With the economy slowly coming out of recession, the outlook for financial services institutions looks much brighter. Cost cutting was the no 1 objective for this sector during the years following the global financial downturn, but now acquisition activity is back on the agenda, as many financial organisations are making bold plans for strategic growth in light of more favourable market conditions.
The UK accounted for the largest percentage of M&A deals undertaken by volume last year, making up 147 of the 468 financial services deals announced in 2014. IT typically represents 8% to 15% of the cost base of a Financial Service organisation and IT is always a major consideration following an M&A activity. The coming together of two potentially different IT systems and applications requires as much careful consideration and planning as the deal itself. In addition, regulators are increasingly asking for full integration plans as part of their approval process.
So what role does IT play in supporting the M&A process and what are the particular challenges?
A recent survey carried out by EY produced an interesting report highlighting the IT challenges facing financial organisations following an M&A. Unsurprisingly, the most challenging aspect of IT integration was “designing the future landscape” — identifying how to bring the IT applications and infrastructure of the two organisations into a common architecture — that of the acquirer, that of the target, a new third party platform for both, or a hybrid of these options. This was cited by 27% of respondents as their biggest challenge.
Respondents noted that designing the future landscape was an especially big challenge due to the need to keep up with competitors and evolving client requirements. Another issue around designing the future landscape was acknowledging the increasing dependence of stakeholders for faster and better technology. The existence of legacy IT issues in the acquirer and/or target was cited as an additional headache in the IT integration project.
Different sub sectors faced different challenges
For banks it was balancing the demands of IT integration with the day-today running of a business and other projects. Respondents from asset management and insurance companies found data cleansing, testing and migration far more challenging than banks do.
Third party demands
The banking sector traditionally had huge in-house IT teams, but costs, regulations and the pace of technology evolution has changed that and there is a real appetite for using third parties, including IT outsourcing companies, across the finance sector. As indicated above, the variety and complexity of challenges that this sector presents undoubtedly places extra demand on the third party provider charged with overseeing the IT integration following a merger or acquisition.
Firstly that they will need to demonstrate expertise at integrating technology and application platforms and providing the ongoing support requirements of regulated organisations. The regulatory and compliance requirements from financial services companies are complex, and clients need to work with a partner who has experience at working in this sector and understands how outsourced services can support their specific needs. For example, a transitional services agreement underpins many M&A activities, and companies should satisfy themselves that potential providers can demonstrate expertise of working within a TSA framework.
Finally, innovation and new technologies are key to realising growth – no more so than in finance and banking. Banks are responding to the increasing reliance on technology by consumers and want to dramatically improve clients banking experience. They want partners with strong research and innovation capabilities, providers that bring advanced analytics capabilities to help them discover new insight and opportunities.