Takeovers, mergers and acquisitions (M&A) test companies to their limits. These stresses affect all companies but for financial services organizations they can be compounded. Not only do two businesses have to come together, but so do the systems offering their products and services.
Part of the problem is that incumbent financial services companies tend to have inconsistent digital transformation programs. “While many institutions have been aggressively using automation and digitization for their back-office operations to provide such services and save costs, most still aren’t applying these new technologies to product design and client service functions to the extent they could,” explained David Maya and Til Schuermann, both Oliver Wyman partners writing in American Banker in 2018.
For a more successful M&A program, there are three things to consider when looking at your IT systems and considering how to bring two sets of IT together. These are: capacity, flexibility, and simplicity.
Less of a specific product or service, more a philosophy of distributed computing, Service-oriented Architectures (SOA) are a way to organize banking services through application components over a network.
SOAs typically have four properties:
- A specific business activity
- May feature underlying services
- The end user is unaware of the background workings
In this way, different applications can be combined in a modular fashion to offer new services.
Inherent to this approach is flexibility. Services offer business benefits to meet strategic goals and different applications are designed to be interoperable. This approach also gives those developing systems significant flexibility because services can be refined and improved.
According to McKinsey, flexibility is a crucial component for a successful M&A campaign, and SOA is a key consideration. “First they [companies with a successful track record in M&A] get their own IT house in the best possible shape before initiating any deals. Many have already adopted advanced, service-oriented architectures that are generally more flexible and adaptive, as well as designed to provide a platform that accommodates a wide range of business applications.”
SOA and M&A
The flexibility inherent in SOA makes it easier to connect legacy backend systems from outside sources – a key consideration in any M&A program.
As many large financial services groups have complex legacy systems, the less flexible these systems are in practice the more difficult it will be to combine them. Much of the work to execute a successful M&A program will be in the preparation – the better the interoperability the more easily systems can integrate.
SOAs were adopted to extend “the reach of core business functions while reducing the internal expenses and complexity,” according to Zeev Avidan writing in DevOps.com in early 2020, who adds that adapting SOAs to deliver Microservices will further increase flexibility.
Organizations benefit when they are simplified and organized to prepare for M&A activity. For example, too many systems performing similar functions will be a problem. Several Enterprise Resource Planning (ERP) systems will be more complex than a single ERP system.
Simple systems give the most benefit. Unfortunately, most older institutions have complex legacy infrastructure in addition to new systems. Consolidating or managing these will be an important first step in a successful M&A program.
Banks have been under almost constant pressure over the past decade to develop new services to meet the demands of globalized customers and have had to adopt new technologies to offer these services. This creep of technology has in many cases left a complex patchwork of modern and legacy infrastructure. In addition, financial services companies have had progressively more intrusive regulation which adds further complexity. Reducing this complexity will help prepare for M&A by introducing capacity.
What does not help?
Reducing the number of systems will be a definite benefit, but to standardize them may be a step too far. Many banks are both complex and unique. “Everybody knows that most financial services organizations, apart from the most recent disruptors … are far too complex. There is a huge amount of legacy which is impairing the ability to adapt,” reads KPMG’s Capturing the benefits of simplification report. Bespoke solutions will be cheaper than standardized alternatives in financial services.
To map, “a bank’s process on an existing software application is necessarily more complex, if at all possible, than mapping software on the process,” wrote Finmechanics COO Philippe Carrel in The Ban’s Digital Journey – Simplify IT at Finextra.com last year.
Some standardization will bring benefits, but too much may bring problems says Carrel. “Trying to fit financial instruments with very different types of sensitivities or data processing into a single application usually leads to developing workarounds that, at scale, will likely prove problematic and require bespoke support. Other types of consolidations, such as trying to shoehorn real-time valuations or computer intensive risk calculations into systems originally designed for trade processing amount to teaching elephants to dance,” says Carrel.
Because each financial services institution will be different, there is no one-size-fits-all solution.
Accenture suggests four steps to untangling existing systems:
- Find a starting point – consider customers, systems, locations and products.
- Picking technologies – with so much choice this is worth a lot of thought, and Hybrid IT, Colocation and Edge technologies would be sensible places to start.
- Removing legacy systems – pick those which are a barrier to growth. 40% of bank COOs say the costs of modernizing legacy systems is the biggest barrier to adopting new technology.
- Evolve the workforce – 25% of COOs say the biggest barrier is the ability or inability of staff to implement change.
Understanding the challenge ahead
IT leaders need to be involved in M&A discussions at the earliest possible point.
The due diligence process should help IT leaders understand the target organization, and particularly how it complements business systems. This will give a better indication of final integration costs because the IT functions do not just enable banking functions but many more, like HR, logistics, CRM and so on.
Capacity, flexibility and simplicity – three things IT professionals need to consider when they look at M&A programs. As companies grow, they grow in complexity. Any M&A activity is a good way to begin reducing that complexity to give space for a new company’s systems. Panduit helps to link systems and give FS companies a flexible foundation for M&A. Panduit, alongside our vast partner ecosystem, gives your business the most secure foundation to take advantage of any merger or acquisition through the right use of Hybrid IT, Colocation and Edge computing.
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