The era of digital technologies has wreaked a havoc in technology services space. The traditional, large and slow-paced, IT services firms are left grappling with this dynamic ecosystem of digital technologies that seems to be evolving at an exponential pace. And why only IT services firms, digital has brought about disruption in almost every business model one can imagine. These companies are then resorting to one of the oldest tricks in the book – acquisitions – to play catch-up. They acquire smaller specialized digital companies in order to gain access to technology capabilities, expertise, and talent. Countless resources are being spent on identifying buyout targets, conducting due diligence, negotiations, and more in pursuit of the deals. However, it does not end there – after the acquisition is closed, the companies have to spend considerable time and effort as they embark upon the journey to make the acquisitions successful.
According to a study by Accenture Strategy, organizations recognize that technology (71%) and cultural (62%) integration are two key components critical to acquisition success. Indeed, majority of the organizations are struggling to extract full value from the deals due to their inability to integrate diverse cultures. The study reported that almost two-thirds of the global corporations (c.64%) have kept their recent digital acquisitions as standalone businesses. To be sure, part of this can be attributed to the creative earn-out structures that are synthesized as part of the deal to decrease the risk on buyer’s part.
Consider the case for Mindtree. In its bid to transform itself from a traditional IT services provider to a digital transformation solutions provider, it acquired Magnet 360, a salesforce partner, in Jan 2016, and Bluefin, an SAP-HANA consultancy, in Jul 2015. The company has since struggled to grow these businesses up to the expectations. This has significantly impacted its overall margins as well. The businesses are now starting to do well, with Mindtree witnessing increased traction for the services. However, as per recent reports, Mindtree is still one or two quarters away from stabilizing the businesses.
One company that has managed to successfully integrate digital businesses is Capgemini. It acquired Onio, a salesforce partner, in Jan 2016, and Fahrenheit 212, a strategy and design consultancy, in Feb 2016. It has also recently announced the acquisition of Lyons Consulting Group, a digital commerce solutions provider, and LiquidHub, a digital transformation solutions provider. Capgemini understood the challenges that arise when agile digital companies are to be integrated with formal structure of established companies. Instead of allowing the new entities to be completely standalone or going for full integration, it defined separate integration levels for different areas – Brand Strategy, Sales, Organizational Units, Operating Model, and Administration and Support Functions. While the Onio brand was merged with Capgemini brand, its operational autonomy and culture was preserved by maintaining it as a separate unit.
While it is necessary to find and acquire that perfect digital business, merely acquiring digital businesses does not lead to transformation. Organizations need to have a well thought out strategy for integration in order to reap full benefits from their digital acquisitions. They need to find a perfect balance between leaving the entities standalone, which makes it difficult to realize potential synergies, and full integration, which may kill the culture and essence of the digital business. In this world obsessed with AI (Artificial Intelligence) and related technologies, the ability to successfully execute the other AI (Acquisition Integration) can be thought of as a rare competitive advantage.