A calculated risk

"Two into one makes half," my six-year-old proclaims over his bowl of cornflakes. Nevertheless, if it is two companies into one we are talking about, half is rarely the right answer. Mergers and acquisitions foresee results that will make combined companies add up to far more than the sum of their constituent parts. Ending up with something half as good would be judged a failure. This is why sophisticated and experienced adults struggle with the calculation that a child finds perfectly straightforward - how to put two into one and make it work properly, with no remainders, no provisos and no hiccups.

A need for extra help

Two into one can certainly be a tight squeeze, as anyone who has recently experienced a merger or acquisition will testify. On paper, the business activities of two companies may appear well matched and the economics probably stack up, but there are always assumptions and premises underlying the future promise of one integrated, smoothly running organisation. The desired outcomes behind mergers and acquisitions are most frequently expressed in terms of achieving cost savings, benefiting from economies of scale and scope, exploiting synergies between products and services, driving efficiencies and gaining competitive advantage. All of which are perfectly laudable objectives - but how often are the operational efficiencies and cost reductions, envisaged by the board and shareholders alike, actually realised?

A few months down the line, a glance at the new organisation all too frequently reveals that the integration process is falling behind plan as managers struggle to make sense of two disparate sets of business processes and integrate a morass of legacy systems. By this stage, one plus one appears to equal a great deal of trouble, and the possibility of creating order out of chaos seems a distant and shrinking hope.

Suggest outsourcing at this point, and even the most seasoned change management professionals might view it as totally crazy. However, this is a time when bringing in a third party to help rationalise the process could put the integration programme back on track.

Granted, there are different types of outsourcers. We are not talking about those 'bodyshops' that offer hugely discounted labour rates without actually engaging adequately with either the client or the process. Yet, there are companies that can provide the cost advantages of alternative locations, the reality of enhanced quality and strategic guidance at a time when it is probably most needed. These outsourcers are experts in change management at the process and enterprise level - adept at understanding how to engineer a business in alignment with its strategic objectives while saving money and improving customer service.

The right time to try

With widespread consolidation anticipated in the mid-tier and among smaller brokerage firms, now is a good time to consider how the pain of managing any transition might be alleviated. In an industry where survival increasingly depends on better-than-average customer service and operating a lean, efficient back office, outsourcing should be on the strategic agenda of most companies. But, for those going through substantial reorganisation, it can be part of the solution to ensure that those elusive merger and acquisition goals are met.

Undoubtedly, there will be broken processes on both sides of any merged venture and areas of overlap or duplication where the board foresaw opportunities for economies. While operations are being combined, it is an ideal opportunity to streamline them, to attain optimum performance from workflow management, to establish a customer service team par excellence and to fix those issues that everybody has put up with for years, but where resolution of which could make life far easier.

Outsourcing delivers benefits to a business by taking processes that are high-volume and repeatable, making those processes more effective and performing them at lower cost. Sometimes those processes are customer-facing - for example, the provision of contact centres. However, one possibility that is frequently overlooked is the ability to outsource large chunks of back-office work - the daily grind that keeps a business running but involves large numbers of people and vast quantities of data.

Many large organisations have already dipped their toes in the outsourcing market because of the advantages it brings: the ability to reduce staff costs and gain access to the right skill-sets; removal of fixed assets from the balance-sheet; high operational flexibility to manage peaks and troughs in demand; and the potential for process automation and improvement.

To remain competitive against the larger players, small companies need to make outsourcing part of their strategic considerations.

Broking has at its heart the management of customer accounts - whether those customers are institutions, high net worth individuals or small investors. Managing customer relationships can be broken down into three areas: winning customers, serving customers and retaining customers. Once customers are won, the objective should be to keep them as long as possible by delivering outstanding performance in the area of account management and servicing. A number of broking processes can be outsourced (see box).

Getting started

Any organisation that has been through an International Organization for Standardization or similar accreditation process will have taken stock of the numerous distinct processes and sub-processes into which its daily business can be broken down. The way to get best value from a merger or acquisition is to identify best practices for performing each of those processes - best practices that may be inherited from one of the organisations involved or bought in from a third party. Obviously, getting the optimum technology to perform those processes plays a part too, and this is another area where an outsourcer with extensive experience of similar businesses can advise.

It is important to identify the right processes, but it is as important to identify the correct processes to outsource as it is to choose the right supplier.

For the uninitiated, these can be difficult decisions. Faced with a universe of processes, some of which will be deemed mission-critical and others not, it might seem impossible to select the processes that are to be outsourced initially.

It is not enough to rely on instinct; neither is it appropriate to rely on the judgement of people within the business, all of whom have agendas, perspectives and subjective views, particularly in a post-merger or acquisition environment. Rather than risk the success of outsourcing projects, it is advisable to find a supplier with a proven methodology for helping make those decisions.

Given the increased sophistication of buyers over the last two years and the fact that people are looking to outsourcers not just to replicate existing processes, but also to solve business problems in situ or after transition to the new outsourced environment, some outsourcing companies have developed reliable, statistically based methodologies for identifying processes that are suitable for outsourcing. eFunds, for example, has a mathematically based formula it uses to ascertain which parts of a business are ready to outsource now, which may be ready later with some preparation, and which should never be outsourced.

Achieving the vision

For the objectives driving a merger or acquisition to become reality, two diverse sets of business processes have to be brought under control within a short timeframe and then tuned to provide optimal operational support for the resulting organisation. One of the main problems businesses encounter when faced with a need to integrate their systems with another is that they simply do not understand how their own business fits together in the first place, let alone how it might function as part of a marriage.

It seems incomprehensible, but many organisations still use processes that remain undocumented and are understood by only one or two key people.

Outsourcers can quickly rationalise the processes they meet within a business. Their expertise can cut through the politics and uncertainties of both organisations to implement recommendations that align with the strategic imperatives determined by senior management. They will begin by doing a detailed survey of the business - documenting processes where necessary, hoovering up the knowledge that resides in the organisation ready to analyse it and put it to effective use. Then they will apply the expertise accumulated over years of providing similar services to other financial services companies and begin the journey towards restructuring the enterprise, with some parts remaining inside and others to reside externally.

Quantifiable success

Another problem with mergers and acquisitions is that it can often be difficult to measure whether or not they are working until the bean counters give the bad news at the end of every quarter that the projected cost savings have not yet materialised. An outsourced process, even a very complex one, is easy to measure, so at least management can pinpoint those areas where progress has been made and instigate further scrutiny of those that are lagging behind.

Measurement of outsourced processes by service level agreement forms the basis of a relationship where results are easily visible to both client and supplier. At the commencement of an outsourcing arrangement, both parties agree on the metrics to be used. Sometimes these are based on historical data from the client; more frequently they are based on empirical data gathered by the supplier during the transition phase from in-house to outsourced. The whole relationship is geared around improving against those metrics, with the minimum acceptable standard of performance being what the client had already achieved internally.

In practice, that standard is only the beginning, and further process improvements more often than not lead to better quality, reduced staff numbers and further cost reductions on any given process. In that case - finally - one plus one starts to equate half a dozen, with the output from the newly combined organisation exceeding what either of the parties had attained beforehand.

Employees and management alike can find the integration phase of a merger or acquisition troubling. It is incumbent on management to ease that pain in any way possible, by enabling a smooth transition path and providing tools and capabilities to simplify and facilitate activities.

Many managers will experience a sharp intake of breath if asked to consider, on top of all the integration activities, the possibility of outsourcing activities that are crucial to customer service in both organisations.

Nonetheless, where the endgame is efficiencies that are both demanded and expected, creative thinking is essential. For that reason, it may well be that adding one plus one, plus one more, is a more pragmatic approach to getting two into one.

THIRD-PARTY PROCESSES

Areas that can be outsourced include, but are not limited to, the following:

- Data capture, scan and sort

- Applications handling

- New account opening

- Direct-debit mandates

- Payments authorisation

- Maintenance of customer records (change of address, bank details, etc.)

- Handling inbound enquiry calls

- Account closure

- Billing processing

- Remittance handling

- Database management

- Finance and management accounting.