Achieving High Performance in the Payer Industry through Mergers and Acquisitions

Mergers and acquisitions have been a part of the health insurance and managed health care industries, collectively known as payers, for many years. In the for-profit sector alone, industry consolidation through mergers and acquisitions has resulted in more than 45 percent of commercial enrollment being concentrated in only four companies, with a concurrent reduction in the number of medium to large payers. Overall, in 2007 alone there were 21 completed and four proposed mergers and acquisitions.

There are a variety of reasons for this heightened mergers and acquisitions activity in the payer industry. Some of the benefits that result are improved efficiencies, revenue growth through acquisitions, growth in a specialized market and the acquisition of specialized skills, products or technologies. Regardless of the reason, the market expectations are high.

Merging two companies is not easy. The risks are high and failure can erode value quickly. A merger is successful only when it contributes to high performance for the overall organization. When a merger fails, Accenture believes it can be traced to one or more of six key areas:

• Lack of definition around the end-state operating model needed to support the strategic intent of the deal.
  
  
• Failure to plan early and thoroughly, including a failure to fully synchronize planning between different parts of the organization.
  
  
• Unrealistic attempt to adopt “best of breed” solutions for major systems and processes.
  
  
• Failure to integrate IT and business processes in a timely manner.
  
  
• Insufficient attention to customer-facing activities during the integration.
  
  
• Insufficient attention to managing the workforce during the transition.
  
  

There is considerable risk associated with mergers and acquisitions and, if not managed properly, a merger or acquisition can depress the value of a publicly traded company and diminish the performance of any company. Six factors behind success and failure include:

1. Clearly Defined End-state Operating Model
   A clearly defined end-state operating model must start with a strategic intent behind the decision to merge. Having a common understanding of why the merger is a good idea and how high performance is derived is a necessity to creating an effective operating model. This may sound easy as the strategic intent should be well understood by a company’s board and senior leadership, but it is not always communicated throughout the organization, or even to key managers below officer level. In some cases, the leadership may be attempting to communicate the strategic intent effectively, but the messages are not well articulated, are too vague or are delivered inconsistently.
   
   
2. Integration Planning
   To accelerate integration, companies must create a detailed integration plan in advance of closing the deal. By creating this plan, participants have time to identify and resolve many of the myriad integration issues before “day one.” Integration plans should detail how strategic issues will be addressed in the first few months after the deal. In particular, integration plans should identify operational issues that require attention within 100 days of a deal’s closing. In addition, planning for recontracting with all major vendors and providers should be addressed very early in the process, since many newly merged companies have found substantial savings from consolidating the supply chain.
   
   
3. Adopting “best of breed” Solutions may not Always be the Best approach
   Aside from incorporating specialized products or capabilities (often the main goal of the acquisition), a “best of breed” approach has often meant that merging companies are better off choosing to rapidly migrate to the systems and processes of only one of the companies, especially systems and processes that are highly interdependent. Time and effort trying to piece together systems will fail to return commensurate value. The primary goal is to stabilize the newly merged company—transformation should follow later.
   
   
4. The Need for Timely Integration of Systems and Business Processes
   Systems support processes and successful integration activities must coordinate aggressive and effective post-merger integration, along with strict attention to metrics and performance. Decisions around IT consolidation have a direct impact on the ability to support necessary processes, and must be accounted for during both planning and the integration itself. Because there are so many interdependent processes and systems, it is important to schedule integration tightly and to “manage to scope.” Related to that, failing to understand details properly will lead to some process or system running out ahead of their related interdependent processes, resulting in unanticipated problems that require even more effort to resolve. Finally, if integration is not substantially carried out within 18 months of the deal being closed, in Accenture’s experience it becomes much harder to break down silos, making the eventual integration effort far more difficult and costly.
   
   
5. Never Lose Focus on the Customer
   Even the most efficient integration can erode value if insufficient attention is paid to market-facing activities. The key to preventing, or at least substantially decreasing, this risk begins in the very early stages of migration planning and staging. This is one of the most complex activities involved in merging two companies, and a great deal of debate on migrating by customer versus product readiness will take place. Risks and issues around decisions like cutoff dates, accumulator conversions, benefit coding and processing of prior claims need to be identified, and plans for mitigation need to be in place. Lack of detailed planning and continual attention to these myriad issues and functions always results in a loss of customer satisfaction and loyalty.
   
   
6. Managing the Workforce during Integration
   Companies need comprehensive communications plans in place long before the deal is closed. Telling employees that nothing will change results in lost credibility, while being upfront with fact-based plans and expectations, even unpleasant ones, builds trust. Management should engage early and often with employees to help them understand the changes taking place, reinvigorate morale and support the execution of integration plans. It is also important for the management team to swiftly and directly deal with individual morale problems before they spread because seriously negative attitudes are infectious.
   
   

The benefit of good merger planning and execution is clear. The challenges to achieving success in a significant merger are broad and complex, but they are understood and can be addressed to positive effect. Having a partner with a highly successful track record goes a long way toward achieving that success, and Accenture’s mergers and acquisitions clients have significantly outperformed the largest merger and acquisition transactions.

Through work on more than 400 transactions, Accenture has developed the framework, capabilities and best practices needed to achieve high performance. The Accenture Merger Integration Playbook divides the process into three distinct phases: establishing the overall framework for the merger; conducting detailed planning at the organizational and functional levels; and executing approved integration plans. Throughout these phases, there are specific activities and tools designed to address the six factors behind merger success and failure.

The Merger Integration Playbook is a proven and tested set of diagnostics, customized integration methodologies, performance metrics, tools and templates that can mitigate integration risks and help businesses achieve high performance through their merger and acquisition strategies.

Contact us to find out more about how mergers and acquisitions can help your organization achieve high performance.