Harmonization of technology landscapes: Successful with a focus on business capabilities

1. Introduction

After the pandemic-related slump in M&A activity¹, experts expect a huge increase in strategic acquisitions and new alliances in 2021 – also due to the gaps that became particularly apparent during the COVID 19 crisis². It is not just the increasing number of transactions that poses challenges for companies. Increasingly complex technology landscapes also make post-deal integration more difficult. As a link between IT and business, enterprise architects can make a valuable contribution to the success of M&A with the help of modern software tools by relating the IT landscapes to the business capabilities of the company. This article shows best practices of such an integration of enterprise architects and, based on an international study, takes a look at how strongly these specialists already support the M&A processes of their companies today.

 

2. Increasing IT complexity leads to new M&A requirements

Companies today are closely intertwined with technologies and software. Successful harmonization after an M&A deal therefore goes far beyond the desks of executives, legal and finance departments. It requires the involvement of IT experts and enterprise architects are increasingly moving into the spotlight. Just a few years ago, however, they were considered specialists who worked in an ivory tower on a rigid set of rules for IT organizations. Now the establishment of modern software tools for enterprise architecture (EA) has fundamentally changed their roles and responsibilities.

As a discipline, forward-looking enterprise architecture management is equally dedicated to the IT and business worlds – and is thus predestined to play a central role in the integration phase of M&A processes. With their holistic overview, enterprise architects provide a sound basis for decision-making when evaluating, streamlining and merging IT landscapes, and promote collaboration in the critical post-merger integration phase by providing resilient data. The significant contribution they can make in these processes is illustrated by the example of the software company Atlassian: Due to the high M&A frequency of the company, the EA team established a practice with the help of the LeanIX software solution to be able to realize the IT value of an acquisition in only 90 days³.

 

3. Make business capabilities the starting point for integration

Best practices have shown it’s not business processes or business units that are best for comparing companies in terms of their technology landscapes. It’s business capabilities: everything a company needs to perform its core functions. With this level of abstraction, transparency can be created not only about the applications and IT services used by companies, but also about their interdependencies. The result is a significant improvement in the overview of the IT landscape and thus, a reliable basis for decision-making for all those involved in post-merger integration. How this can look in practice is described by one of the responsible enterprise architects of the technology group ZF in a current webinar, which deals with the integration of the commercial vehicle supplier WABCO, acquired in May 2020, into the group⁴.

 

Source: based on company presentation LeanIX

 

3.1 Map joint strategy to business capabilities

Based on the corporate strategy, a joint business capability map must first be created for the two companies to be merged. The classification of business capabilities is important for aligning investments and resources. Gartner’s pace layer model divides capabilities and their associated applications into three areas: The foundation of a business includes all applications and skills that ensure standardized and efficient processes and is called COMMODITY. Building on this is the area of DIFFERENTIATION with unique processes that serve to differentiate the company from the competition, and finally INNOVATION for gaining future competitive advantages. With the help of this model and the clear visualization in the LeanIX Enterprise Architecture Suite (EAS), transparency is created for existing and new business capabilities and the applications linked to them. Simultaneously, a common strategic working basis is created for the teams in the M&A process.

 

3.2 Create integrated application landscape

IT applications are the backbone of business capabilities. Enterprise architects create complete transparency of all existing applications and services and thus, a complete picture of the actual architecture in a central location – with resilient data from both companies. The goal is to be able to precisely analyze each individual application with cost and benefit metrics. To this end, enterprise architects involve all relevant stakeholders on both sides and use specially created surveys to record the evaluation of the applications for which they are responsible, and according to their business and technical suitability. The result is an in-depth understanding of the integrations and interdependencies of all applications, which can be used to precisely evaluate the conversion effort.

 

Source: based on company presentation LeanIX

 

Source: based on company presentation LeanIX

 

3.3 Define way forward for each application

Once the common business capability map has been created as a basis and transparency of the existing IT landscape has been achieved, the next step is to define measures for each individual application in order to decide on the design of the desired target architecture. These measures must be aligned with the overall IT strategy for the merger, which can look differently as a mandate to get the best of both worlds versus alignment on key platforms versus a clear “winner takes all” strategy.

From the information gathered about applications, Gartner’s TIME model can be used to classify different measures: TOLERATE (T), INVESTIGATE (I), MIGRATE (M) and ELIMINATE (E). The Business Transformation Management module of LeanIX can be used to directly determine the subsequent candidates for elimination or migration, and to consider the lifecycles of applications.

Source: based on company presentation LeanIX 

 

3.4 Plan integration and track project execution

In the final step of the integration phase after an M&A deal, enterprise architects develop the application roadmap and monitor the implementation. They communicate the timeframe and impact to the business stakeholders, track the project status and the savings achieved, and intervene in the process in a controlling manner if an adaptation of the roadmap becomes necessary. With the help of modern software solutions such as LeanIX, they are able to visualize the integrated application landscape at any point in the future and automatically update the EA documentation when a project step is completed.

Enterprise architects can make a decisive contribution to the success of M&A with their expertise, as the process described above has shown. But what does current practice look like in international companies?

 

4. LeanIX M&A Survey 2021 looks at processes in international companies

LeanIX works closely with the respective EA teams of its 400+ cross- industry, large international customers. From December 2020 to January 2021, experts from these teams were asked about M&A activities in their organizations⁵. Focus areas included determining how many M&A activities took place last year and the roles EAs play in these processes, which EA use cases are particularly relevant for successful M&A activities, and the hurdles EAs face in these activities.

 

4.1 Numerous M&A activities in 2020

Even in 2020, a year marked by crises, M&As or carve-outs of business units played an important role for LeanIX customers. Three quarters of those surveyed had at least one M&A or carve-out project on their agenda. In almost 40% of cases, M&A or carve-out processes took place. For another quarter of surveyed companies, at least one M&A project was pursued. The remaining 12% answered to having pursued at least one carve-out.

 

Source: LeanIX M&A Survey 2021

M&A deals and carve-outs may differ in terms of due diligence or post- merger integration tasks. With regard to IT, however, there are many common challenges. Not only must the infrastructure of different units become harmonized and/or separated, but informed calculations have to be made to alter applications, products, and business processes –

a process requiring all technical dependencies to be accounted for. It’s imperative that these decisions never lead to interruptions in business continuity nor reduce the value of the M&A or carve-out project. In companies with highly complex IT landscapes, technological integrations are a critical factor in M&A processes, especially when companies rely on virtual communication. In these unprecedented times, according to one Deloitte study, company managers consider technical integration to be the biggest hurdle in the overall integration process⁶.

But what role does EA – a discipline capable of deconstructing complex IT landscapes – play in the M&A process? A 2012 study from the Technical University of Munich⁷ found that architects themselves are convinced that they can make a valuable contribution to the success of M&A processes. But can the enduring benefits of EA hold up within large international corporations in 2021?

 

4.2. 80% of EAs are involved in M&A activities

Regardless of whether M&A projects made it to corporate agendas in the last 12 months, the vast majority of surveyed EA experts (80%) stated that they are involved in M&A processes in some form or another. Of note, LeanIX customers indicate that they see the potential of EA for M&A processes and at the following stages in particular:

• Identifying possible acquisition candidates
• Identifying possible business units for carve-out
• Due diligence
• Post-merger integration
• Implementing carve-outs

The extent to which EAs are involved in M&A activities (specifically, the five aforementioned stages) varies greatly.

More than a third of surveyed EA experts report being involved in only one stage of the overall M&A process; another third is involved in a total of two stages. Only 20 percent of architects are consulted by their companies in three or more stages in the M&A process. And a staggering 20% of respondents do not participate in any M&A activity whatsoever.

 

Source: LeanIX M&A Survey 2021

 

4.3 EA involvement highest for post-merger integration

EAs are involved in a variety of phases for M&A activities. Survey results show that post-merger integration is the phase EAs are most heavily involved. Nearly 90% of architects participating in M&A activities reported to be actively dealing with post-merger integration. Further, less than half of the respondents stated that they provide support during due diligence or the implementation of carve-outs. EAs are often not even consulted when identifying potential candidates for M&A projects or carve-outs.

There’s a clear reason why EAs are leveraged most often for post- merger integration. By specializing in shaping and managing complex IT landscapes, EAs are a perfect point of contact during the merging, acquiring or carving out of business units as they can foresee the effects of M&A activities on IT structures. Additionally, since the post-merger integration phase is regarded by many as the most critical M&A stage, many companies choose this phase to draw upon as much expertise as possible to ensure a successful M&A project via a post-merger integration⁸.

Some EAs are consulted with and actively involved in the due diligence phase (an earlier stage in the M&A process). This indicates that companies understand and recognize the value of EA management. With the help of modern EA tools such as LeanIX, relevant data on the technological infrastructure can be shared and reviewed early on in virtual yet confidential workspaces. In turn, this data can be used for value assessments and risk evaluations. As these EA tools continue advancing at exponential rates, so can the impact of EAs in M&A processes.

 

Source: LeanIX M&A Survey 2021

4.4 Most relevant EA use cases for M&A

When looking at the relevance of specific EA use cases during M&A processes, it is evident why EAs are involved in these projects in the first place. All common EA use cases are considered by respondents to be of significant importance for M&A projects, with agreement of more than 70% each.

Survey analysis revealed 94% of respondents agree there needs to be full transparency of the as-is state of the to-be harmonized IT landscapes for M&A activities to be successful. As one survey respondent noted, not every organization has access to the necessary data. Other respondents highlighted that without transparency, companies lack the foundation to make sound decisions (i.e., without data-driven information at hand, integrations cannot even be planned let alone implemented). This includes not only information on infrastructure and existing applications but also business capabilities and current dependencies.

 

Source: LeanIX M&A Survey 2021 

At first glance, it is surprising that significantly fewer enterprise architects consider the definition of a joint business capability map for their own company and the acquired company to be a relevant use case, namely a total of 80 percent of the respondents. However, this shows a correlation between the extent of M&A involvement and the evaluation of the use case. The rate of agreement rises significantly with increasing involvement: of the enterprise architects involved in only one phase, two-thirds attribute important significance to the use case – but for architects involved in three or more phases, this proportion rises to 95 percent.

The more enterprise architecture is involved in the M&A process, the more business capabilities are relied upon to provide management with a different and better basis for decision-making. One of the architects surveyed describes this as a “higher level” focus in an M&A process, meaning that instead of looking at business processes in a parallel manner and overlooking possible relations, all existing relations are holistically revealed at a glance.

Achieving synergies is at the very heart of many M&A deals. Only if the newly established business unit achieves greater value than the sum of the two individual enterprises is such a deal considered successful. With regard to IT, application rationalization plays an important role. This assumption is supported by the survey results, in which 88% of EAs agreed that this use case is indeed relevant. This is unsurprising given that application rationalization helps companies eliminate redundant applications and services which in turn leads to direct cost savings. One survey respondent identified time as a crucial factor and noted that an early evaluation and management of existing dependencies is crucial for post-merger integration.

More than 80% of all surveyed EAs agree that the development of both the target IT landscape and specific application roadmaps are relevant M&A uses cases. Establishing a framework for the future architecture as well as for individual applications is an important part of any post-merger integration.

Around 70% of the respondents said that developing scenarios and plans for post-merger integrations is important for any M&A project. It can be assumed, however, that the lower relative ranking of this use case (compared to the other use cases) will increase in the future. On the one hand, some respondents already explicitly point out the necessity of such simulations. On the other hand, EA tools are making significant in-roads in this area. In 2020, LeanIX launched the Business Transformation Management (BTM) module, which enables EAs to visualize interactive timelines to see the “to-be” states of IT landscapes as it relates to the “as-is” state. This module fosters the collaboration when planning and implementing transformation initiatives.

 

4.5 EA challenges during the M&A process

The enterprise architects who participated in this study identified various challenges to overcome in order to successfully involve enterprise architecture in the M&A process. For a successful post-merger integration, both parties – meaning the acquiring and the acquired company – need to understand that the EA team is there to support them. As EAs have sound and transparent data plus a detailed picture of the IT landscape, they can streamline the M&A project by preventing lengthy discussions about preferred IT assets. Time restraints can also pose a challenge, and many respondents complain that unrealistic planning complicates the integration process. In all, survey data confirms that it is foolish to think that a post-merger integration can be handled without interrupting day-to-day business⁹.

 

5. Increasing value of enterprise architects for M&A

Most enterprise architects are already at the table for M&A projects in their companies: This is a key finding of the present study. With the increase in mergers and acquisitions predicted by experts, the requirements are rising – both in the evaluation of potential takeover candidates and in the implementation of an M&A deal. Currently, most enterprise architects are involved in post-merger integration. Best practices show that the focus on business capabilities is particularly important in this phase of the M&A process and that the definition of a common business capability map should be at the beginning. This use case is already considered important by 80 percent of the enterprise architects surveyed. It can be assumed that with the increase in M&A activities on the one hand, and greater involvement of EA specialists on the other, this use case will become even more relevant in the future. This is shown by the fact that 95 percent of the heavily involved enterprise architects already agree with this statement. The range of tasks within M&A will also expand in the coming years due to the increasing pressure to be able to access reliable information in the lead up to a transaction. As a reliable partner for the business and as a connection to IT, enterprise architects can become a game changer in the M&A process.