐merger or acquisition, the CFO is busier than ever, without the bandwidth to lead the charge. To drive the standardization of operational F&A functions, ideally the sponsor is positioned at the Controller level, with in-‐depth finance knowledge and a keen understanding of the desired ultimate outcomes. It is critical for the change management sponsor and key stakeholders to agree on the transformation objectives and outcomes. A sponsor will drive the overall project from acquisition to integration and will:

• Lead the change management and drive values • Manage the ongoing nature of the integration process • Attack bumps in the road right away • Report progress to the Senior Leadership Team • Work through problems to reach resolutions that are best for the organization • Communicate, communicate, communicate

Strong and focused leadership is the hallmark of successful transformations. It is essential for the integration to be led by someone who has authority to drive the program across all companies and all levels of the company; and someone who understands the politics of the M&A and can deal with them deftly.


The 7 Critical Questions Successful integrations are those that have a clear and aligned vision with strong stakeholder buy-‐in, supported by a well-‐coordinated process transformation plan. When preparing the roadmap for the integration and standardization of the F&A department, there are a few questions that should never go unanswered.

1. What are your expectations? 2. Is there a communications plan in place to ensure clear, effective

communication and collaboration throughout the Finance and Accounting department? 3. What processes in each organization are best in class? 4. Have you identified high-‐value and non-‐value activities in each organization? 5. Do you have a plan to implement and manage change that defines key success factors

throughout the integration lifecycle and is strategic, accountable, disciplined and agile? 6. Do you have the right F&A talent to support the process change? 7. Are you sufficiently managing risk and have stakeholders agreed on what should

be done to mitigate risk?

The Big Question: In Or Out? When companies merge, the inevitable question is, “Who is going to do what and how are we going to do it?” This cuts to the very heart of any M&A transaction. Management must decide whether the organization merge functions or operate the businesses autonomously. Will there be a shared services approach to F&A between the company and the subsidiary? Or will the company outsource its F&A functions?

Operate Businesses Autonomously

Benefits: • Status-‐quo retained • Change kept to a minimum • Time to evaluate options Risks: • Status-‐quo retained • Process and cost efficiency not realized • System constraints from disparate systems

While many enterprises find it advantageous to combine resources, there may be a business case for continuing to operate as separate entities. Companies may choose to remain autonomous to protect their proprietary materials. Budgetary constraints or the perceived cost of centralization may influence how the post-‐merge entities run their day-‐to-‐day operations. Most M&A events result in a pooling of resources, however, employee/management resistance to P&P change may cause difficulties. As well, business cultures that do not blend well together can also lead to a lack of integration.


Create a Shared Services Center Benefits: • Process optimization • Economies of scale • Controlled internally Risks: • Realizing transition and transformation costs • Key staff lost, not retained • Internal change management

Cost reduction through the elimination of redundant tasks is a common goal for mergers. The shared services approach is a collaborative strategy between the buyer and the merged/acquired company, where F&A functions and processes are centralized, reducing repetition, usually in a lower-‐cost labor market. Newly merged companies often feel that this approach allows them to retain full control over their finance department. However, companies that take an in-‐house approach to centralization and standardization often do not achieve maximum benefits of the M&A transaction. The main culprits are: lack of expertise in organizational transformation, lack of a process plan and strategy, and lack of human resources to effectively oversee effective change. Partner With an Outsourcing Provider

Benefits: • All of the benefits of a Shared Services model PLUS • Labor arbitrage • Process standardization & best practices • New technology & toolsets Risks: • Transition timeframe • Knowledge transfer • Challenges of change management

Outsourcing is frequently a byproduct of standardization. Often a subset of F&A functions outsourced, particularly tasks and processes that are perceived as non-‐essential to organizational differentiation, like payroll. The company can then build economies of scale and leverage operational efficiencies around basic, low-‐value functions. More and more, enterprises are starting to outsource the strategic functions of F&A as well, as this assists CFOs in using information rather than generating it. Global BPO providers offer a variety of outsourced models, with companies opting for functions to be tasked onshore (for example, Sutherland’s Management Controllership Center in Tulsa, OK), a blended model (management in Tulsa and transactional work offshore) and pure offshore (everyone is offshore). With leading BPO partners, clients instantly have access to world-‐class facilities, highly skilled talent, best practices processes and controls. A BPO partner also has the experience to drive process engineering from “quick wins” to “game changers”.


Benefits Of Standardization Process standardization in Finance and Accounting as well as throughout the organization, allows a company to become more transparent and agile. The establishment of consistent, repeatable F&A processes is the start of the journey toward ‘operational excellence’. When processes are codified and engineered purposefully, the effect on business can be profound. Maximum Efficiency Standardization drives efficiencies, as an enterprise can codify rigorous and consistent processes across the organization and subsidiaries. The result is vastly diminished function repetition and staff redundancies, lowering operational costs. These streamlined processes enable F&A managers and staff can focus on strategic business objectives and less on day-‐to-‐day tactics. Agility Through Visibility Access to shared tools, knowledge and real-‐time reports is the foundation for increased communication and collaboration. F&A staff members can more quickly identify potential issues, and cross-‐organizational visibility provides key stakeholders with better business intelligence. This decision-‐making information allows the company to react more quickly to market trends and opportunities, positively impacting profits. Reduced Risk The built-‐in accountability of a standardized end-‐to-‐end process imposes greater controls, checks and balances, and thereby reduces risk. Additionally, high quality reporting and consistent documentation assists with a clear audit trail and facilitate with regulatory compliance. The numerous benefits of standardization include:

• Economies of scale and cost reductions • More accurate high-‐quality financial reporting • Cross-‐organizational visibility • Simplified and more insightful decision-‐making information • Optimized staffing resources • Increased accountability • Highly effective knowledge sharing • Better controls between subsidiaries and business functions • Reduced risk and increased governance • Better compliance • Improved flexibility and quicker reaction to the global market • More strategic collaboration across management/silos • A stronger competitive position

When team members are working with the same tools and information across the organization, the end result is maximum efficiency and profitability.


A Working Example: Accounts Payable

Is Your Finance Department Drowning in Paper?

Without standardization, inefficiencies and redundancies appear in a variety of ways, and each indicator has an impact on how your company performs, in terms of both external issues, like customer service, and internal bottom-‐line influencing factors. Here are some common indicators that an A/P department’s processes should be standardized and optimized.

Indicator Impact People • Bloated staff structures

• High turnover • Stagnant turnover inflating salaries • Decentralized model

• High G&A labor costs • Lack of staff continuity • Inconsistent customer service

Process • Lack of clear policies & procedures • Manual, paper-‐based processes • Long cycle times • High volume of exceptions • Minimal service levels • Minimal reporting • Paying vendors too frequently • Poor visibility • Limited controls & compliance

• Customer service issues • Impact on working capital • Poor supplier relationships • Unable to identify root cause of issues

Technology • Disparate systems • Lack of system integration • Minimal e-‐tools • Limited or no automated workflow

• Manual, paper-‐based processes • Unable to optimize available functionality • High support and maintenance costs


For companies considering or going through a merger or acquisition, there are three key ways to maximize the outputs of your about-‐to-‐be or newly merged F&A departments:

• Leverage your people • Harmonize your processes • Implement the technology

Leverage Your People

Maximize the collective intellectual capital of your accounting department by giving your managers more time to think strategically and deliver true value in the form of business insights, new ideas and innovations.

Identify processes that can be outsourced or performed through a shared services approach. Go through the entire F&A cycle, starting with A/P and cash apps. These are the most transactional of the F&A functions. Starting with these transactional processes often results in immediate cost savings and helps leverage your people so they can get away from the busy work and concentrate on the work that matters.

Harmonize the Processes

One of the things Sutherland sees time and time again with companies who have approached us for post-‐merger consulting, is that the company didn’t have the plan and process in place to standardize the F&A functions, or they’ve applied a “lift and shift” approach, simply implementing the buyer’s process, without regard to best practices or improvements.

Merged companies quickly arrive at the stark realization that, despite the merger, there are a multitude of diverse processes and standards. Standardizing the F&A processes ensures reliable, high-‐quality reporting, and it can often prove to be a key factor in the economic development of the organization as a whole.

The processes from the merged companies should be combined into a single standard to take full advantage of the economies of scale. While regional differences are factored in during harmonization, all common points across the organization must be consistent.

Implement the Technology

The CFO and CIO work together to evaluate their technology options in the ERP integration. There are countless considerations to factor into the final decision: budget, time, organizational and IT infrastructure, and M&A objectives are just the tip of the iceberg.

To maximize efficiencies, a commonality among the IT systems is required for companies that want to avoid uncommon data, under-‐employed major software applications, numerous redundant data centers and computing platforms, etc.

The IT choice they make will influence their ability to control and manage the operations on a global or national level. Management objectives need to be translated into system objectives. The ERP and IT support strategy are not just about technical considerations and requirements. It goes much deeper than that. The technology and tools used are about aligning business structure and strategy, F&A processes, common reporting, communication, and responsibilities.


How An Outsourcing Partner Can Help

A qualified outsourcing provider can help an organization with best-‐in-‐class solutions to maximize M&A events. A world-‐class outsourcing provider goes beyond cost reduction: they function as a partner to collaborate on solving business problems using outcome-‐based thinking to focus on transformational activities that generate value. Develop and implement policies and procedures – An outsourcing partner has the expertise to create a strong transformation process plan with transparent accountability, strong controls and clear strategic outcomes. Access to tools and technology – Partnering with an outsourcing vendor delivers instant quality improvements, with access to high-‐quality tools and technology needed to automate manual processes and standardize systems. Optimize non-‐value activities – Outsourcing partners provide a proven way to reduce daily operational costs by removing and optimizing non-‐value, transactional activities. Focus management on strategy and growth – Removing non-‐value activities from the daily operations allows newly merged companies to focus on the core work that matters to create value and drive performance. Provide the right F&A talent – Instead of struggling to obtain, train and retain specialized F&A talent –from senior executives to A/P clerks– companies can instantly tap into an extensive pool of highly skilled accounting professionals.

How Sutherland Can Help You In addition to reducing the cost of the Finance function, outsourcing provides CFOs with the opportunity to focus their retained organization on the core competencies and strategic vision that are important to the organization’s competitive position and bottom line.

Sutherland can help you move from: To:

• Finance as a function • Transaction processing requiring

effort and attention • Focus on ad-‐hoc operational

solutions

• Finance as a business partner • Focus on performance

management for core processes • Finance operations very low cost

and effective


About Sutherland Global Services Sutherland Global Services is a multi-‐national technology-‐enabled business process outsourcing (BPO) services company providing a unique combination of vast BPO resources as well as extensive expertise and industry knowledge in Finance and Accounting. We help you build a high-‐performance finance organization by combining accounting best practices with proven BPO processes. Our global service delivery infrastructure and full range of outsourcing solutions – from specific transactional processes to controller and compliance functions –help you reduce costs while gaining better visibility and control of financial processes and data. All of our finance and accounting engagements are led by our Controllership & Management Center, based in Tulsa, Oklahoma. Our strategy quickly improves your F&A operations by adapting a set of standardized processes and using technology and automation to improve efficiency. We begin by analyzing your existing accounting workflows, then we design an outsourcing solution based on your business objectives and available resources. Ongoing processes are transferred to our organization. Once this transition is complete, we follow through to ensure flawless service delivery. The Result: You gain access to higher quality, more complete financial information to support effective tactical and strategic decision-‐making across your business. Our outsourcing solution not only reduces the cost of the finance function; it provides CFOs the opportunity to focus the organization on what is strategically important to the business.

Sutherland FAO – A Practical Overview Structure

• Globally distributed delivery capacity and domain capability • The Deloitte-‐established Tulsa FAO Centre of Excellence has been servicing clients since

1995 • Strategic global locations designed to satisfy SSAE 16 standards and Sarbanes-‐Oxley

requirements Capability

• Full suite of FAO services – transaction processing to financial and management reporting • Integrated Analytics to support Collections, Financial Planning and Analysis functions • Onshore, offshore and hybrid solutions tailored to meet client-‐specific needs

Expertise • Dedicated team experienced in business transformation, process optimization and

transition services • Expertise in utilizing existing client applications and/or SGS-‐hosted ERP systems • Robust set of add-‐on technologies supported by in-‐house application management team

Flexibility • Custom-‐crafted Pricing and Commercial Structure aligned to client needs and objectives • Output/Outcome Based Pricing and No Termination penalties


Contact: To have a deeper discussion about the M&A process, please contact: David Kaminski, Senior Vice President, Client Engagement, F&A Services PHONE: +1 (904) 699-‐1985 EMAIL: [email protected] WEB: www.sutherlandglobal.com David is the Senior Vice President of Client Engagement for Sutherland’s Finance & Accounting Outsourcing Practice. With over 30 years of experience, David has worked as a Partner with Capgemini, and has served as General Manager of Worldwide Financial Services for Microsoft Corporation. During David’s 9 year tenure at Microsoft, his responsibilities were split between running two global businesses as Chief Credit Officer of Microsoft Corporation and President of Microsoft Capital Corporation. David and his team of 400 professionals managed a global asset of $8 billion in more than 180 countries. Steven Braud, Vice President F&A Services PHONE: 1+(585) 520-‐4079 EMAIL: [email protected] WEB: www.sutherlandglobal.com Steven is a Solution Architect with Sutherland’s Finance & Accounting Outsourcing Practice. With over 30 years of experience, Steven has worked for Fortune 50 companies in Strategy Formulation, Business Performance Management, Accounting, Transformation, General Accounting and Close & Consolidation. He is an industry expert in Order to Cash for outsourcing and has consulted with several Fortune 50 Companies for Cost Reduction, Performance Management, Shared Services, Finance Transformation and ERP Implementations. Stan Mejia, Assistant Vice President, F&A Services PHONE: 1+(918) 461-‐4766 EMAIL: [email protected] WEB: www.sutherlandglobal.com Stan is a Transition Expert with Sutherland’s Finance & Accounting Outsourcing Practice. With over 30 years of experience, Stan has worked for some of the leading Accounting, Consulting and Outsourcing companies in the world, and was an Accounting Center Controller for one of the nation’s largest retailers. He has a strong background in Consolidation, Transition and Transformation within an accounting organization, and his experience includes serving as the Lead Client Service Representative for several accounting outsourcing programs, including those that require both domestic and offshore services.

Avoid the M&A Uh Oh Moment! Have a Plan!

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