Essential Technology: A GCS Blog

Perhaps I'm on a 'failure' kick, but that word will appear heavily in this blog entry too.  What do you think are the most common design or management failures of a business network? Trends have developed through assessing hundreds of different networks from 1 to 1000s of PCs, Here is my list, in order of severity and also expense:

1) Data Backup: Is this surprising? I regularly run across companies that don't have a functioning backup system. Most of the companies have invested thousands of dollars into these non-functioning backup systems. Backup failures are split pretty evenly between design (never could have worked) and management (might have worked before).

2) Security: Does everybody in the office share the same password? Or maybe your file permissions allow Full Control to all users? If not, those than your users share accounts to access critical data. All of these and much, much worse are common.

3) Over-Spending: Sad but true, wasting money ranks #3 on my all-time failures list. Overstaffing is easily the most expensive form. Excessive hardware, unused licenses, and 'managed services' are all common budget busters.

4) Licensing: Though much improved in the last 10 years, licensing comes in at #4. Even small businesses can own a large number of licenses with various contract terms, quantities, installed locations, and versions. Figuring out what is owned can be surprisingly difficult. The Business Software Alliance campaign that awards $50,000 to those who turn-in an employer should make every owner think twice.

As a business asset the typical network infrastructure is valued at investment less depreciation. All design, installation and configuration costs are written off immediately. Is this a fair assessment of the value of the network?

On Forbes.com today a model for assessing the value of public/social networks is presented. They postulate that value of a network is "the net value of each user's transaction summed up for all users."  Can the same valuation be applied to business technology systems?

For many social networks the business IS the technology. You can't separate Facebook or Twitter from the application and infrastructure behind them. They are completely integrated. Can the same be said to modern business technology systems?

Most modern businesses can not function independently of their technology. Business processes have been defined, human resources selected and prices have been set based on the use of certain technologies.

So what is the value of a business's network? If $10 million of annual sales is 1) sold on Blackberries, VoIP handsets and email, 2) delivered using MS Project with parts procured on the internet and 3) accounted for on Dynamics GP (Great Plains) than "Beckstrom's Law" places the value of that network at the net earnings on that $10 million dollars. At a net margin of 7% - 10% that is $700k to $1 million dollars.

Why is this important? A $10 million dollar service company likely has no more than a $250,000 to $400,000 investment in technology. That's not a bad ROI.

In this final installment on this round of M&A, I'll focus on preparing for the transition. These tasks can simplify the integration process while reducing your organization's risk. Click to read Part I and Part II.

User Security: Internal employee abuse is a major risk. Many unknown new employees will have access to your network and data. An aggressive computer monitoring solution can mitigate those risks. Logging all user activity tends to improve behavior on network systems. Improved behavior minimizes employment risks, such as sexual and racial harassment. Logging also deters intentional damage to your systems. Security cameras and door access control installations can add an element of protection to inventory and company assets. Door control systems allow you the ability to terminate an employee's access to buildings or areas instantly and completely.

User Limits on Technology: It is likely that your existing technology infrastructure has a user limit near your current utilization. Most technology vendors offer heavy discounts to small and mid-sized businesses. These discounts are removed at fixed employee increments. For instance, Microsoft no longer considers a business "small" after 50 employees. You may find that as you grow employee count, the per-user technology expenses increase substantially and suddenly. Investigate technology costs of the combined organization prior to the acquisition.

Accounting Security/Auditing: Quickbooks and other basic accounting packages offer limited user security within the application. Transactions such as invoices and purchase orders may be deleted. This leads to two of the most common forms of employee fraud. In the first, the employee erases invoices to steal the payment. In the second, fraudulent POs can be erased allowing the criminal to steal the ordered goods. Advanced accounting systems prevent this abuse and allow more granular security in user rights.

Accounting Transaction Limits: Every accounting system has transaction limits after which performance and reliability erode. There is a dramatic difference in the transaction limit and overall price of the first tier of accounting applications from the second tier.

Chart of Accounts Organization: As the complexity of your chart of accounts increases, you should consider a more advanced accounting package. One benefit of high-end solutions is advanced chart of accounts capabilities. Many can also manage multiple, independent organizations in a single database. This has been the mainstay of the oil and gas industry as well as other investment management organizations for years.

IT should have a prominent role throughout the M&A process. Not engaging them early enough presents significant financial risk.

In the first part of this series we started looking at the technical assessment process that IT should undertake prior to any M&A activity. In this second part we'll look at a some common financial risks which may escape some executies.

Non-Technical Assessment

Off-balance sheet leases: Equipment leases on computer networks and phone systems are very common. Leases allow the buyer to keep the liability off of the balance sheet and may be overlooked on the expense register. The most common lease, a Fair Market Value lease, has a balloon payment due at termination usually 36 to 60 months after purchase.

Telecom Contracts: Many companies go several years or more between negotiating telecom contracts. These companies can pay thousands of dollars per month too much. The company may be locked into long term contracts from 36 to 60 months. These services may be wholly incompatible with your needs. Termination fees are often the remainder of the contracted balance.

Microsoft Licensing: A popular Microsoft licensing method called Open Value requires the buyer to make three annual payments. It may not be easily recognized as an annual recurring transaction. This annual fee can easily exceed $50,000, and in some cases $100,000, in businesses with less than 100 employees.

Out of Support Technology: If equipment is out of manufacturer's support, it is prohibitively difficult to source parts. It is impossible to engage the manufacturer, which is often times required for assistance. Expect to replace or procure spare parts for all out of support hardware. Businesses that are good targets for acquisition will frequently postpone required hardware or software upgrades.

Usually IT is the last to find out about about a merger or acquistion. Most execs utilize the "We're already doing it so now make it work" mentality.  As any IT Director or IT Manager knows, technology costs represent a significant expense during acquisitions and mergers. Failing to anticipate these costs can significantly affect valuation models and cash flow projections. Execs have to engage IT during the assessment phase of M&A. To help with that goal I have created a three part series to help IT Directors and Managers prepare their systems for an acquisition or merger, assist with assessment of M&A targets and maximize the resulting business value of merged IT systems.

Assessment:

As the IT Director or Manager, you must participate in the financial modeling that the executive team is using to evaluate the merger or acquisition. Consider at least these major cost components:

Platforms: Even within niche markets there are a variety of technology platforms in use. Mixing platforms can increase the initial costs of integration and/or the recurring cost of support. Your Microsoft stack is not going to work with OESNetware without a significant amount of expense. It is not uncommon for organizations to run parallel systems for years after an acquisition or merger due to this cost.

Wide Area Networking: There are many types of connectivity used to link remote sites with other offices. Most are incompatible with one another. Assume a replacement of all firewalls and routers within the acquired organization.

Phone System: Most businesses merge their phone systems to accommodate new locations and offices. This almost always means throwing away one or more of the systems. Replacements can range in price from $7,000 for small remote offices to $100k or more for large sites.

Historical Access to Data: A major component of integration costs is integration of historical data to new or merged systems. It is much cheaper to have a "day forward" strategy, incorporating only new transactions into merged systems. This strategy's success depends on retaining the functionality of old systems for strictly historical data access. This generates substantially higher support costs, but defers major upfront expense.

Check in again for the next installment as we continue this topic.