More than 1,600 mergers and acquisitions in the energy and utilities market alone were completed worldwide in 2020 according to S&P Global Market Intelligence. 40 percent of the deals in this industry happened in the renewables sector. The same report also shows that in Germany, for instance, the number of takeovers and mergers have been increasing. This is also driven by the German government’s energy transition plans (Energiewende) and the European Union‘s Green Deal. At the same time, digitalization is changing the market; utilities need to examine and, in many cases, adapt their business models. M&A – especially for the major players of the industry – are expected to make this easier through acquisition of targets with required digital capabilities and desired business models.
Traditional PMIs often focus on synergy effects
The success of an M&A depends largely on the post-merger integration (PMI) phase. This phase mainly focuses on merging the target company with the existing business. PMI programs usually cover all functions and areas – starting with the integration of assets, through business processes, to the IT landscape.
Because IT is ubiquitous in modern day business processes, a well-integrated IT landscape is one of the key enablers to successfully run the new business. Typically, PMI focuses on the pure integration of the target company’s IT landscape. During this phase, it is decided whether and which applications of the target company should be retained, and which should be decommissioned. Considering already existing applications and their functional fit to the target company is often the decisive factor to lift as many synergy targets as possible.
From integration to transformation – it pays to think outside the box
But why only limit PMI to pure integration and not take this opportunity to rethink existing IT capabilities? While PMI is already evaluating the whole application landscape for possible integration scenarios, this could be the perfect entry level to think about further IT landscape optimization. Why? Because optimizing IT is not an end in itself but should open further opportunities.
However, this much more extensive approach often fails due to the already high PMI-driven workload and thus a lack of business buy-in. Nevertheless, companies should not waste this great opportunity, because a transformation of the IT during a PMI phase is able to improve processes by much more than just little increments – if done right. For example, the further development of IT services through cloud can increase both business and IT flexibility many times over.
These new abilities lead to the opportunity of quickly developing and deploying new solutions without the “baggage” of legacy architecture. Prominent example would be a predictive maintenance application for windmills during the PMI of a renewable energy company. Only focusing on integration would have led to a significantly longer time for the business to have the capacity to focus on such solutions.
How to set up a PMI process that combines business model evolution and IT transformation?
Transformation should not be a bottom-up approach, therefore not follow the question of which IT solutions could enable additional business capabilities. Instead, those responsible should think the other way around: Which business capabilities can be evolved regardless of the available IT applications?
In other words, IT follows desired business capabilities, not the other way round. An IT transformation is only feasible if the operational side and the IT department work closely together. The first step in this transformation is always a business-driven ideation phase to rethink their existing business capabilities.
“IT follows desired business capabilities, not the other way round”"
Instead of evaluating how both business landscapes can be patched together, those responsible should think outside the box and leave their old legacy world behind. The focal question will have to be: What can drive our business in the future? In the example mentioned above, the question was why wind turbines are not serviced until they are broken. Business started thinking about how to easier predict forthcoming maintenances. While ideating, IT derived appropriate implementation measures for the application landscape. Wind turbines now break down less often, repair costs go down, and revenue goes up. At the same time, the company gains important insights into product’s reliability.
Modern, data-driven use cases can lift the entire company to a new level of digital innovation
Ideally, IT is already involved in the ideation phase to assess the impact on the existing application landscape – but without taking too much of a front seat as not to compromise open thinking. At the latest, on completion of the ideation phase and after a clear vision of the optimized business capabilities has been developed, IT should be involved and the question of how to support future business requirements be discussed. Instead of following the traditional PMI approach and only evaluating integration options, these new optimized business requirements might also lead to the implementation of completely new solutions. An important criterion for such new solutions is their functional fit, followed by strategic IT principles – defined as part of the transformation – that will also enable IT to address future requirements such as cloud readiness.
Ultimately, the evolved PMI setting can help develop a new vision for both business and IT. Importantly, any initiative should be backed by a valid business case that rationalizes the IT changes being considered – optimization just for optimization’s sake should not be the goal.
Go beyond just integrating IT – show courage and transform IT into a best-in-class support function that enables new business capabilities
IT must follow the business model – start the transformation journey by rethinking the existing qualities of the business model. Only then will IT perform a detailed analysis of how to best meet the business requirements.
Always bear in mind the objective – do not optimize for the sake of optimizing, but always make sure that every IT project is backed by a valid business case (except for business requirements that are mandatory to implement, e.g., legal changes)