There's more than one way to combine IT systems when companies merge.
In 1998 Angus Chemical Co., a $300 million specialty-chemical company headquartered in Buffalo Grove, Ill., was deep into its implementation of a J.D. Edwards & Co. enterprise-resource-planning (ERP) solution. It was ridding itself of an old legacy system and preparing for Y2K. In October 1999, however, Angus was acquired by Dow Chemical Co., Midland, Mich., which operates on a highly refined SAP AG R/2 ERP system. What to do? Dow decided to allow Angus to complete the J. D. Edwards work for Y2K compliance. But on day one of the acquisition, Dow established a plan to shut down the application in favor of its own SAP R/2. The reimplementation project was completed at the end of 2000. "Even though they had a very good implementation of J. D. Edwards, in order to get the highest degree of synergy and value across the two companies we replaced their system in favor of our standard work processes and business solutions," says Douglas W. Snoddy, Dow's senior director, information systems. Many companies involved in mergers and acquisitions will face the same challenge: What to do with the two different IT systems supporting the merging businesses? Even when those solutions are from the same vendor, their implementations and customizations are typically so unique and customized as to make them as different as systems from different providers. While Dow lives by its single-system strategy, not all companies see it that way. "There is no business rationale why one system is better than 20," says William L. Sanders, vice president and CIO, Honeywell International Inc., Morristown, N.J. He engineered a best-of-breed integration by mixing Honeywell Inc.'s ERP system with the system of AlliedSignal Inc. when the two companies merged in 1999. Northern Telecom Ltd. took yet another hybrid route, cobbling together different ERP systems through interfaces when it acquired Bay Networks and emerged as Nortel Networks Corp. in 1998. Examining the basic approach of the IT systems integration at these companies can offer lessons to other companies involved in a merger or acquisition. Single-Source Solution Over the coming decade, Dow Chemical plans to grow into a $60 billion company, triple its present size, through both organic and M&A growth. The company finalized its acquisition of Union Carbide Corp. in February of this year, adding some $6.5 billion to its revenues, and is currently in various stages of the acquisition process with at least eight other candidates. Dow has articulated a clear strategy for integrating the IT systems of these and future acquisitions. "You'll talk to companies that will tell you their best practice is selecting the best of the breed of the two IT systems when they do an M&A," says Snoddy. "We don't do that. We have spent 10 years developing and implementing what we think is the best practice in the chemical industry, and we believe it is encapsulated in the solution and system we have. Rather than getting bogged down in endless discussions, sometimes spending years analyzing, assessing, and deciding which technology is best between the two companies, we implement immediately." This will include moving the newly acquired Union Carbide off its SAP R/3 system and onto Dow's SAP R/2. Dow's first move, similar to actions at other companies involved in M&As, is always to link up the communications systems between the two companies. This includes e-mail, intranet, and collaboration tools such as meeting and conferencing solutions. Dow has custom coded interfaces to these solutions to facilitate hook-up with new companies, making interfacing a best practice. In the case of the Union Carbide acquisition, Dow had a secure e-mail connection between the companies even during the due-diligence period prior to the deal's closing. Day-one integration of an acquisition typically includes implementing Dow's standard workstation and standard infrastructure. In the case of Union Carbide, the global directory of ID code, name, location, phone number, fax number, and e-mail addresses of the company's 13,000 employees was integrated via directory interfaces. According to Dow it can take months before work processes and business systems can be implemented at a newly acquired company. In the interim IT systems are cobbled together with custom-code interfaces to automate the process of linking applications. To get financial-reporting data into the corporate systems right off the bat, for instance, Dow has an interface to its R/2 system that allows the company to bring in financial data from other packages, including SAP R/3, Oracle, and J.D. Edwards. Interfaces linking disparate systems are seen as the short-term facilitators of integration, "but they are not the long-term integrators of our work processes," says Snoddy. Best-of-Breed Approach Finding good synergies in both aerospace and industrial automation product lines, AlliedSignal and Honeywell merged in mid-1999 to form Honeywell International (Honeywell in turn is being acquired by General Electric Co.). The Honeywell/AlliedSignal solution to business-system integration, however, was quite different from Dow's. The two companies opted for a best-of-breed approach by business unit. In aerospace the company settled on the SAP ERP system that AlliedSignal had just installed, while the automation business went with the Oracle ERP implementation at Honeywell. Financial and other data (for sales/marketing and purchasing, for example) from both systems as well as remaining legacy applications are dumped into a common Oracle database, and are used with data warehousing and other query tools for consolidation and reporting. "Our main objective has always been to select the fewest number of packages that meet real business needs, not have one application," says Honeywell's Sanders. "The only business rationale for having one standard is that you are potentially able to implement faster, and your cost of ownership can go down. But there is no business rationale for tearing out one system and putting in another just to say you have one ERP system." One principle guiding the company's application decisions was that any group of businesses with the same supply chain had to operate on the same ERP system, but there were other guidelines as well. SAP's ERP system, for instance, was selected for the aerospace businesses because Honeywell felt it did a better job than Oracle on the cost and quality tracking required by the government (automotive and chemicals businesses also opted for SAP). Since most of the automation business in the combined company was Honeywell's (aerospace was split about 50/50), it was natural to maintain the Oracle implementation, which since 1994 has been installed module by module. Likewise, in the e-commerce arena, although customer interfaces were made uniform AlliedSignal still brought its Sun/Netscape platform (more scalable) to the merger and Honeywell brought its Microsoft suite (more flexibility of applications). The two are linked through data-warehousing technology. Admittedly, Honeywell looked at applications including SAP and Oracle that it already had in house, choosing one or the other. "The only thing we came up with that was really a compromise is that we need to have people to support both SAP and Oracle," says Sanders. "That added some incremental cost, but it was far less than the cost of trying to just have one system corporate-wide." Moving data from Honeywell's aerospace financials on the Oracle ERP and its many legacy systems over to the new company's SAP system was a significant challenge. First, the aerospace organizations from the two companies had to decide on common business practices and consistent designations and nomenclature for customers, products, etc. Then data had to be cleaned and made accurate for movement between the two packages. In some cases physical inventories were taken to verify stock levels. Data migration and the challenge of integration overall was further complicated by the restructuring of the regionally organized Honeywell legacy systems to fit the global business model of legacy AlliedSignal. Records kept in Brazil in different strategic business units, for instance, had to be cleansed and moved to databases for specific global strategic business units. To effect the change, the new company operated parallel transaction systems (both regional and global), testing the data integrity, until the regional system could be shut down. Sanders attributes the success of the integration, completed in 90 days after 90 days of planning, to global business teams with IT representatives linked back to a central IT team, as well as rigorous project management with detailed milestones and deliverables. Along the way, combined IT expenses were cut by 25% and staff was reduced by 15%. Gluing The Two Prior to the Bay Networks acquisition, Northern Telecom was running its manufacturing on a Baan ERP system, while Bay was firmly committed to SAP R/3. Like Dow, the companies glued systems together for the short term via interfaces, and then, like Honeywell, the two merged entities evolved to a best-of-breed combination, but this time based on function. Baan was selected for the back office -- manufacturing and order fulfillment -- while SAP powers the front office for order management. This approach to architecture created a lot of connection points. The complementary technology that supports it and allows the systems to communicate with each other across the corporation is Nortel's integration hub. Built on multiple-interfacing technologies, including file-transfer-protocol, electronic-data-interchange, and enterprise-application-integration tools (Integration Tool Kit), the hub acts as a traffic cop for transactions originating in either system, worldwide. It also serves as a temporary, first connection point of newly acquired companies (Nortel has completed 15 acquisitions since Bay Networks), which are patched into the hub to get their IT systems up and running in the Nortel fold. Similar to Dow, systems at the acquired companies are migrated to the Nortel SAP or Baan applications, and the legacy systems are retired. For instance, when Nortel acquired customer-relationship-management software vendor Clarify Inc., San Jose, last year, Clarify's PeopleSoft Inc. ERP system was linked into the hub, then eventually shut down in favor of Nortel's core applications. "The best practice with an acquisition is to move quickly, get it behind you," says Richard Ricks, CIO, Nortel Networks, Research Triangle Park, N.C. "At closing, we have acquisitions integrated on our infrastructure, they are in our e-mail environment, and the connectivity is established through the integration hub for the existing environment of the acquisition into the core applications of Nortel. The integration hub is fundamental to speed -- being able to establish the integration so you can conduct business as a single entity. It also allows us to facilitate, in a sequence of events that makes sense, a logical integration and transition into the core platform." The initial Nortel/Bay link was accomplished in just 75 days with this approach. To deal with the data-migration challenges presented by Bay's different data standards, Nortel turned to a database environment created as part of its Baan implementation, called data central. Based on Oracle technology, the database contains all customer information, product codes, component supplier codes, and customer ordering codes. "Data central is a repository for all of Nortel's crown jewels," says Ricks. "Housed there are all the product, supplier, and customer data that is key to running the ERP systems that are not generated as part of the order, but used by the order." Data from the Bay SAP system was mapped into the various fields and dimensions required to prepare it for Nortel consumption, allowing the combined company to operate on a common source of information. "There's no magical way to do it. It's just hard [work]," says Taylor. Data central is likewise interfaced to the integration hub, forming the third leg of the hub-and-spoke architecture with the Baan and SAP systems.