Mergers and acquisitions (“M&A” or “mergers”) are highly complex and disruptive activities, which often shifts focus away from ‘business as usual’ (“BAU”) activities and refocuses management attention on integration and synergy capture. The primary responsibility of the IT organization during an M&A event is to successfully combine the acquirer and target organizations to ensure continuity of technology service operations through seamless integration of people, processes and technology. While these types of events direct most of the attention towards the IT challenges of integrating services, platforms and operating models, one area that is often overlooked or downplayed throughout this process is the role of the IT Vendor Management Organization (“VMO”).
During a merger, the VMO should fulfill a number of different operational and strategic roles. If executed correctly, these roles directly contribute to the success of the merger in the following ways:
- Demand Management – Throughout the integration process, clients often experience large influxes of demand for project related resources associated with new contracts and expansion of existing relationships with vendors. The VMO can help to consolidate this demand by identifying vendors who are best positioned within the client vendor ecosystem to fulfill the required capacity. While the project teams are expected to identify resource needs for both pre-close planning and post close execution, it may ultimately fall on the VMO to ensure that vendors are sufficiently ‘ramping up’ staffed capacity to support projects. The VMO may also monitor service consumption to ensure that labor availability with vendors is sufficient to meet peak demand – which often occurs within several months of the close of the merger. In addition to tactical responsibilities, the VMO is strategically positioned to assist the sourcing function in identifying vendors to meet short and long term technology demand. As part of integration demand planning, the VMO may also assist or lead business case development, risk assessment, benefits projection and tracking, vendor selection, quality of service delivery, escalations and issue resolution, and contracting.
- Risk Management – New vendor relationships typically result from the merger, multiplying the number of vendors in the portfolio and increasing the associated risk profile of the extended enterprise. When teams work towards very tight and expeditious timelines, it is possible and often highly likely, that stakeholders have limited time to fully assess and evaluate extended enterprise risks, including regulatory, financial, operational risks and risks related to information and data security. Appropriate due diligence and analysis is required to evaluate any extended enterprise related exposure. The VMO performs an essential role in identifying non-compliance with laws and regulations and detecting extended enterprise solvency issues, which might threaten a vendor’s ability to maintain service levels and cause disruption to operations. They may also reveal potential risks to extended enterprise service delivery arising from inadequacies in a vendor’s internal supply/distribution processes. In addition, the VMO is vital to maintaining, inventorying, tiering and assessing new extended enterprise relationships; determining which are of high risk; and identifying those that require further attention to reduce areas of vulnerability. If the risk requirements of the organization are expected to change after combination, the VMO should play an integral role coordinating with vendors to reassess and modify vendor risk profiles.
- Relationship Management – In a perfect world, vendors would have one primary executive who coordinates directly with a client’s business unit executive resulting in an ideal ‘one to one’ relationship between the vendor and the client. While in principle this sounds effective, the reality is that this dynamic rarely occurs in industry – relationships are more complex - typically represented by ‘many to many’ relationships between global service providers and their clients. When considering this complexity during a merger, one could imagine that any vendor relationship challenges which existed before the transaction may be exacerbated by the fact that the number of direct vendor relationships are potentially doubled when organizations combine. The VMO appears well positioned to help coordinate discussions and interactions amongst all stakeholder groups including the acquirer, target, BAU teams, and integration teams who may be engaging vendors on an ongoing basis – particularly during planning stages. Leveraging the VMO as a primary facilitator with vendors, may be an effective way to control spiraling relationships and aligning opportunistic or concerned vendor sales teams. In addition to managing the massive influx of new relationships, the vendor management team also helps to reinforce, measure, and monitor any transition service agreements (“TSA”) that may exist with the acquired entity. Depending on the structure of the acquisition or merger, this function may be critical to ensuring that both the new vendor relationships and relationships with legacy operating companies are managed effectively.
- Financial Management – Regardless of where costs are managed or controlled within the organization, whether within the business or within IT, the VMO should play an essential role in achieving integration related cost reductions and synergistic value realization prior to, during, and after a merger closes. In the early stages of planning, the VMO is ideally positioned to investigate opportunities to combine or rationalize vendor relationships between the acquirer and target enterprise, in order to effectively achieve economies of size and scale, and maintain preferred vendor status with the most important and critical vendors. The rationalization of vendor relationships provides opportunities to analyze pricing, commercial and contract structures, and laying the groundwork for the establishment of post-merger vendor performance targets. The development of realistic yet aggressive targets can promote accountability and encourage cooperation to support the new company’s success. In addition, the VMO can also support the organization to effectively use short term resource demand as an opportunity for longer term financial benefits by leveraging large spikes in capacity to lock in more favorable pricing for the duration of the integration – and beyond. Throughout the merger, the VMO appears ideally positioned to leverage the total value of the relationship with the combined organization as a means to achieve savings targets. Firms looking to perform financial management and contract management activities prior to merger close, should develop clean room protocols with the counterparty addressing the handling of competitively sensitive information for compliance with antitrust regulations. The firms should consider engaging a 3rd Party Advisor, who can advise on the set up and management of a clean room environment and analyze sensitive information subject to the clean room protocols established. This is a critical step to remain compliant with antitrust regulations.
- Contract Management – During BAU, new business demand, typically leads to technical requirements, which can lead to a new contract or a change to an existing contract. These activities are still commonplace during a merger; however, unlike business as usual activity, the stakes are greater and the timeframes are shorter. Regardless of these added constraints, the VMO remains the optimal function to perform vendor qualification, develop and initiate an RFP, negotiate with new vendors, and maintain agreements. Unlike BAU, mergers provide ample opportunitiesfor firms to make a shift in strategic direction or to incorporate new vendors into their portfolio – both as a means for meeting capacity or demand for skills. Due to the large influx of additional contractual needs or contractual revisions, the VMO plays an essential role in ensuring that resources including services, labor, hardware, and software are readily available to meet an influx in demand. Influxes in the demand for new contracts may also increase the demand for contract management services. These services typically include RFP development and negotiation support. The VMO may require external 3rd party support to augment VMO capacity and prevent shifting knowledgeable competency and skills away from strategic planning to tactical process oriented work. The level of contractual support required from the VMO to support the contract management processes should not be underestimated.
While existing VMO operations are essential to achieving merger related benefits, a merger also provides an opportunity to not only strengthen vendor relationships but also to develop and expand upon existing VMO capabilities. Often during BAU, it may be difficult to rationalize VMO investments, however, as part of a larger change initiative, like a merger, it is often easier to precipitate change by including VMO capabilities within larger organizational and operating model change.
A couple of key opportunities for consideration include:
A couple of key opportunities for consideration include:
- Target Operating Model (“ToM”) - Are we structured properly? Understanding the acquirer and target VMO operating model can help to establish the ToM for the combined organization. Key elements of the operating model include processes, methodologies, key contacts, operating procedures, and tools / templates which should be identified and inventoried for the new company (“NewCo”) in order to seamlessly integrate VMOs. Additional questions worth considering regarding the future state operating model include:
- Is the acquirer centralized, center-led, or distributed? Target?
- What services (strategic sourcing, procurement, vendor management) does the acquirer VMO perform for their customers? What services does the target VMO perform for their customers?
- How many personnel are currently supporting the acquirer VMO model? Target?
- How many personnel should be supporting the VMO model for NewCo?
- Which processes / process groupings within each service does the VMO own? Support?
- Which processes / process groupings should the VMO own? Support?
- What are the gaps between the current model and the desired state?
- Do we have a plan for closing ToM gaps?
- Capability Maturity - How well are we doing? Understanding the acquirer and target VMO capabilities, can help to establish lines of distinction between responsibilities for the business and VMO. Identifying and assessing capabilities will help to define the VMO at the process level and establish areas, which may require further investment or attention. Additional questions worth considering regarding capability maturity include:
- How many functions (contract management, performance management, financial management, etc.) is the acquirer VMO performing? Target?
- How well is the acquirer performing these functions relative to the market? Target?
- What are the gaps between capabilities for the acquirer and target?
- What capabilities from the acquirer and target should be leveraged for Newco? Which do we need to build / invest in for optimal ROI?
- Do we have the processes, procedures, tools, templates, and people to effectively perform these functions?
- Do we need to acquire people, process, or technology to enable these functions?
- VMO Strategy - What can we do to be more strategic? In addition to improving the overall VMO operations, mergers also provide an opportunity to increase the strategic value of vendor relationships. Typically vendor value can be improved via vendor pricing concessions, value add / pro bono services, transfer of responsibility, reduction of administrative or relationship maintenance costs, thoughtware or intellectual property, and strategic vendor contributions. Additional questions worth considering regarding VMO strategic improvements include:
- How much time and effort do stakeholders spend meeting with / engaging vendors? How many vendor contact touch points do we have on a regular basis?
- How do we define vendors which have a strategic importance to our enterprise (i.e. either significant amount or spend or deliver critical product or service)?
- Is it easier for our business customers to purchase products or services? Do we have sufficient cost transparency?
- Which vendors go above and beyond to meet our needs? Which vendors are difficult to work with, resulting in additional administration or transfer costs?
- Is our vendor environment sufficiently competitive? Where should we increase competitive pressures?
- Do we have a full grasp of our total vendor footprint?
- What can we do to redefine our vendor relationships, to increase our buying efficiency and improve vendor value?
- Are we expecting our vendor relationships to expand or contract as a result of the merger? How do we plan on leveraging our projected growth? How do we plan to manage shrinkage? Can we realize any additional economic efficiencies from vendor spend consolidation?
For additional insights on Deloitte’s M&A Methodology, Vendor Management and Service Delivery Transformation practice please visit Deloitte.com.
Ajay Bolina, Principal, Deloitte Consulting LLP
Asish Ramchandran, Principal, Deloitte Consulting LLP
Joseph Greiner, Manager, Deloitte Consulting LLP
As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
Copyright © 2015 Deloitte Development LLC. All rights reserved.