Accomplishing a Successful M&A Using Enterprise Architecture

More and more enterprise architecture teams are getting involved in the planning and completion of mergers and acquisitions (“M&A”) within their organization. Here’s how enterprise architects can get involved in the due diligence and integration of a merged or acquired company.

Context          

Mela Apfel (fictional name) has been appointed about seven weeks ago to the position of director – enterprise architecture at Apple Republic (fictional name). This was a new position. Apple Republic is a multinational clothing and accessories retailer. It owns two brands, Apple Republic and BOLD NAVY (fictional name), and wants to increase the number of its brands by mergers and acquisitions. BOLD NAVY was their first acquisition. The integration went fairly well. With the integration of BOLD NAVY’s operation to Apple Republic’s operations, Apple Republic finally ended up earning more profits than they had anticipated originally, but the integration process took 12 months more than they had originally planned and the integration cost 195% more than anticipated. At the time, the enterprise architecture department did not exist.

Apple Republic’s made in USA products appeal to higher-income families. A client can purchase at an Apple Republic store and/or online high-quality clothing at a decent price. Its clothing design is somewhat traditional and yet unique. Execution at Apple Republic is among the best in its industry. With its excellent loyalty program and top-notch supply chain, its quality of services and delivery are the envy of the industry. High and very high customer satisfaction is over 70% year after year. Turnover of inventories is over 10 times a year. This means that on average a piece of clothing stays less than 37 days in stores and warehouses. Net profits have been over 19% for the last 3 years and the company aims to keep it that way in the future, even though their products are made in the USA at a higher cost than their competition.

Apple Republic wants to grow its revenue and profits at a minimum pace of 20% per year. In the past, it had done so by increasing its number of stores geographically first throughout the USA and then throughout other countries. Except for Asia, Apple Republic stores are now just about everywhere. To keep growing, Apple Republic needs to expand through mergers and acquisitions.

Apple Republic’s first acquisition was BOLD NAVY three years ago. It provides affordable in-vogue clothing to low- and middle-class income families at affordable prices. When Apple Republic purchased the brand, BOLD NAVY was only present in the USA, barely profitable, provided no online e-commerce, and no loyalty program. Many had doubts about the fact that Apple Republic could execute this turnaround and make BOLD NAVY strive like Apple Republic. Yet, Apple Republic applied the same recipe. In brief, it dumped the supply chain system that BOLD NAVY had and replaced it with theirs. It introduced a loyalty program, allowed clients to view and purchase clothing online, and has grown the number of its stores in other countries and continents. The turnaround took much longer than planned, but the results are now satisfactory. High and very high customer satisfaction is over 70%. Turnover of its inventories is 8 times a year (or 46 days). Net profits were 12% last year. Finally, BOLD NAVY’s 27 new store openings in Europe are going very well.

Critical First Initiative: The Next Merger and Acquisition  

Mela Apfel’s new boss, the VP – Information Technology Services of Apple Republic, has warned her that a possible merger and acquisition (M&A) of a private retail chain, called Amplitude (fictional name) – specializing in mainstream plus-size clothing for men and women with stores in the USA and Canada, could be imminent, as shown in the drafted org chart in Figure 1 above. The usual stages of an M&A process include (a) the identification of possible contenders for acquisition or (b) business units for divestiture, (c) due diligence, (d) post-merger integration, and/or (e) the implementation of divestitures.  In the case of Apple Republic, its Enterprise Architecture team would be important during the due diligence process and essential during the post-merger integration process that would follow, as shown in the acquisition and integration plan in Figure 2 below. This time, the head office made clear that Apple Republic would integrate the next brand without delays. Or else, the consequences to the Information Technology Services could be severe. Mela’s boss was quick to point out that he counted on his Enterprise Architecture team to get things rolling according to plan. In brief, the pressure was on full blast for Mela Apfel.

There are several reasons why Apple Republic wants to purchase Amplitude. The plus-size clothing market is growing over 20% per year, a lot more than other garment retail markets. Second, the retailers in this market are small and there is not yet any clear leader. Third, there is room to grow internationally. Fourth, the Apple Republic and BOLD NAVY brand did not serve the plus-size clothing market well. Fifth, Apple Republic’s line of products could be sold in Amplitude stores by offering sizes that were not really offered in Apple Republic stores currently. Finally, but not least, Amplitude’s current net profit margin is high at about 20%.

New Enterprise Architecture Department

Apple Republic’s recent Enterprise Architecture team is now made up of three individuals, including Mela. The other two enterprise architects were named a few weeks after her appointment, report to her, and they each take care of the enterprise architecture initiatives and projects within one specific brand. A fourth enterprise architect would be named after the formal transaction that took place regarding Apple Republic and Amplitude. Enterprise architects at Apple Republic were not just IT architects. They were also good business architects and could easily contribute to corporate planning with organizational, value, capability, information, strategy, initiative, process, requirement mapping, on top of the usual EA application, data, and technology architecture. Still, Mela found it more prudent to hire a reputable business architect consultant to get a better handle on the business architecture aspects of her enterprise architecture practice, get going more rapidly, and guide her afterward a few times a year.

The second thing she did in parallel was to purchase an easy to use and secure enterprise architecture software application to gather all existing information that had been accumulated within their enterprise including a list and description of applications and databases on Excel files, a requirement management tool, and their main business processes in Visio diagrams. This tool was to be hosted on the cloud and be used by enterprise architects, a few IT architects, and business analysts. Their findings and artifacts were to be shared with viewers, consisting of key business and IT stakeholders within Apple Republic. This would enable feedback from key business stakeholders, business analysts, IT portfolio and project managers, business process experts, and all IT/data/software/application architects and make sure that enterprise architecture would become an integral part of the corporate strategic planning process.

Building the Foundation      

The import of all relevant data from the various systems and software applications already in place within the company into the enterprise architecture software application was simple. Using Excel files, the fine tuning and import of data took Mela’s team a little more than 2 weeks. Making frequent data intelligent synchronizations using restful APIs from their Jira and ServiceNow software to their new business and enterprise architecture software was also going to be an important task.

The data from all these different sources was sometimes inaccurate, with duplications and even conflicting information. Mela and her team intended to clean it up and update it in due course with the completion of additional initiatives. Initially, they would make sure to prioritize their efforts in fine-tuning the information that related to the Amplitude M&A initiative. With time, all the information in the enterprise architecture model would be fine-tuned with the start, realization and delivery of other new initiatives not related to the M&A.

Mela and her team rapidly ended up with Organization, Capabilities, Value Streams, Information, Stakeholders, Application/Systems, and Initiative/Project high-level current-state mapping for each of the 2 brands of Apple Republic. They needed to do the same rapidly with Amplitude. They would later get into more details and do the Business Strategies, Product, Process and Requirement cross maps.

Critical and Client Facing Capability Ownership     

The enterprise architecture team initially completed Figure 1 above, which showed the first two levels of the future state of Apple Republic’s Organization Chart, including the new acquisition, Amplitude. They also identified and described in detail thirteen critical and client-facing level 1 capabilities of Apple Republic, which are mentioned in Figure 3 below. They are Billing Management, Contact / Leads Management, Client Management, Partner Management, Channel Management, Merchandising, Supply Chain Management, Human Resources Management, Brand Management, Manufacturing, Information Management, Application Management, and Stores / Franchises Management.

Right now, Amplitude owns and uses all these business capabilities, except Channel Management, where they have very limited knowledge of social media, and Manufacturing, where they have no expertise. With its acquisition by Apple Republic, they would eventually stop owning and only use Billing Management, Partner Management, Supply Chain Management, Information Management, Application Management, Stores / Franchises Managements. These business capabilities would now be owned by various departments of Apple Republic.

Supporting Systems and Applications

After the completion of an M&A, odds are very high that there will be duplications of various applications. Using business capabilities to identify these duplications and formulating a plan to streamline these applications in an orderly fashion would rapidly be requested. Figure 4 below shows an example of the status of the supporting applications of one of the key capabilities mentioned in Figure 3 above, in occurrence the Billing Management, right after the acquisition of the retailer Amplitude by Apple Republic.

The Billing Management level one Capability includes the following level 2 capabilities: Billing Statement Management, Invoice Management, and Client Payment Management. Three applications support these capabilities after the Amplitude acquisition; one originates from Apple Republic and the other two are from Amplitude. As for the databases, 4 are used after the acquisition of Amplitude, two originate from Apple Republic and the other two are from Amplitude.  At least 4 options can be executed to streamline the billing management capability. They are:

  1. Merge the Amplitude Invoicing database with the Apple Republic Invoicing database,
  2. Merge the Amplitude Clients database with the Apple Republic Clients database,
  3. Decommission the Invoice Statement Application that originates from Amplitude, and
  4. Stop the Invoicing Application B Services that was provided to Amplitude before the merger with Apple Republic.

The Value Streams    

Examining key value streams delivering crucial value propositions should eventually be examined for Apple Republic’s enterprise architecture team. This would be done using some of the methodologies underlined in this book entitled “Practical Guide to Agile Strategy Execution: Design, Architect, Prioritize, and Deliver your Corporate Future Successfully”. Once Amplitude is officially acquired, Mela will need to turn her attention to this new business unit and examine some and eventually all these client-driven value streams, focusing on the business capabilities that are missing, low performing, and of critical, a very high, or high priority.

Projects and Business Outcomes     

Most if not all your initiatives and projects should be derived from capability-based roadmaps, especially those that are missing, low performing, and of critical, very high, or high priority. Laying out the nomenclature, roadmap, and GANTT Chart of your initiatives and projects into sub-initiatives and sub-projects needs to include a business outcome derived at minimum from strategies and tactics. At best a business outcome should be derived from goals and objectives.

If goals and objectives are nowhere to be found in the organization, the business and enterprise architecture team should try to extract them from management. In reality, many business and enterprise architects often must fall back on imprecise strategies and tactics because of the reluctance of some managers to commit to precise goals and objectives. As for Mela Apfel and her team, they are very fortunate. Apple Republic is very well managed. All sections of its organization have clear strategies and goals that can be disseminated into tactics and objectives and guide the enterprise architecture team in deriving clear business outcomes for each one of the initiatives and projects where they will be involved.

Conclusion    

Mela Apfel is now ready for her meetings with the big brass of the company (key stakeholders). She will now be able to show, gather and modify relevant information on requests to assist them in their decision-making during the current due diligence and integration stage that will follow.