Silly season is upon us as a new round of Mergers and Acquisitions (M&As) dominate the headlines in the financial press. Fueled by the appetites of the capital markets and the unavoidable push toward globalization, the velocity of new business combinations announced in the financial press now resembles a tsunami. 

But bolting together two organizations is no longer as simple as it was just a few years ago when companies “made” all their processes. Because of the trend toward large-scale outsourcing of both non-core and industry specific processes, the fallout of the announcement no longer affects the corporate staff alone.

This matchmaking round has a new stakeholder/affected party that is the outsourced provider. With companies contracting for a myriad of service relationships, sorting out integration takes the art and science of successful corporate combination to a new level of complexity.

Outsourcing and M&A are fundamentally the same activity — both constitute major transactions that change the business model and are predicated upon successful business-process integration. Obtaining the benefits of integration and paying for the acquisition call for a similar step change in scale, service levels, location strategy and scope. Changes are necessitated in delivery — adjusting scale, scope, organization, service levels, location, workflow — all in aid of reducing the cost structure and improving quality.

 THE TRANSITION REALITY
Although at their core, M&As are simply very large and complex transactions they do have certain characteristics that affect the smooth transition to one business model.

Architects of the merger are not focused on the delivery model. The heady days of deal making generally ignore in-depth discussion of operating models. Most M&A discussions focus on revenue, products, markets and liabilities, and not on the intricacies of delivery models. It is left to the merger-integration teams to sort out synergies and cost reductions.

The period between announcement and integration is difficult for all. The jockeying for provider supremacy starts on the very day of the announcement.  Client teams and service providers are equally unsettled as they await a determination of the future of the delivery model and associated partnerships. Should the deployment plan proceed as envisioned? Are special projects still on the table? Will the outsourced scope come back in-house, or be split among provider, or will one organization carry off the prize? How long will transition take? Will there be a change in technology platform? Frankly, these issues are resolved in the second and third wave of merger-integration decisions, so pushing resolution to the top of the list is premature and futile.

Your target operating model or my target operating model? In some cases the acquiring party has a strong bias for or against outsourcing, and the decision regarding the combined organization’s target operating model is dictated from the top. More often, the pressures of cost reduction occasioned by the event push the integration teams to consider all options: make or buy, and evaluate any cost or service leverage that can be obtained by consolidating providers.

Often the acquired organization with a more evolved delivery model is at a distinct disadvantage. The acquiree may have learnt to effectively manage the outcomes of third-party provisioning rather than the processes themselves, and then must regress into a service-delivery model that does not take advantage of scale, technology or provider leverage. As a result, the evangelists of the outsourced model struggle, perhaps advocating for third-party provisioning too aggressively and as a result building up resistance.

My outsourcer is better than yours.  If the sourcing relationships on both sides have been deemed successful, both parties, acquirer and acquiree, come to the table ready to fight it out on behalf of their pet provider. Relationships that successfully built up over a period of time should be difficult to walk away from. 

Striving for objectivity in evaluating the provider succession relationship is the right strategy. Yet many integration teams cloud the discussion with emotion. The best successor providers exhibit flexibility when dealing with the unknown and the unknowable. They have the bandwidth to scale operations quickly, and will work effectively in the new culture.

Behavior by proxy. M&A dramas often play out in the relationships between providers. Integration and change angst is projected onto the provider management and staff.

Most outsourcing contracts do not adequately anticipate the implications of M&A activity. Certainly the requisite pay out clauses are in place, but few parties understand the full implications of the actual event upon the other. Most deals are like weddings with less than adequate anticipation of the transition reality in the event of a service discontinuation.
 
USING GLOBAL SERVICES TO REALIZE MERGER VALUE
Merger is a great platform to incorporate a change or expansion of a target operating model. All parties are exquisitely focused on cost savings, harmonization and standardization. What better junctures to justify the expansion of an alternative delivery model to create value?

Moreover, the providers can benefit from M&A activity as well. Well-positioned providers find business combinations a boon to their business as they assist in increasing the share of their client’s wallet. Unfortunately, others will find themselves left by the wayside, coping with the effects of termination clauses that may not adequately anticipate radical changes in the corporate landscape.

However, smart organizations face numerous challenges in the integration-implementation process. Here are just a few of the rules that keep integration teams on the straight and narrow.

Get the cost out fast. Certainly, a well thought out evaluation process is critical during the integration but the early success of the combination is predicated on cost synergies, not on perfection in operations. Long, drawn out strategic planning and selection processes merely delay the realization of necessary savings. This is not a time for transformation but for transition.

Be brutally honest with provider management. No one likes to participate in a beauty contest without any chance of winning. If the decision to insource or consolidate in the hands of one pre-selected provider is inevitable given the predilection, politics, or other propensities, forego hosting a lengthy, expensive contest that ticks off a box or salves the conscience. Using a bake off dishonesty to drive down costs is a foolhardy exercise.

Bite your tongue and bide your time. Seemingly going backwards from a distributed services model to an in-house model is a hard pill for a more evolved, acquired company to take. But combat should be ceased once the decision to implement a delivery model is made. Those who belong to the loyal (and not so loyal) opposition often lose the battle when they can win the war by biding their time.

Communicate honestly and openly with provider personnel as you would with your own team. Good outsourced staff feels as strong an affinity with their customer as they do with their employer. Their performance is not immune to the changes in their customers’ operating models. Frequent and transparent communication with the outsourced team is critical to keeping service-levels and key performance indicators stable during a period of uncertainty and indecision.

Realize that getting the new delivery strategy absolutely right the first time is almost impossible. The challenges of expanding an outsourcing relationship as a result of an M&A are not very different from the initial implementations. Instituting processes and technology, implementing new policies, and changing the ways of working in an environment fraught with a panoply of change can take the definition of ‘painful’ to a new level. Thus the wise integration team settles for transferring files seamlessly on the first try.

The smart integration team looks at M&A as just another corporate event and takes the opportunity to deepen transferable, key skill sets in change, risk, transition, performance and people. Face it, if it’s not another merger, it’s another outsourcing.    

Deborah Kops has worked as a partner at two professional services firms, Managing Director at two global banks and a founding executive at a BPO service provider. She has a unique perspective on an industry that she believes will flourish, often in spite of itself.