Selecting Target Operating Models: Standard TOMs for Serial Acquirers

If acquisitions will be a recurring component of your growth strategy, you may benefit from creating some standardized TOMs to more quickly assess deal scope and costs.  How many, and what kind, will depend on your industry, and the variety of deals you plan to do. 

Components of a Standardized TOM
Recall that a TOM describes the “5 W’s” or Who will do What from Where on Which tools, When.  In preparing standardized TOMs, it is possible to address these questions, as well as to add some additional parameters that make integration planning, estimating, and execution more repeatable and efficient. 

The following components should be considered for incorporation into a standardized TOM:

1. Clear descriptions of all 5w’s for each functional area
2. Corporate policies that will, or will not, apply to the acquired company
3. Task lists required to achieve each TOM in your company’s operating environment
4. Estimating factor input fields that indicate for each task the scope and level of difficulty particular to the deal being evaluated
5. Mathematical formulae that use C and D above to calculate effort hours required (bottoms-up calculation)
6. Resource cost inputs
7. Mathematical formulae that use E and F to derive costs
8. Assumptions inputs/documentation
9. Additional features that disallow incompatible combinations of the factors above
   

Note that while it is possible to create a quite sophisticated model if all of the components above are included, it is most likely only cost-effective to do so if many acquisitions are planned.  Furthermore, in-house knowledge of the appropriate estimating factors, task lists, etc. will be limited unless several acquisitions have already been executed, or unless you conduct a program to determine these inputs.  The effort and complexity of the standardized TOM is why most companies continue to use business cases to evaluate synergy and cost realization efforts.  That said, it is possible to document standard TOMs that include only non-quantitative data, and this may also be of some use.   

Minimum TOMs
Your minimum TOM should be just that.  It should describe the minimum level of integration required to meet your legal, regulatory, and non-negotiable corporate policy requirements, i.e.  public companies will have consolidated financial filing requirements. 

Regardless of whether you want to delve into the creation of sophisticated models, creating a minimum TOM is usually a very informative exercise.  It engages the executive team in decision making to decide the non-negotiables, and then provides those decisions as established parameters for future transactions.  It will also highlight key dependencies that may have been previously hidden.  For example, if email integration is imperative due to the use of email for emergency notifications, investigate whether network integration is required as a facilitator for email integration.  It is not uncommon for these critical path items to manifest and create a quite extensive minimum TOM.

Insights into how extensive the minimum integration requirements will inform your decision process, both in regards to what kinds of deals you should pursue, and also what internal initiatives should be explored if acquisition is to remain a key component of your growth strategy.  Recall that we discussed in previous chapters how back office structure impacts TOMs?  If you plan to grow by acquisition and use extensive outsourcing and/or automation in your back office, you will have a more involved minimum TOM due to the high number of dependencies in such a model.  In this case you could consider deciding to restructure the back office to add in additional flexibility to accommodate acquisitions.  Alternatively, you could adjust your valuation models to accommodate higher costs to achieve, recognizing that doing so may reduce the number of deals in which you will be a competitive bidder.  Either way, the minimum TOM exercise brings these choices out in the open, where they can be considered and addressed.  If your company needs to do innovative or extra-accretive transactions routinely, then it will be critical to have a defined minimum TOM, and to ensure that your back office has the flexibility to accommodate these transactions.

Full Integration TOM
In a full integration TOM the acquired company disappears, and the acquirer’s model has the same 5w’s as it had prior to the transaction.  Simply put, it describes the model whereby the acquirer completely absorbs the acquired into their standard organization design, tools, processes, and facilities. 

There are two critical points to remember when it comes to full integration TOMs.  First, if you have extensively used outsourcing and automation there may be little difference in your minimum and full integration TOMs.  This may indicate that you can realize value only from deals that will be fully integrated.  It follows, then, that deals that rely on extra-accretive revenue synergies would not be a good fit.  Companies in this position are largely limited to overlapping and some types of complimentary deals and must use other strategic transactions to achieve innovative growth.
Second, the cost of integrating an acquired company into your existing target operating model will bear no resemblance to the current run-rate costs.  This may sound obvious, but I continue to see deal models that assume existing run-rate costs, or run-rate plus an escalation factor, perhaps computed as a percentage of accretive revenue.  Either approach completely ignores the costs of actually executing the integration program.  We will go into the calculation of costs to achieve in more detail in later posts.

It takes a substantial effort to prepare a full integration TOM that includes all of the components discussed at the beginning of this post; however, for the serial acquirer the investment is worthwhile.  A properly designed full integration TOM can dramatically reduce the time it takes to fully integrate, aid in calculating costs to achieve for valuation purposes, reduce integration program costs, and provide program-wide visibility into the critical path and dependencies.  Furthermore, this model is easily converted into a standard workplan and baseline program budget, both of which can then be “rolled up” with similar documents for other acquisitions, providing enhanced management visibility.

Partial Integration TOMs
If your back office has a flexible structure, and you plan to do a variety of deals, it can also be useful to define some standard partial integration TOMs.  For example, at one prior client we employed 2 partial integration TOMs in addition to our full and minimum TOMs (for fun we referred to these as the Party Sub, the Footlong, the 6-Inch, and the No-Soup-For-You).  The difference between the 2 partial TOMs largely hinged on whether the acquired company would be integrated into the parent company’s IT network, since network integration was required to access many of the standard tools and programs such as email, benefits, and procurement.  With the 4 models defined, and estimating tools in place for each, we could very rapidly estimate the effort-hours, timeline, and costs for deals using a standard tool, and incorporate this information into the deal evaluation.  Also, by using the same tools each time, we were able to identify areas where the models needed adjustment and thus improve them over time.

Recap
Standard TOMs are a useful tool for any company that plans on routinely using acquisitions as part of its growth strategy.  Preparation of standard TOMs will discover critical path dependencies, as well as inform management about the ability of the current back office structure to accommodate each deal type.