The Admixture We Know as Outsourcing | Article

Men discussing a DealIn synergism, an admixture–any alien element–can be introduced, and it often increases the effectiveness of one or more of the original properties. When the concept of combining different elements with the strategic purpose of creating something that operates better was applied to the business world in the 1970’s, it became a major force in shaping companies and the way they do business. Mergers and acquisitions have now become an effective means of dealing with fierce competition, global expansion efforts, industry change, diversification; cutting costs, eliminating ineffective management, and increasing product and technological range. This issue of Outsourcing Journal highlights how adding the element of outsourcing into the merger/acquisition mixture can increase the synergy and effectiveness of merged entities.

A company may need help, or it may want to grow. In either event, the new combination of skills and assets, customer bases, products and leverage that result from a merger or acquisition do not necessarily mean that success will ensue. Deal makers promise that the new entity will accomplish strategic goals–such as cutting costs, adding value–which will more than make up for the investment in acquiring the new companies. But many efforts have failed–destroying shareholder wealth in the process.

With the high stakes involved in mergers and acquisitions, it is essential to find the keys to success that will have the new entity up and running powerfully and effectively as soon as possible. Over the last ten years, we have seen outsourcing play a critical role in merger and acquisition activities. As an admixture in such risk-filled business maneuvers, outsourcing can be a key element in increasing the chances of success for the new entity.

Outsourcing Eases Transition

There are many areas of challenge to a merger, both in the negotiation and in the implementation phases; outsourcing is an important strategic tool to use in meeting those challenges. The merger–a very complicated process, even without all the variables–must be accomplished as quickly as possible so that the new company will have the opportunity to gain the predicted profit very soon. In a global economy where markets change rapidly, this is best accomplished with the services of a flexible outsourcing supplier.

Outsourcing is an excellent and cost-effective way to manage change. It supplies continuity and quality of service, which is demanded by the company’s customers. It is also the bridge to use when merging companies across international borders, where the scrutiny of regulatory agencies can be an obstacle to the merging process.

The integration of staffs and IT systems are pivotal areas where mergers often fall off the precipice into failure; outsourcing excels as a business tool to accomplish integration and efficiency in these areas. The morale of the staff–concerned with job security, seniority and compensation, company rules, and who their supervisors will be–can cause business to stop as rumors fly. If key staff persons leave, they take with them a significant amount of knowledge. The potential savings in employees that can be accomplished through outsourcing as the vehicle to manage the transitional HR issues, cannot be underestimated. Technology is of great concern because it helps to achieve the cost-reductions promised to the shareholders and is often the make-it-or-break-it factor for business in today’s global economy. Integrating infrastructures and applications, or building entirely new ones, is best handled through outsourcing.

In particularly large mergers–as when British Petroleum recently acquired Amoco–outsourcing has been used in nearly all company processes, across the board. Companies like British Petroleum use outsourcing as a powerful tool for consolidating and getting all processes–IT, HR, back-office accounting, logistics–into an integrated structure.

Another merger/acquisition strategy where outsourcing can be extremely helpful is in roll-ups. When a company, which is acquiring numerous other companies, is in an alliance with an outsourcing supplier, the acquiring company can focus on integrating the core businesses, while the supplier focuses on integrating the non-core pieces of the businesses. This allows the consolidating company to do more acquisitions faster and still preserve its capital for integrating the core businesses.

Outsourcing is Not an Impediment

Outsourcing is experiencing explosive growth; and it is not unusual for one or both of the companies involved in a merger to already have one or more of its processes outsourced. In order to gain economies of scale, the newly merged entity will look to consolidate those processes. This has been the case particularly in the financial services industry where banks have consolidated.

Whether the merger means that two different outsourcing suppliers will need to be consolidated to one, or whether it requires returning a process back in-house, you have to deal with the incumbent outsourcer. Typically, the problem is that there is still a substantial length of time left on the contract.

One approach is for the merging companies to build into the price of the merger the acquisition costs and the early termination costs; but these can be fairly substantial.

The other approach, which suppliers increasingly are allowing, is to purchase from the outsourcing supplier some services in other areas, which will affect the supplier’s revenue stream. In other words, if there is $100 million dollars left on the contract over three years, a supplier often will be willing to allow the workload to move to another outsourcing supplier, or to return it as an internal process, if there is a commitment to purchase $100 million of services in some other area.

Generally, suppliers have a broad base of services which the new company could purchase. Instead of prior long-term outsourcing commitments being an impediment to mergers and acquisitions, this approach allows flexibility for new value to be created from the transaction.

Recap

In our continuing effort to provide to our readers helpful information about issues related to outsourcing, this edition of Outsourcing Journal presents information about successes and failures in merger/acquisition activity and the role of outsourcing in eliminating failures. Mike Luttell, president of the banking division of Electronic Data Systems, talks about the significant number of bank mergers and acquisitions that have occurred over the last decade and how outsourcing can help in consolidating human and technological assets. Also in this issue, we present information from Tom Conarty, director of IT at Bethlehem Steel, about the need for flexibility in contracts so that mergers and acquisitions can take place. Finally, Jeff Kaplan, director of strategic marketing at International Network Services, provides lessons learned from failed assimilation of acquisitions.


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