Anyone who has worked in a large organization knows how rare it is to encounter unified information systems that capture all relevant data required for intelligent decision making. Typically, individual departments have their own systems for critical tasks and, at best, corporate IT departments try to pull together data warehouses to make sense of these disparate systems. This presents both a management problem and a potential risk for investors.
Get Away From “My Data”!
Data silos occur for a variety of reasons. In many organizations, management fails to provide unified information systems that can meet the needs of all departments. Even when supposedly “unified” systems are put in place, organizations always have departments which exert more political power than others. Often, even in the rare cases where good unified systems exist, many individuals still wish to keep their data in “silos” either for political reasons or because they simply distrust any central system.
Even companies that are in relatively static industries must ensure that information systems are adequate for the needs of all departments and can adapt to changing requirements over time. However, this is not enough. A well run business also has managers willing and able to force employees to use these systems if political or cultural obstacles get in the way.
Mergers and Spin-Offs: Potential IT Disasters
The Economist recently published an article that illustrates the danger of inadequate information systems within the financial services industry. The article describes the difficulties that many financial services companies have had with IT system integration and how these problems created additional uncertainty during the financial crisis. Even for a financial organization that has grown organically, system complexity is going to be extremely high due to the nature of the business. Traders and managers who have always relied on Microsoft Excel to handle their models will be reluctant to switch to centralized systems even if they are flexible. Too often, proprietary traders may want to protect the “secret sauce” for their business at the expense of the overall firm.
These problems are further compounded in a merger or spin off. In the case of a merger, disparate systems must be combined in a seamless manner if managers of the combined entity are going to be able to manage risk in a unified manner. Since most large financial organizations have a great deal of custom software, systems integration can be an arduous process that takes months or years to complete. In the meantime, managers either must make decisions with incomplete information or will only receive accurate information with a delay. In the case of spin-offs, care must be taken to separate IT systems that were long intertwined.
Investors Beware
Typically, mergers and acquisitions are justified by managers claiming that the combined entity will have “synergies” that will allow for significant cuts in operating costs. While this is often true, in the short run, any complicated organization is going to face much higher costs as IT systems are integrated. If the business involves financial services, risk controls may be compromised in the short run while such integration work takes place. Investors should be aware of this risk when considering companies that are in the midst of a merger and particularly when evaluating “serial acquirers” who have picked up a large number of businesses over a short period of time.
The author previously worked in the commercial software industry.