Starting With The End In Sight: Integrating Finance After A Merger

When two companies merge, integrating their Finance functions is a major imperative. Variations in financial standards and procedures can prevent the merged entity’s Finance function from effective daily operations, impacting both internal and external stakeholders. Integration of this key function is also time-sensitive: the entity’s leaders, not to mention investors, demand consolidated financial statements, earnings and projections as soon as possible. Additionally, a majority of the potential gains from a merger cannot be achieved without committed support from Finance.

Many companies recognize this challenge and give substantial attention to financial integration soon after announcing the deal. However, this urgency creates its own problems. Under time pressure, finance professionals will feel rushed to combine disparate numbers and harmonize divergent processes. If they do not yet have a clear vision of the new company’s future state, they may implement manual temporary work-arounds, such as preparing manual reconciliations of customer accounts, that require incremental work effort, cost and risk to Finance. By focusing only on interim integration work and not considering the future state in parallel, many companies risk that the manual interim state will one day become the future state. Maintaining disparate and manually integrated systems limits opportunity for future standardization and cost reduction, thereby preventing promised synergy capture. Only through proper investment in process and system automation, such as integrating financial and management reporting processes and tools, can the cost of Finance be reduced, service levels to the business be optimized, and finance function synergies be realized. Companies who implement temporary manual solutions to integrate the Finance function for Day One and then design the Future State risk significant rework and throw away of the interim solutions.

Executives could achieve better results in the long run if they took time up front to consider the future-state goals for Finance: What should the combined finance organization structure look like? Which operations, processes and systems should be adopted? What financial advantages do they expect the merger to produce? What benefits can business units expect from Finance? And what Finance- related milestones are essential and practical for Day One of the new company?

Spotlight on the planning stage

Successful companies set up the key design principles and strategy to be adopted by the Finance function before interim designs for Day One are considered. Typical design principles may include: the level of process and system customization, the degree of centralized governance, and the globalization of processes and procedures.

In addition to generating answers to these questions, they establish the new entity’s Finance leadership team, which may include the CFO and his/her direct reports: the Corporate Controller, Treasurer, Business Unit and Regional Finance Leads, Corporate Financial Planning & Analysis, Head of Tax, and Head of Investor Relations, etc. They also develop a disciplined and far-sighted plan for implementing their financial integration strategy. Through our extensive experience in this area, Accenture has defined ten critical success factors for Finance integration. We have grouped these factors into three stages: planning, resources and implementation. (See “Ten critical success factors for Finance function integration.”)

This paper examines the planning stage, which centers on setting overall goals and priorities. Some of these goals and priorities may already have been derived from the analysis during the pre-deal and due diligence process prior to the announcement or may need to be considered post announcement. But with the merging of the two companies now in process, leaders will want to put substance and rigor into what can be broad or vague predictions.

In particular, the future-state operating model must be defined. Moreover, expected synergies, both material and cultural, need to be assessed and tracked. Considering these priorities, leaders also have to decide which of Finance’s many activities must be integrated by Day One. After establishing the Day one “must haves”, they can prioritize what else should be integrated by Day One to support Finance’s many stakeholders: management, operations, customers, vendors, financial institutions, government compliance agencies and investors.

Defining the future-state operating model for Finance

In defining their financial future-state operating model—organization, locations, reporting structures, policies, processes, technologies and workforce—the most effective companies treat Finance function integration as a major change program. The effort can involve major modifications in how one or both of the formerly separate organizations deliver their finance operations.

Thus, leaders will want to clarify the newly merged entity’s future-state operating model for Finance early on. Any interim solutions that are developed should be considered steps toward full integration. The future-state operating model, not temporary workarounds, should drive the integration process.

High-level targets defined by leaders can support this principle—by giving direction to the Day One team members without distracting them from accomplishing Day One requirements. For example, during a recent integration involving two energy companies with different finance and operating systems, the management team developed a roadmap for moving the new entity to a common ERP (Enterprise Resource Planning) platform. Defining the future finance organizational model proved more complicated. Accessing current Finance headcount and cost to create a detailed baseline was challenging because of restrictions to such information prior to Day One, as regulated by the Hart-Scott-Rodino Act. However, even with these challenges, executives were able to provide a high-level vision to the team to give them a general understanding of the projected organizational model.

Acquirers sometimes skip this step, especially when the timeframe before Day One is short. They assume that their existing financial standards and processes are the future state and that integration is largely about bringing the acquired company into their current operating model. That assumption has significant drawbacks, because even the best-run organizations have inconsistencies and complexities in their financial operations. Some inconsistencies are understandable because they enable unique operating models in different business units. Leaders may want to retain such variance in the acquired operation. But most inconsistencies are merely inefficiency-causing or effectiveness-limiting disparities that executives have wanted to eliminate but never had the time nor resources to do so. The integration process provides an opportunity to address those inefficiencies. Of course, integration team members will not have time to eliminate such legacy variances before Day One. But they will know that the variances should not be transferred to the future operating model.

In defining the desired finance operating model, leaders should keep the new company’s larger strategy in mind. The goal, for leaders, is to determine the best model to support the new entity not on Day One but in one to two years. To illustrate, in the merger of a large U.S. telecommunications company, the Finance organization made some key future-state decisions during Day One integration planning. Specifically, the company chose the acquirer’s accounting policies, financial and management reporting structure, and financial system of record. Communication of this decision enabled the Day One team to quickly integrate the acquisition’s accounting transactions into the acquirer’s general ledger and reporting tools. In turn, these accomplishments supported Day One reporting as well as policy and data harmonization.

Ten critical success factors for Finance function integration

Planning

1) Define the future-state operating model.

2) Assess potential synergies, and assign ownership and tracking responsibilities.

3) Establish the “must haves” for Day One.

4) Establish the “like to haves” for Day One – taking into account the lead time.

Resources

5) Announce the Finance leadership for the new company.

6) Identify key people and the risk of their exit, and work to minimize loss.

7) Set full-time integrators in Finance to drive the process.

Implementation

8) Set detailed, clear milestones and manage accordingly.

9) Work closely with IT for the Day One and future-state framework.

10) Build momentum for a larger transformation of Finance.

Identifying and assigning Finance-related synergies

Finance is an area ripe for synergies after a merger. Indeed, Accenture has seen the total cost of the function drop by up to 40 percent after some acquisitions. However, many companies fall substantially short in realizing the synergies they expected from their acquisitions.

Executives also tend to underestimate integration costs. These difficulties stem in part from deal proponents’ natural optimism. Further complicating matters are the challenges inherent in estimating gains without a detailed view of both companies’ costs before closing the deal. Many enterprises also stop their integration efforts at Day One rather than continue pushing towards complete integration and standardization of processes and systems. Moreover, companies may fail to rigorously fold synergy targets into their annual plans year after year and to track progress over the integration period.

Perhaps most problematic, integration teams tend to get caught up in the urgent task of Day One preparation. As a result, many relegate synergy management and tracking to the bottom of the priority list. They may assume that the combined organization will automatically realize synergies as long as the integration is executed to plan. But one of the most reliable ways to achieve hoped-for synergies is to establish a centralized synergy management office. This office assists in developing targets down to the department level. In addition, it helps assign ownership and authority to department owners so they can meet the targets as part of the annual budgeting process. The office then monitors realization of those synergies year after year, with departmental budget targets tied to the company’s performance management and compensation processes.

To be effective, monitoring should start from a clear current state baseline, with harmonized, side-by-side headcount and cost, using the same assumptions used in the pre-deal process to justify the merger. Otherwise, the complexity of Finance function integration gives managers an easy opportunity to manipulate their synergy target. An example of this is significantly increasing the headcount assumption in the current baseline over the headcount assumption used in the pre-deal economics, thus enabling less future headcount reduction required to attain the same synergy benefit. Some expected synergies are likely to turn out to be so unrealistic that leaders will want to exclude them altogether. But to maintain the integrity of the process and extract lessons for the next acquisition, leaders should track even unrealistic estimates. Unexpected opportunities can be tracked independently for reference during future acquisitions.

Tracking the cost of the integration is also recommended; otherwise, it may fall by the wayside as seemingly more pressing challenges arise. Moreover, planners should allow for a reasonable period to achieve desired synergies after the integration is complete, since the new entity may require some time to stabilize.

Selecting the must-haves for Day One

Finance activities

Chart-of-accounts mapping

New or modified intercompany relationships

Consolidated statements Core financial reporting

Limited management reporting (including historical data)

Budgeting and forecasting as a combined entity

Payroll distribution Standardized financial policies Statutory compliance Signature authorization approvals

Operational controls

Control over inventory and fixed assets

Transfer pricing

Structure of cost allocations (corporate, regional, divisional or plant level)

Sales reporting

Procurement process and inventory management

Identification of interdependencies across functional groups and their impact on Finance

Employees

Leadership communication road show backed by overall executive support

Leadership visits to countries or specific locations with significant risk

Adoption of high perfomers by senior leadership mentors

Publicizing of the progress to build as sense of a winning team

Customers

Communication with customers

Consolidation of duplicate customers, if possible

Changes in current contracts

Credit approval process for existing and new customers

Decisions about how payments will be directed and how cash application and cross-payments will be handled

Call-in number for customer questions

Vendors

Communication with vendors

Consolidation of duplicate vendors, if possible

Consolidated purchase volume to drive discounts

Changes in payment terms, purchase orders and current contracts

Call-in number for supplier questions

Investors

Communication with investors on thoughtful leadership transition

Framing of clear milestones on integration and synergies

Plan for continuity of message and themes across the transition period

General

Training, as needed, for Finance and non-Finance personnel

Establishing Day One financial integration “must haves” and “like to haves”

With the Finance function’s future-state operating model defined and synergies managed, Finance executives can concentrate on preparing for Day One of the new entity. The team needs to clarify which integration items must be accomplished for the Finance function to meet commitments to its stakeholders on Day One.

These commitments typically include financial reporting and earnings guidance for stock exchanges, compliance agencies, financial institutions and investors; internal reporting for management; billing, collections and cash applications for customers; invoice receipt and payment for vendors; and payroll for employees. These may not be the only Day One “must haves,” but they will receive the most resources and attention.

The time frame of a merger will affect the ranking of financial must-haves for Day One as well as the robustness of the solutions. For example, the energy company mentioned earlier had only two months between its acquisition announcement and Day One. Given this tight time frame, the bulk of the must-have work centered on establishing interim standards and processes. Integration teams with longer lead times may find they can accomplish the minimum requirements and still have time and resources to harmonize some “like to have” policies and processes.

Among the Day One “must haves” are several legal items which the company should have an understanding of to operate as a combined company (See “Selecting the “must haves” for Day One.”): changes to the names of legal entities; new signature approvals; and combined external reporting, financial reporting and payroll enabled. However, the level of harmonization and automation for some of these may depend on the time taken to integrate before Day One. Thus, integration team members may have some latitude on the sophistication of their solutions.

For example, Day One financial external reporting may simply consist of a top- line chart-of-accounts mapping using a consolidation tool with accounting policy adjustments and eliminations.

Or it may involve a general ledger bridge with detailed chart-of-accounts mapping at the general ledger level before consolidation and eliminations. The Day One solution for payroll may be to continue to pay employees as before. Or it may include some compensation or benefits harmonization prior to Day One.

What an organization decides to accomplish by Day One depends on its existing and desired operating model, imperatives and strategy for leveraging the combined company. For instance, in one professional services company where the main asset is the enterprise’s workforce, the integration team worked to harmonize certain employee benefits for Day One. By contrast, in the telecommunications company mentioned earlier, the organization enabled a combined daily sales and customer report for Day One, because customer retention was vital to the merger’s success.

While workarounds for some priority items are inevitable, the integration team should understand their risks. Once a workaround is in place, team members may be tempted to delay implementation of the permanent solution so they can concentrate on Finance functions yet to be touched. Moreover, every workaround on an essential process can lead to more manual effort, preventing Finance from achieving its intended synergies.

Starting out with confidence

Even the most complementary mergers bring a great deal of uncertainty to people inside and outside the organizations involved. Anxieties fueled by the rumor mill can sap a newly formed company’s energy just when it needs to rally around the challenge of integration. Taking time to establish the new entity’s direction will free up executives and employees alike to move forward with shared expectations.

This clarity will also guide the integration team through the thicket of diverse finance standards and processes. Any integration entails a lengthy series of judgment calls, each of which can hinder the team’s progress as well as consuming significant time from high-level executives. Companies that invest time in the integration planning stage will be rewarded in time saved before and after Day One. Indeed, we have found that planting a stake early on helps Finance understand where it eventually needs to land.

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