The Life Cycle of Acquisition-Based Companies

A few years ago, I was discussing this phenomenon				Materials Management to a shared service model,
with the CEO of one of our clients. His company had				enabling the corporation to more effectively leverage
grown almost entirely through acquisition, and for				its broadest possible purchasing power.
several years the company had experienced revenue				Manufacturing companies in the commonization stage
growth rates exceeding 20%. However, the				of maturity typically have shared services in place for
company had plateaued with respect to earnings, and				commodity types of business processes such as
looking at their overall performance it became clear				finance, human resources, and information systems
to him (and to the Wall Street analysts that watched				management. As they advance through the
his company) that a great deal of money had been				commonization phase, some of them also begin to
left on the table. Working with that CEO, I developed				pull together a common platform for procurement,
a model called the ACL Life Cycle. Understanding and				encompassing at least their most costly and common
using the ACL Life Cycle has proven enormously				raw materials. A few in this stage reach a point
beneficial to clients depending on an M&A				where their data center operations are completely
strategy for continued growth.				centralized, and may even be outsourced to a third
The ACL Life Cycle				party like CSC. Toward the end of the
The ACL Life Cycle describes the maturation process				commonization phase, centralization of work
of companies who grow substantially through				deployment and capacity utilization as well as process
acquisitions and mergers. Using the ACL model, we				quality emerge as companies begin to deploy
can clearly identify the company's current position.				common processes and systems in customer
Knowing that position, and then looking forward at				requirements management, enterprise requirements
the company's financial objectives through the lens of				planning, manufacturing execution systems, and
their business strategies, the specific actions that are				distribution management systems.
needed become clear. Those actions can then be				Telecommunications companies in the commonization
formed into an executable plan with associated				stage of maturity also typically have shared services
performance measures, and managed through				in place for commodity types of business processes
completion to bring the overall enterprise to				such as finance, human resources, and information
heightened levels of financial performance. It is				systems management. As they advance in maturity
important for acquisition-oriented executives to				through this stage, telecoms also become aware of
understand the major phases and characteristics of				the available leverage in centralizing the management
the ACL Life Cycle.				of some of their most valuable assets. However,
Businesses who have survived one or more				unlike the manufacturer's raw material focus, for
acquisitions and/or mergers are usually left with some				telecommunications operations those elements are
degree of disintegration among their processes and				things like spectrum licenses, network equipment,
systems. A company's success in reaching the				connection agreements, partner agreements,
financial objectives of the merger or acquisition is				distribution centers, and retail outlets. Centralizing the
directly correlated with the degree to which that				management of those assets to identify overlaps
disintegration has been replaced by a set of business				and redundancies enables telecoms to emerge from
processes and information systems that are common				the commonization stage with much more effectively
enough to generate enterprise-wide leverage. Implicit				leveraged business assets, providing broader market
in that commonality is enterprise-level direction and				coverage with a lower total asset base and
guidance, manifested in company-wide business				generating much higher earnings on that consolidated
strategies and performance measures that align all of				foundation.
the combined business units. These businesses move,				Healthcare companies in the commonization phase of
in this post-acquisition or post-merger environment,				maturity find substantial benefit in the commonization
from an acquisition-based operating model to one				and centralization of their commodity type processes
characterized by shared services and a general				and systems. This is primarily because of the impact
commonization, to a stage where the enterprise				on cash flow and earnings when the employee base
"whole" really is able to become something greater				is reduced through shared services, and employee
than the sum of its business unit "parts". It is more				benefits and supplies are both leveraged in terms of
than the typical cost-reduction synergy anticipated in				the broader purchasing power of the company
most of these transactions; it is a new platform for				following a business acquisition of significant size.
innovation, and an even higher level of				However, there is also an especially rich opportunity
innovation-based leverage.				available to healthcare companies in the
Companies who experience substantive growth as a				commonization stage that stems form the leverage
result of business acquisitions typically follow the ACL				available related to insurance coverage - not for the
life cycle. ACL in this context stands for: Acquisition,				employees directly, but covering the potential liability
Commonization, and Leverage. Many companies				of the company itself. This category of cost is
never leave the first stage of this maturity scale, and				typically about the third largest slice of the pie, and
still more remain at the second stage. The most				significant reductions there can translate quickly to a
successful companies are usually those who				meaningful earnings impact.
recognize the importance of moving through all three				Financial services providers in the commonization
stages, and consistently implement a structured				stage of the ACL Life Cycle, like healthcare
process for doing so.				providers, often find substantial benefit in the
All companies experience pressures that push them				commonization and centralization of their commodity
toward decentralized operations, including				type processes and systems. With roughly half of
idiosyncrasies of specific market niches served, the				their cost of operations wrapped up in employee
uniquenesses of isolated business processes, unusual				salaries and benefits, there is an opportunity for
needs of specific customer populations, and natural				meaningful impact on cash flow and earnings when
organizational entropy. At the same time, most of				the employee base is reduced through shared
the companies that are successful in achieving the				services, and employee benefits and supplies are
financial performance objectives established for the				both leveraged in terms of the broader purchasing
newly merged enterprise manage to overcome those				power of the company following a business
challenges, electing to pursue the advantages of				acquisition or merger. The next significant area for
leverage, including:				financial service providers in the commonization stage
- broad synergistic brand recognition, enabling				is the capability for rapid reconfiguration of the
cross-selling, bundling of products and services, and				business based on enterprise-wide visibility of
improving revenue				operational data and market intelligence.
- interchangeability of business process resources,				The Leverage Stage of the ACL Life Cycle
enabling the company to reduce its asset base				Companies in the Leverage Stage of their life cycles
- commonality and scalability in equipment / skills /				are usually embarked on a fierce drive toward adding
facilities, facilitating innovation and growth into				real value. They are relentless in their efforts to fully
additional markets				utilize the assets of the entire corporation, driving out
- higher utilization of business assets, reducing unit				redundancy and its associated costs. They are then
cost				able to pivot on the fulcrum of those more agile
- lower levels of redundancy, resulting in reduced				processes and systems to implement innovations
operating costs				that foster organic growth resulting in greater market
These companies also typically find that maintaining				share, greater revenue, and improved earnings for
compliance with financial reporting standards such as				their shareholders. Leverage Stage companies also
Sarbanes-Oxley requirements are enhanced as a				establish a structured and repetitive process of
result of strengthened internal controls.				assimilating new businesses, gathering and
Some companies make a deliberate decision to				incorporating market intelligence into company-wide
remain "holding companies", which simply buy and sell				strategies, and innovating on the basis of these new
diverse businesses that have only marginal				combinations to capture additional market segments.
relationships with one another. These conglomerates				These companies are characterized by coordination
prefer to manage the portfolio through buying and				and centralization of major business functions such as
selling components, and allowing the leadership teams				the planning and allocation of R&D, production
at the individual companies to manage ongoing				work, inventories, raw material purchases, personnel,
operations from strategy through execution. A few				and factories & equipment. They centrally
of them have been quite successful, and this article is				manage a broad spectrum of common business
sometimes not as directly applicable to those at a				processes and systems, including customer
corporate level. It works very well, however, for				requirements management, product data
their major divisions. Companies that benefit most				management, enterprise requirements planning,
from understanding the three stages of the ACL Life				manufacturing execution systems, and logistics
Cycle are those companies who have decided to				management. They are constantly changing,
focus on a single core industry - Aerospace &				evaluating and configuring business assets to meet
Defense, Automotive, Chemicals and Polymers,				future market needs, acquiring and developing new
Textiles, Electronics, Telecommunications, Consumer				businesses, and shedding assets that no longer fit
Products, Medical Equipment producers, Healthcare				their evolving model.
providers, and Financial Services providers are all good				Manufacturing companies in the leverage stage of
candidates.				maturity typically have shared services in place for
The Acquisition Stage of the ACL Life Cycle				most of the critical business processes of their
Companies in the Acquisition Stageof their life cycles				company, having reached beyond the commodity
are usually focused on revenue growth, and capturing				level processes and into those which deliver the most
market share. They are characterized by high levels				value to their customers. Examples include sales
of autonomy in management, in the reporting of				& marketing, order entry & customer
site-level data to the corporate parent, and in the				service, capacity planning and management,
design of their business processes and systems.				production scheduling and shop floor control, and
Companies who remain in this stage for long periods				distribution requirements planning. As they move
of time following acquisitions usually act as holding				through the leverage stage of the ACL Life Cycle,
companies, with the corporation allowing individual				some of these companies leverage the commonality
divisions or sites to operate almost as independent				of their processes and systems to produce
companies with their own P&L, strategic plans,				innovative new products and services, identify
and market-facing branding. Often, companies in the				additional market opportunities, and develop
Acquisition stage lack a common vision of the future				industry-changing relationships that reach through
of the overall business, and tend to operate at				their supply chains.
cross-purposes among the operating units. They				Telecommunications companies in the leverage stage
sometimes even compete against one another for				of maturity also have shared services in place for
the same customers. They share little operating				most of the critical business processes of their
information, making it nearly impossible to coordinate				company, including the seamless provisioning (often
and deploy "best practices", effectively distribute				called "flow-through provisioning" by industry insiders)
work load, utilize general market intelligence, and				of all telephonic services to customers stemming
grasp other elements that could provide				from a single telephone conversation responding to
corporate-wide leverage of the businesses' assets				an individual inquiry about a service. This type of
and resources. A few industry-specific examples here				capability is only enabled when all of the information
should help to illustrate the situation:				from what have historically been disparate data
Manufacturing companies in the acquisition stage are				bases is available in an intelligent form through
usually characterized by redundancies in raw materials,				excellent systems integration, based on exceptional
equipment, staffing, and other business resources.				levels of commonality and strength in enterprise-wide
Because manufacturing companies are relatively				business processes.
material-intense, a great deal of cost can be tied up				Healthcare companies in the leverage stage of
in raw materials, work-in-process, and finished goods.				maturity have typically discovered and implemented
Since acquisition stage companies have so little				leverage-based improvements in their major cost
visibility between business units, there is little				structure elements as a result of enterprise-wide
opportunity for them to reallocate these assets in				information visibility flowing from systems integration
order to use them effectively. As a result, the most				and centralized management of critical business
costly resources remain the most underutilized. In				processes. Health care companies generally also have
addition, acquisition-stage companies have not				uniquely challenging business conditions related to
centralized the management of even commodity-level				three other areas where leverage level operations
business processes, such as finance, human				can be a powerful tool.
resources, and information technology. This lack of				The first of these areas is employee safety. Most
centralization leaves additional inefficiencies in place				health care organizations are spending a substantial
around accounting staff, employee benefits provider				amount of money in this regard, with training and
subscriptions, business software applications, data				documentation of company polices and safety-related
centers, and computing equipment.				practices requiring an increasing amount of company
Telecommunications companies in the acquisition				attention. The integration of systems and
stage also have unrealized opportunities for greater				commonization of processes in a leverage stage
leverage from their business assets, but these more				health care company offers opportunities to more
often take the form of redundancies in network				quickly incorporate internal best practices, externally
equipment, network coverage, retail outlets, partner				imposed business requirements, and feedback about
agreements related to the sale of their products, and				lessons learned across the entire health care
interconnection agreements with other carriers. In				organization regardless of geographic dispersion.
addition, acquisition stage telecom companies often				Commonization and centralized management here can
have a substantial amount of unrealized leverage in				result in substantially lower cost, and more
the lack of integration among the data bases and				importantly, substantially higher and more uniform
information of their various divisions that could enable				levels of employee safety.
shared service operations for commodity-type				The second area is bad debt. The integration of
processes such as billing and cross-selling of products				customer data, and effectively interfacing a common
and services. Like manufacturing companies, telecom				set of enterprise-wide processes and systems with
companies in the acquisition stage also typically have				outside service providers such health maintenance
unexploited opportunities around the consolidation of				organizations and insurance carriers, substantially
data centers and related equipment and staffing.				reduces the amount of bad debt in leverage level
Healthcare providers in the acquisition stage usually				health care companies.
find opportunities in different areas of their				The third area, and perhaps the area of richest
businesses, because of the differing cost structure of				opportunity, is the area of patient medical
their operations. The bulk of their costs and their				information. This area is tricky because of legislation
opportunities while in the acquisition stage of maturity				related to patient privacy and guidelines recently
in the ACL Life Cycle are related to employee salaries				established for the maintenance and communication
& benefits, and to medical supplies and drugs. It				of patient medical information. However, one of the
is less common for these businesses to be able to				fundamental challenges faced by health care
effectively share inventories and equipment, since				providers is the absence of available medical history,
the nature of their business is rooted in community				particularly when a patient is admitted to an
health care that requires local service provision. The				emergency room or urgent care facility. Particularly
opportunities that do exist, which are typically not				when a patient is unable to respond to questions
exploited well in acquisition stage health care				directly due to an incapacitation illness or injury, time
companies, are related to centralizing commodity				can literally mean life or death. Making all necessary
type business processes such as finance, human				information available to the physicians and other
resources, and information systems, and leveraging				health care professionals involved as quickly as
required service and supply procurement across the				possible is extremely important. When critical business
enterprise.				processes and information systems for the
Financial Services providers, such as banks,				management of this information are brought to an
brokerages, credit unions, financial planning companies				effective level of commonality, the rapid
and tax & audit services exhibit yet another				dissemination of the needed information can be
cost profile, with the largest elements typically				greatly improved, while patients' expectations around
including personnel and occupancy costs. In these				the privacy of their information are still met.
businesses, like health care provision, being where the				Financial services companies in the leverage stage of
customers are is critical. The companies' ability to				maturity, like health care companies in some ways,
understand the changing demographics and match up				must balance the needs of differing local customer
their branches as well as their skills to the targeted				geographies against the advantages of centralized
customer base is often a differentiator between the				management in critical business processes and
companies that succeed and those that fail. Financial				systems. There is real value in allowing some latitude
services providers who are still in the acquisition				to local branch officers and customer-facing staff
stage of maturity in the ACL Life Cycle often do not				such as loan officers to accommodate the unique
have the commonality in fundamental business				circumstances involved in specific cases. However,
processes and systems to readily reconfigure their				these companies often find that a significant
operations to meet the changing needs of their				advantage of the leverage provided by
marketplace. Their acquisitions or mergers have				enterprise-wide commonization of processes and
enabled them to grow horizontally, typically into				systems is the ability to see the nuances of differing
adjacent markets. However, lacking an adequate				markets at a corporate level, and recognize broader
foundation of commonality in processes and systems,				trends among those different markets more quickly
there is substantial money left on the proverbial table				and clearly than they could before. This improved
as a result of ineffective resource deployment, and				visibility, in turn, enables management to reconfigure
delays in the reporting of operational performance				their service offerings, redeploy resources such as
data that would enable the company to be more				sales dollars, and organize sales campaigns for those
responsive. These companies also fail, in their				specific markets more quickly than they could
acquisition stage, to take advantage of their larger				previously.
purchasing power to gain leverage around purchased				The best of these companies, regardless of what
services spanning items as diverse as employee				industry they occupy, utilize their common platform
health care and branch-level office supplies.				of processes, systems, and information to
The Commonization Stage of the ACL Life Cycle				understand the needs of their customers in unique
Companies in the Commonization Stage of their life				ways, and fluidly translate those needs into the
cycles have usually awakened to the value of				features of their products and services. A few, at
focusing on Return on Net Assets (RONA) and				the very top of the game, come to understand the
Return on Invested Capital (ROIC). In order to begin				customers' needs even before the customer
to capture improvements in these areas, companies				recognizes them, and when necessary they
in the Commonization Stage often turn to shared				reconfigure their entire business to meet those
service models of operations for selected business				needs, gaining unassailable competitive advantage.
processes and systems. Strategies and performance				The enterprise-wide leverage they achieved as a
measures begin to crystallize around common themes				result of carefully and skillfully handling the
that span multiple operating units or divisions. Among				post-merger or post-acquisition integration of
the areas of focus for a shared service model in this				processes, systems, and data provided the platform
stage are Finance (A/R, A/P, General Ledger, and				from which innovation launched them to new levels
Financial Reporting), Human Resources (Payroll,				of performance. Examples could as easily be provided
Benefits, and Employment Records), and Information				for companies in pharmaceuticals, retail operations, or
Technology (Computer Hardware, Network				the food & beverage industry. The lessons
Administration, and selected Software Applications				learned and the techniques vary a little, but the
Management). Some companies in the Commonization				principles are the same.
Stage also move Procurement and other aspects of

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The Life Cycle of Acquisition-Based Companies

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