Here's how to address the lack of transparency and controls in subsidiary operations, so as not to trip the M&A process.
According to Thomson Reuters, Global mergers & acquisitions activity so far in 2011 is at its highest level since 2000. The total value of all M&A was $309.6 billion so far this year, up 61% over last year and the most since companies inked deals worth $554.2 billion in 2000.Similarly a Bloomberg/Business Week story recently said that conditions are ripe for an M&A boom in 2011.Corporations have the cash and motivation to go back on the hunt for acquisitions after a long drought as they seek to increase market share, enter new markets or add new product lines by acquiring other companies. In the post-merger integration planning process, IT executives have traditionally focused on two things – a) achieving cost reductions in the IT organization by eliminating redundant processes and systems b) integrating the remaining systems to streamline the processes of the combined company. However, there is a third critical area that they must focus on, but which typically gets overlooked in the due diligence or integration planning process – risk and compliance issues from small subsidiaries with legacy systems (and even spreadsheet-based systems) that don’t enforce policies and processes like the corporate systems do. These potentially weak links can trip up an otherwise well-planned M&A integration process with negative operational and regulatory surprises. As an IT executive, during the integration process, you have an opportunity to identify the weakest links and then help selected subsidiaries choose a system that meets their business and budget requirements, but also addresses your risk and compliance requirements. But how do you recommend what type of system they should select?
Multiple options are available, each with advantages and disadvantages. In the end, your IT governance model, together with the business requirements of the subsidiaries, should drive the decision. Below are three options that you may consider:
Option 1 - Deploy the same ERP system across the company
Under this option, the entire company implements the Corporate ERP system to ensure that the same processes, metrics and assumptions are being used across the company. This would give headquarters clear visibility and control over the procurement process.
While some companies have implemented such an approach, especially if their products, supply chain and business model are homogeneous across the globe, it brings significant challenges. The process complexity and workflows in a small, autonomous subsidiary is typically very different from those of headquarters or a large division. As a result:
- Smaller subsidiaries are likely to get smothered by process overload
- Subsidiaries may not have the budget and resource skills to implement the headquarters’ ERP system
- Subsidiaries might need to heavily customize the corporate ERP system to accommodate their unique industry, functional and compliance requirements
Hence, such an option may not be viable for many companies. Instead, they would opt for a two-tier ERP approach – the corporate ERP system deployed at headquarters and larger divisions; and a different ERP system at the smaller subsidiaries that is simpler, easier to use, and better suited to subsidiary’s local business, financial and regulatory requirements.
Option 2 – Deploy a two tier ERP approach with simple data integration between headquarters and subsidiaries
In this option, the company implements corporate ERP system at headquarters/larger divisions, a different ERP system at smaller subsidiaries, and a layer of simple transactional data integration (or rollup) between the two ERP systems. The most popular scenario under this option is rollup of financial data from the subsidiary system to the corporate ERP system to enable financial consolidation for fiduciary and management reporting at headquarters. This example is often seen in an environment where the subsidiary runs its operations at an arm’s length from headquarters or when headquarters is a holding company with several independent and autonomous entities, each with its own business model. In such scenarios, the role of the integration between the two ERP systems is to enable financial consolidation of the information from the subsidiary to headquarters. However, this approach is not sufficient if headquarters and the subsidiary need to collaborate or coordinate their activities more closely.
Option 3 – Deploy a two-tier ERP approach with process integration between headquarters and subsidiaries
When headquarters and subsidiaries need to coordinate activities or collaborate with each other, a two-tier ERP model with process-level integration between the two ERP systems is the right approach. For example, if headquarters and subsidiaries want to coordinate purchasing activities to benefit from lower purchasing prices, better payment terms, and higher quality levels that corporate has negotiated and which they would not be able to negotiate themselves. Corporate purchasing negotiates a contract with a global supplier and defines the contract terms in the corporate ERP system. Due to integration between the two systems, the vendor terms are available to the subsidiary. Additionally, when the purchasing transaction is completed at the subsidiary, the procured amount is automatically updated into the headquarters ERP system, giving corporate purchasing visibility into how well their negotiated contract is performing. Furthermore, if corporate purchasing renegotiates the contract, the new terms are automatically visible to the subsidiary.
In corporate governance models where headquarters and subsidiaries collaborate around activities such as budget planning, have common functions, such as shared finance or HR services, or have common processes which require coordination, such as in the procurement example just discussed, Option 3 with process integration between headquarters and subsidiaries is the best way to implement a two-tier ERP model.
Summary and Recommendation:
To ensure that your M&A integration is not tripped by lack of controls in subsidiary operations, you need to identify the subsidiary operations which can cause potential risk and compliance issues and select a system for them. However there are several approaches for providing the visibility headquarters needs to coordinate, and collaborate with subsidiaries. Option 1 (a single ERP system) may not always be the best approach, especially if subsidiaries have very different business models, economics or other business requirements. A two-tier ERP model is the right option for such scenarios. Option 2 enables you to effectively implement a two-tier ERP model for subsidiaries that operate very independently or only need to provide rolled-up data for consolidation at headquarters. However, if some level of cooperation between headquarters and subsidiaries is needed in their supply chain operations, shared services or collaborative planning activities, then Option 3, two-tier ERP with process level integration, is the best approach. With Option 3, subsidiaries get a system that meets their business and budget requirements and provides them the flexibility to innovate and compete effectively in their local markets, while meeting the compliance and coordination requirements of headquarters, needed for a successful M&A integration.
Sheila Zelinger is Vice President of Portfolio Marketing at SAP, which includes SAP Business Suite as a corporate ERP system, as well as multiple solutions including SAP Business All-in-One, SAP Business By Design and SAP Business One for mid-sized organizations, including subsidiaries.