Reducing Complexity Is Key for Successful Mergers

Earlier today I had the opportunity to pick the brain of Peter Cummings, COO of Opera Solutions, a consulting firm specializing in rapid profit improvement. Company representatives had offered Opera's executives and senior management as sources in the areas of mergers and acquisitions, outsourcing and other global business trends.

I was interested in hearing Cummings' thoughts on the impact of recent telecom industry mergers, such as SBC-AT&T-BellSouth, Verizon-MCI and Lucent-Alcatel. I also asked him to comment on how companies can execute successful M&As.

Cummings says the SBC-AT&T merger especially "has changed the entire global picture" by bringing together a large base of communications customer. He feels that this consolidation will accelerate the development of fixed-mobile convergence (FMC) and mobile content offerings. "The huge customer base" resulting from the merger will create a "large barrier to entry," if the consolidated company can organize itself to reduce churn, hold onto its customers and extract maximum lifetime value from its customer relationships.

Cummings says the AT&T merger was a key motivating factor behind the recent Lucent-Alcatel announcement. He says this move results from "the whole question of size as it relates to bargaining power." These equipment suppliers needed to become larger to deal effectively with the larger merged service provider. A smaller company is at a disadvantage when trying to deal with a larger company. "A lot of M&As are related to the relationships in bargaining power," he says.

I asked Cummings to explain how Opera Solutions goes about helping companies execute more successful mergers. He says his company has developed skills that help it bring about "rapid profit enhancement in terms of providing very fast increase for a company within 24 months."

Investment Rationalization and Procurement Optimization

Cummings describes "investment rationalization" as the first area they work in with a client company. Opera helps management "look throughout the company at how they're spending their money and making capital expenditures across all entities." After mergers, "companies are often unwilling or unable to fully integrate the pieces of the business they have purchased." They end up with "all these different mismatched products and services."

"It's as if you had 20 different kinds of chicken noodle soup," says Cummings, invoking a simple illustration, "every one of them with a slightly different formula." Companies often permit such a situation to continue without standardizing processes and products, resulting in "tremendous internal complexity." A company can easily get burdened with large unnecessary costs because of lack of standardization around "items purchased, tasks done, stocks, inventory, the flows of products and services all through the distribution chain."

Applying Opera Solutions' expertise in investment rationalization, Cummings says, "We go in and do integrated complexity reduction that kicks out all these costs …. We have found almost astronomical savings," he maintains.

Opera Solutions also works with newly merged companies to help standardize purchasing across business units to take advantage of quantity purchasing, a process Cummings refers to as "procurement optimization." Companies realize savings by having "all divisions purchasing the same products together," standardizing "the items that go into making your products," incorporating "reusable parts" into processes, and similar measures that increase purchasing volume resulting in cost savings.

Customer Value Management

Hiring mathematicians and computer scientists from India, China and other sources, Opera Solutions has developed a global outsourced network of experts that is capable of applying advanced mathematics to develop customer behavior models for what Cummings calls "customer value management." Such models can help large companies understand their customers, their behavior and how they're segmented, so as to be able to design ways to retain them and extract maximum lifetime value from the relationships.

Up to now, Cummings says, telecommunications companies are experiencing 25 percent customer churn, a deadly cycle that can be overcome through the development and use of "advanced mathematical behavior models" that can help the company understand their customers and design ways to retain them.

"The company has plenty of data about me and can locate me within about four to five meters of where I am in Charlotte in the hotel where I'm staying," says Cummings. "They know I was in China last week, and in London and Paris. But they're not using that information. If they could understand me as a business traveler with particular needs, they could make a tremendous amount of money making sure I would never switch providers."

Opera Solutions is capable of helping its clients develop the mathematical models to analyze customer behavior and reduce customer churn.

Business Transformation Management

Opera Solutions also offers expertise in strategic business process outsourcing (BPO), helping companies identify "where you find the best fit to do certain tasks," says Cummings. "They can take out a tremendous amount of the costs by offshoring. They can get the skills they need and far more qualified people at much less cost, by taking entire parts of their operations offshore."

Perhaps the key takeaways for me in this discussion with Peter Cummings had to do with the importance of integration and reducing complexities in executing mergers and acquisitions. Cummings gives a glimpse into some of the methods and practices that can make that happen.
AB -- 4/27/06
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