Business operating models are now taking advantage of cloud-first thinking as the technology continues to mature and flexible computing solutions become mainstays.
In the wake of an M&A transaction how to treat the respective organizations’ technologies is a perennial issue: how (and whether) to merge them, or, in the case of a divestiture, how to decouple them. Conventional dogma has long counseled that the wise course is to “transition, then transform.” However, cloud-based technology commitments now afford executives a “transform in transition” model. The cloud-centric flexible computing solutions (FCS) models allow for simultaneous cost structure and capability transformation while being optimized for timing.
Cloud models replace aging, capital-intensive technology characterized by increasing fixed costs with a more flexible, consumption-based operating model based on variable costs. Such models can scale up or down as a business’s organic and inorganic needs dictate, and provide advanced capabilities based on leading practices with minimized investments into the future.
Cloud-based ERP technology options may be especially relevant for organizations looking to divest underperforming or non-core assets. Divestitures often include transition service agreements (TSAs) provided by the seller to the buyer post-deal, including operational services or support for an interim period after the transaction closes. TSAs often include financial penalties for not exiting the agreement prior to the agreed upon date, increasing the pressure on both sides to exit quickly and with minimal impact to the business. But this can be challenging if the TSA includes support services for a traditional, on-premises or hosted ERP system, due to the complexity involved with ERP system configuration.
Cloud-based ERP systems can help turn a potential M&A deal-breaker into a deal-maker. Opting for a cloud-based ERP solution as part of the FCS architecture can be a practical, cost-efficient alternative to traditional fixed-cost on-premise or hosted solutions and may appeal to both seller and buyer. Requiring minimal hardware and manageable configuration, a medium-sized organization can often be operational on a cloud-based ERP system in one to two quarters; a large international organization may require about twice that time.
But in both cases, this approach is typically two to three times faster than traditional on-premises solutions, thereby facilitating accelerated exits from the TSA. Considering that a cloud ERP system provides regular upgrades, the ability to scale users, easy adjustments to system functionality, state-of-the-art security and increased system capability, it may offer the ultimate in flexibility during a post-deal transition.
Selecting the Appropriate ERP Platform
“Choosing a cloud-based platform set should involve the same thorough due diligence as any other strategic facet of an M&A transaction,” says Asish Ramchandran, a principal with Deloitte Consulting LLP. “Each vendor has a defined set of current and developing strengths, and different approaches to managing and enhancing their products,” he adds.
For example, there are pure-play vendors that focus solely on cloud while traditional on-premises vendors that maturing offerings in the cloud space. There are vendors that require customers or clients to stay current on all releases, and other vendors that allow them to skip releases if they decide they don’t want to put their configuration through the system testing required to stay current for a point in time.
Regardless of the vendor, there are a few keys criteria for a buyer to consider when selecting an FCS with a cloud ERP option:
—Buy for the present. Prioritize the capabilities required to exit TSAs with urgency, and plan to add more capabilities and functionality in phases post TSA exits.
—Use a two-tier strategy. For companies acquiring a new subsidiary with minimal integration plans, having the subsidiary migrate to a cloud based system can be a viable cost optimized, scalable option. This provides the subsidiary with a degree of autonomy, allows for long term ERP optionality for the parent while minimizing the impact on the acquirer’s current on-premises ERP solution, especially if the footprints are complementary.
—Keep it simple. To fully leverage the true value of a cloud solution and reduce implementation timelines, consider adopting the standard process workflows (e.g., accounts receivable, accounts payable) inherent to the system. These workflows are typically based on best-in-class processes, so changes should be challenged early and often. A 10-percent customization is a KPI threshold that should not be exceeded if possible
—Understand the price drivers. Go in with your eyes wide open, because there are many drivers and strategies that vendors will use to price a cloud ERP system. Expect to evaluate costs driven by: users (typically priced in tiers); transaction volumes (i.e., the amount of data that flows through the system); functionality (core functionality such as GL, AR and AP is typically included, but additional functionality may cost more); revenue (percentage of annual revenue); and legal entities (some vendors utilize entities as a multiplier). Continuous cost discipline is key to cloud ecosystems.
—Don’t forget third-party add-ons. “Even the most comprehensive cloud ERP solution does not have all the functionality needed to run the business,” notes Ramchandran, “but often this can be addressed via add-on or bolt-on applications designed to work effectively with the cloud ERP solution.” Typical bolt-on products include tax, business intelligence, reconciliation, HR, payment gateways, and others.
—Decouple ERP from other infrastructure requirements. There is minimal to no infrastructure investment (capital expenditure) required for a pure cloud solution, beyond connectivity and user interfaces. “But, it is important to evaluate data conversion and system integration transaction volumes,” says Rick Aviles, a managing director with Deloitte Consulting LLP. “When large data volume transformation is required as part of the system integration or data conversion process it is often more efficient to set up an on-premises-to-cloud iPaaS (integration platform as a service) solution.” Cloud-based ERP systems are hosted in advanced data centers, with guaranteed high availability, and have ERP-unavailability penalties in place.
Cloud ERP May Not Be for Everyone
While a standard cloud-based ERP system may appear to be a good fit for most M&A scenarios, there are areas and inflection points where it may not meet an organization’s needs as effectively as an on-premises solution can. Following are examples of issues to consider:
—High transaction volumes may challenge current cloud capabilities and cost economics. While FCS systems continue to improve their ability to handle increasingly larger annual transaction volumes, some organizations’ specific volume or customer policy needs may dictate either an on-premise solution or a hybrid architecture or a cloud solution with multiple instances of cloud software. Consider working with vendors to understand what counts as a transaction; determine overall data and transaction volumes; identify the appropriate level of integrated financial reporting the organization requires; and decide if the organization needs a multiple-instance solution (anticipating that software and hardware advances will increase transaction volume capacity and capabilities over time).
—Subscriptions can get costly. Cloud subscriptions allow customers to scale costs up or down based on business needs, but that flexibility without discipline may come at a price. “At a certain point a business may reach a size where the subscription model is no longer cost-effective,” notes Christian Saint-Onge, a senior manager with Deloitte Consulting LLP. “When developing the business case for cloud services, it is important to identify the inflection point at which, or if, an on-premise solution becomes a more viable option.”
—Storage isn’t free. In a cloud environment customers pay for storage, and fees can add up quickly despite very low unit costs. This can get expensive with the inclusion of maintenance costs and storage device upgrades. Customers who consume large amounts of storage FCS provider for high-availability storage.
Harnessing the Power of Cloud ERP
Emerging cloud capabilities are enabling many organizations to fundamentally change the way they operate and to move from a traditional, on-premise back-office infrastructure to a consumption-based model. Cloud-based ERP systems have advanced dramatically in the past 15 years, to a point that they now regularly compete head-on with traditional on-premise solutions and show favorably. By selecting a flexible computing solution both the seller and buyer can leapfrog to a state-of-the-art technology, a subscription service with flexibility to grow with each business, and often minimal infrastructure needs. For cost-disciplined post-M&A implementations, cloud-based ERP may prove to be a cheaper, faster, and better solution