integration - the key to successful M&As
See also: Royal
Sun Alliance case study
As the growth
in Merger and Acquisition (M&A) activity continues unabated, more
and more insurance companies will need to untangle the complex challenges
of IT integration. Some are better prepared than others, says Katherine
Hammer of ETI.
not just the insurance industry that's experiencing an unprecedented level
of M&As. Strategy Base from Clarus Research reports that, in the 2nd
quarter of 1998, global merger and acquisition activity for transactions
greater than $500 million totalled $631 billion -- as compared to a total
of $810 billion for the whole of 1997, which itself was also a record
In the US alone, Houlihan Lokey's Mergerstat reported 9,192 M&A transactions
and announced deals across all industries in 1999 -- totalling a staggering
$1.418 trillion. This is almost triple the recorded $495bn in deals in
As has been witnessed in recent years with the creation of industry leaders
such as Royal & SunAlliance and CGU, the benefits of M&As can
be huge. However, there are many challenges that must first be addressed
before synergy or economy of scale are realised. In one example from the
banking world, LloydsTSB has so far been unable to combine the Lloyds
and TSB Back Office systems - with the result that customers of each bank
are unable to access the same banking services and promised cost savings
have not yet materialised.
A possible explanation for this kind of predicament can perhaps be found
in the low priority given to integrating IT systems when organisations
merge or acquire. In fact, a typical M&A Top Ten 'To Do' list cites
the first three priorities as being: Financial & legal incorporation,
HR & physical plant congregation and Product & service consolidation.
The issue of IT integration usually comes a poor tenth - demonstrating
that M&A game plans fail to recognise that there can be no product
and service consolidation without IT integration, and that often the effort
required to integrate disparate IT architectures and a myriad of legacy
systems can be huge.
The Difference Between Success and Failure
With large proportions of company revenues being spent on IT, it's no
surprise that one of the economies of scale most organisations hope to
achieve after a merger is a greater efficiency in their data processing.
On the surface, this would seem simple enough, as most companies have
some applications, such as general ledger, payroll, and so on, in common.
Yet, it is precisely this area of application and data consolidation that
can prove to be the difference between success and failure for M&A
projects. Even seemingly similar applications can prove extremely challenging
to successfully integrate.
Forrester Research estimates that building, maintaining and supporting
application integration accounts for 30 per cent of the average corporate
IT budget even without absorbing the costs to perform the data consolidation
required after a merger or acquisition.
To maximise the potential return on investment of mergers and acquisitions,
the necessary integration between the two companies must be achieved quickly
-- minimising the disruption to customers.
Economy of Scale or Diversification?
There are generally two drivers for M&A: Economy of Scale and Diversification
-- each of which brings its own set of IT challenges.
Where two companies offer similar services to similar customers, the key
driver for M&A is often the desire to achieve greater economies of
scale that is, to sell to more people, more efficiently. One of
the key problems here is getting a consolidated view of the customer.
For example, Mr Jones might have both a life insurance and motor insurance
policy with the same insurer, each with a different policy number. Because
the customer does not renew or alter their life insurance policy on a
regular basis, the insurer's records show a previous address for the customer
- which is different to the motor insurance policy, which was only acquired
four months ago.
Under the company's existing database structure, there is no easy way
to identify that it is the same Mr Jones that has both the motor and life
insurance policies with the company.
Now consider that Mr Jones might also have a household contents policy
with the second of the merging organisations and it is easy to see how
difficult it can be to get a consistent 'corporate' view of the business
and its customers.
Mr Jones, seeing that all three of his policies are now with the same
insurer, believes he should be able to enquire about each of them in a
single call - but unless the insurer has successfully tackled the issue
of data integration, this may well not be the case.
The Challenge of Diversification
Where the two organisations offer different, if not entirely unrelated,
services to a wider range of customers, the anticipated benefit of the
M&A is more likely to be revenue diversification -- i.e. selling a
wider range of services to more customers. In this scenario, the two companies
can hope to leverage one another's penetration in certain markets while
also enjoying the benefits of a consolidated infrastructure.
As in the example above, a major challenge remains the integration of
different IT systems. Here also, a major issue can be the fact that, unlike
companies which sell the same services to similar customers, the business
applications of the two organisations are likely to be completely different
-- not just in the way data is stored and accessed but in the very information
recorded. Often the systems will hold very different data in different
A common element to either of these scenarios is the customer. After all,
without the customer, you simply don't have a business. Through all this
data and systems integration it is imperative to maintain good customer
relationships -- which means that customer data must be accurate and available.
Issues in Data Consolidation
When a company undergoes a merger or acquisition, it can take one
of three possible IT approaches:
Allow the IT organisations to continue independently for a period of time,
using a data warehouse to create a corporate view of the enterprise.
Migrate to one of the organisation's applications.
Migrate to a best-of-breed configuration of applications (for example,
one company's life insurance system and another's motor insurance system).
Options 1 and 2 above are more likely to be adopted by companies seeking
economies of scale, while option 3 is more practical for companies looking
for diversification. Regardless of which of the above methods is chosen,
inevitably there will be an amount of data and application integration
to be performed. In every case, efficient data integration is key to success,
whether this be in cost-effectively loading and refreshing a data warehouse,
migrating one organisations data to the applications of another,
or a combination of migrating data and creating new interfaces between
Bridging the Technology Gap
When confronted with two different applications that suddenly need to
work together, organisations are faced with the need to implement bridging
interfaces. Traditionally, the most popular method of creating interfaces
between disparate IT systems has been for teams of software developers
to write them manually.
With increasingly large and complex migrations involving multiple data
sources however, hand-coding can be a risky, lengthy and potentially expensive
option. It also tends to be an inflexible approach when it comes to accommodating
rapid change, and does not allow for the extensive re-use of code. Forrester
Research estimated that over $100 billion was spent by companies handcoding
interfaces in 1999.
Cost is not the only issue either. According to research by the Standish
Group, around 30 per cent of data migration projects fail - making integration
a highly risky business. So, finding an effective, reliable solution is
an absolute must.
There is, however, an alternative to manual coding. Data migration tools
can dramatically cut the man hours involved with creating bespoke interfaces
and can reduce the likelihood of human error. Most data migration tools
rely on metadata to help bridge disparate applications.
What is Metadata?
The ability to merge with, or acquire, another company and integrate their
data with your own -- delivering almost instant competitive advantage
-- is often no more than a pipe-dream to many IT managers. But for those
IT managers with the foresight to adopt an effective metadata strategy,
this can represent a challenge they are happy to deliver against swiftly
A major problem faced by many companies looking to consolidate data after
a merger or acquisition arises because few organisations really understand
the state of the data in their operational systems.
Essentially, metadata can be described as 'data about data'. It is a way
of understanding an organisation's data that not only helps guarantee
the integrity of data but also ensures that an organisation can quickly
determine what must be modified when changes in business process require
changes to the systems that handle business-critical data.
If an organisation uses products that produce descriptions of what users
have done, this information (metadata) can help an organisation build
a history, or audit trail, of its data by tracking changes made over a
period of time. In terms of your data history, it tells you where you've
come from, where you've been, when you got there, what you did on the
way and what would happen if something changed.
Without metadata, the audit trail of changes to data is either easily
lost or incomplete - meaning that, when the time comes to integrate -
a huge amount of man hours must be spent 're-learning' how the data elements
are stored, formatted, used, and related to other data elements.
Metadata comes into its own when companies need to integrate disparate
applications - as is often the case with mergers and acquisitions. Armed
with the right information about an organisation's data, changes to applications
and the migration of data to new applications can be achieved much faster
and with far less pain than would otherwise be the case.
Building a Metadata Strategy
Regardless of whether an organisation is actively involved in current
M&A activities, building a metadata strategy is crucial to future
success. IT systems are constantly evolving and the added complication
of e-commerce is escalating the need data integration management.
Pursuing a metadata strategy involves building a system of record
a metadata repository - which defines data elements, their attributes,
and their interrelationships so that the knowledge acquired in implementing
one project can be reused in others.
If an organisation required that the products they use automatically capture
and exchange a metadata audit trail, the task of building this system
of record would be greatly simplified.
There are two types of software products in particular that are essential
to a successful data integration project. A metadata management tool can
help automate impact analysis, identifying and highlighting the parts
of an application that are affected by changing requirements; a data integration
tool can generate the new integration code necessary to create the required
interfaces to load and bridge applications.
In a recent example, Royal & SunAlliance used a suite of products
for data integration, ETIEXTRACT(, to migrate 1.3 million insurance
policies from IMS and Adabas to a new Oracle-based processing system.
The tools enabled the insurer to gather information about both the source
and destination environments - helping to generate the interfaces necessary
to move the data successfully. Royal & SunAlliance estimates that,
by using an automated tool over manual hand-coding, they saved almost
30 man-years of interface programming.
By building a metadata strategy and collecting metadata, companies can
steal a march on competitors because they can then integrate data and
applications for future mergers and acquisitions much faster, cheaper
and more effectively.
Dr Katherine Hammer is co-founder, president & CEO of enterprise
data integration management company ETI. She also currently serves as
co-chair of the Meta Data Coalition, which she co-founded in 1995.