How cloud-based ERP address common merger and acquisition challenges
The technology of cloud-based (ERP) systems continues to mature and flexible computing solutions become mainstays. Business operating models take advantage of this.
In a M&A transaction, the question of how to deal with the technologies of the respective organizations is an everlasting issue. How and whether to merge them, or, in case of a divestiture, how to uncouple them is a question that can have a lot of impact on the success of the “new” organization. Previously it was standard that organizations first transitioned and then transformed it. However, cloud-based technology offers a “transformation in transition” model. The flexible computing solution models (FCS) allow simultaneous cost structure and capacity transformation while optimizing for timing.
Models in the cloud replace the aging, capital-intensive technology that is characterized by rising fixed costs with more flexible, consumption-based operating models that are based on variable costs. Such models can scale up or scale down as the organic needs of a business command. They also provide advanced capabilities based on leading practices with minimized investments into the future.
Cloud-based ERP technology may be especially relevant for organizations looking to divest underperforming or non-core assets. Divestitures often include transition service agreements (TSAs) provided after the deal by the vendor. These transition service agreements include operational services or support for an interim period after the transaction is closed. TSAs often include financial penalties for not exiting the agreement prior to the agreed upon date. This increases the pressure on both sides to exit quickly and with minimal impact to the organization. But this can be challenging if the TSA includes a support service for a traditional, on-premise or hosted ERP system. Because of the complexity involved with the configuration of an ERP system.
Cloud-based ERP systems can help turn a potential M&A deal-breaker into a deal-maker. Choosing for a cloud-based ERP solution as part of the flexible computing solutions (FCS) can be a practical and cost-efficient alternative to the traditional on-premise or hosted systems. In addition they may appeal to both vendor and customer. The implementation time varies. For small to medium-sized organizations it may take one to two quarters. A large international organization may require about twice that time.
The implementation is typically two to three times faster than traditional on-premise solutions. Allowing an accelerated departure from the TSAs. Considering that a cloud-based ERP system provides regular updates, has the ability to scale users, adjust system functionality, has state-of-the-art security and increased system capability it may offer the ultimate flexibility for the transition.
Selecting the appropriate ERP platform
When choosing a cloud-based ERP system organizations should be driven by the same diligence as with any other strategic facet of an M&A transaction. Each vendor has its advantages and uses different approaches to their products. For example, some vendors focus on cloud-based solutions while traditional on-premises vendors let cloud offerings mature a little bit longer. Some vendors require customers to stay up-to-date on all releases, and other vendors allow customers to skip releases if they find it not necessary. Regardless of the vendor there are a few criteria for the customer to consider when selecting a cloud-based ERP solution.
- Buy it for now, not for the future
Prioritize the capabilities that are required to exit TSAs as soon as possible, and plan to add more capabilities and functionality later.
- Use a two-tier strategy
For organizations who obtain a new subsidiary with minimal integration plans, having a subsidiary migrate to a cloud-based solution can be a viable option. This gives the subsidiary a degree of autonomy, allowing for a long term ERP option while minimizing the impact on the acquirer his current on-premise ERP solution.
- Keep it simple
To fully leverage the value of a cloud-based solution and minimize implementation time, organizations should consider adopting the standard process workflows inherent to the system. These workflows are typically based on best-in-class processes, so changes should be challenged. A 10% customization is a KPI limit that should not be exceeded if that is possible
- Understand the price drivers
Keep your eyes wide open, because there are many strategies that vendors use to price a cloud-based ERP solution. Expect to evaluate costs driven by: users, transaction volumes, Functionality, Revenue and the legal entities. The ongoing cost discipline is important to cloud systems.