Sunday, February 24, 2008

Got Money, Will Buy Sophistication

Globalization has brought many disruptive changes. The Internet and ease of communication have made it easy for companies to stretch far beyond their traditional boundaries. As a result, companies are opting for inorganic growth by M&A –- not just in their neighborhood, but all over the world. M&A is commonplace in in developed economies. American, European, and Japanese companies have been doing this for years. Brands such as Coca Cola and Honda are virtually in every town on the face of the globe. Now, however, the developing economies are also jumping in the fray.

Rapid growth (say in the 8-15% range) in the developing economies means that they are growing fast and furiously but it also means they are flush with money. On the flip side, most of the developed economies are experiencing tepid growth (1-3%), if any, and are battling with wide-scale problems such as subprime mortgage crisis, unemployment, high gas prices.

On a side note, I recently read that fuel costs have doubled for the airlines in the last year. And given the amount I pay at the pump, I think the family will be taking a not an airplane vacation, not a road trip, but a hike this summer!

The growth patterns between developing and developed economies makes for a perfect breeding ground for M&A in the reverse direction; that is, companies in developing economies are buying troubled brands in developed economies. This is a best way to put their money back to work and fuel inorganic growth.

All that is well and good; makes sense from a company strategy point of view – expand. Makes sense from a financial point of view – invest for the future. I don’t think anyone stopped to think of what else these developing country- companies were buying … their treasure chests filled with cash were buying one more thing that they may not have expected Sophistication. As with any M&A, each time companies expand and gobble up companies elsewhere they have to merge the people, processes, and of course the IT landscapes. In any acquisition, the acquirer usually has an upper hand on determining which of the people, processes, and IT artifacts would survive. Historically, the acquirer, presumably, is better at all of these hence the better financial & growth prospects affording it M&A opportunities. However, right now we’re noticing something different. The developing country companies are the ones that are successful and cash rich – they are part of a nouveau rich class. They’ve filled their coffers rather quickly and all the while not paying much attention to sophistication of internal procedures, processes, and environments. As one IT director of an Indian-client commented, “Embarrassing for us, we bought companies that are more sophisticated in terms of processes than the acquirer.”

So the client asks us about how to marry the uber-sophistique with it-just-about-does-the-job-so-it-will-do? This situation is perfect example where the loosely coupled value-prop of SOA fits well. You don’t need to blindly copy the sophistication (and potentially make a fool of yourself while spending big bucks on system replacements). Just agree on the interfaces (service contracts) and then handle the ease (or complexity) within each of the two environments to bring info up to that interface point. So long as the service contract is abided by, the co. keeps humming and the marriage stays out of trouble!