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Strategy

The Art of Acquisition Integration: Knowing When to Break the Mold

By Lance Perry, Vice President, Cisco Information Technology Group, IT

In today's networked business world, IT plays a critical role in acquisitions. Integrating a new company requires attention to a host of details: infrastructure components such as networks, telephones, data centers, PCs, and printers; applications such as enterprise resource planning (ERP), sales, HR, and engineering; governance practices such as development lifecycles, compliance with standards and mandates such as the Sarbanes-Oxley Act and data privacy laws, and even funding models. Above all, if you expect to do it more than once, a standardized integration model is essential.

Breaking the Mold

Cisco is certainly no stranger to the process: As of March 2005 the company had acquired 96 companies. "We had it down to a science," says Tim Merrifield, director of IT acquisition integration. "If we closed a deal on Wednesday, the next Monday the company would be fully integrated, with a brand-new Cisco infrastructure."

But that acquisition model was developed from dealing with small companies that, like Cisco, sold hardware and services to other businesses. In late 2004, Cisco encountered a company that did not fit the model: Linksys, which supplies VoIP, wireless, and Ethernet networking for home, small office or home office (SOHO), and small business users. Aside from the fact that both companies sell networking products, Linksys is a very different kind of business than Cisco, which builds highly configurable products to order while Linksys builds off-the-shelf products to forecast. Cisco sells directly to enterprise and service provider customers while Linksys sells exclusively through channels. Cisco manages engineering and manufacturing internally while Linksys outsources these activities to Taiwan.

And, perhaps most important, Linksys had 150 employees and was growing at 70 to 80 percent per quarter, while Cisco at the time had 40,000 employees and a growth rate of 2 percent per quarter. The challenge was to integrate the two companies in a way that would optimize business growth. "We wanted to avoid overloading Linksys with costs, processes, and procedures that would impede its agility," says Merrifield.

Selective Integration

The executive team decided to keep Linksys as a separate division. But, some level of integration was necessary, and IT was obviously where the most synergy would exist. Cisco already had a scalable, secure network infrastructure, facilities worldwide, and many business processes (such as legal and fiscal calendars, and accounting practices) that would have to be integrated no matter how different the businesses were. To take advantage of these, Cisco IT put together a team to consider how to selectively integrate the new division's IT infrastructure, applications, business processes, and IT governance in way that would deliver the most synergy or cost reduction.

The team did not find much overlap in application needs, except in HR and finance, because Cisco and Linksys handled sales and ERP quite differently. There was more overlap in compliance and governance standards, especially in regulatory compliance, vendor management alignment, and security.

But the story was very different when it came to infrastructure. The team found many areas that could be integrated for operational or financial benefits, including:

  • The global IP network
  • IP telephony and voicemail
  • Contact center
  • Productivity applications such as email, Active Directory, printing, meeting scheduling, and file sharing
  • Data center space
  • The core software set on desktop PCs (taking advantage of Cisco software licensing agreements)
  • The enterprise monitoring system used for monitoring network devices, production applications, and servers
  • The Cisco Enterprise Print System

The Freedom to Expand

The selective integration strategy began paying off immediately. For instance, at the time of the acquisition, the data center at Linksys' Irvine, California headquarters building lacked the space, power backup, and environmental controls it needed to expand. With an existing Cisco data center only eight miles away, there was no need to build a new data center. Instead, Cisco IT connected the two sites with a DS-3 circuit with six T1s as backup. "Normally, Cisco connects all western region sites directly to our Redwood City, California IDC hub and doesn't daisy-chain sites like this," says Sanjay Singh, Cisco network engineer for Intelligent Network Solutions. "But in this case, the cost savings were significant." Instead of US$17,000 per month for the usual direct connection to Redwood City, the DS-3/T1 combination was onlyUS$4000 per month.

The DS-3 connection provides high-speed access to the Linksys servers in Cisco's Irvine data center and also routes Linksys traffic to the Cisco intranet and Internet point of presence. Besides data connectivity, this allows Linksys headquarters employees full use of the IP telephony features of the Cisco Unified CallManager cluster and a centralized voicemail server at the Cisco data center, via a Cisco Catalyst 6500 Series Switch. To ensure that time-sensitive voice and video traffic receive higher priority than data traffic, Cisco IT used the quality of service (QoS) features in Cisco IOS Software, such as Class-Based Weighted Fair Queuing (CBWFQ). Cisco IT also enabled multicast end-to-end at Linksys, enabling Linksys employees to watch real-time video of company meetings and live training from their desktops.

Connecting to the Global Cisco Network

Linksys also gained better connectivity worldwide through its integration into the worldwide Cisco network. Perhaps the most dramatic benefit involved the Linksys contact center, which serves 40,000 callers per day, almost all of them routed to three outsourced service providers in India and the Philippines. Before the acquisition, Linksys paid US$10,000 monthly for each of two International Private Line (IPL) E1 circuits from Irvine to Manila, an expense eliminated by providing access for the partner to the Cisco extranet hub in Singapore. Traffic for the Manila center now travels from the hub to San Jose across the Cisco All-Packet Network, a high-speed backbone that supports voice, video, and data. Other Linksys partners that previously accessed the corporate extranet directly can now connect through Cisco extranet hubs in San Jose and Singapore for redundancy, improved security, and standardized support. Cisco IT worked with the partners to install new circuits into the Cisco extranet hubs to accommodate the additional volume.

An Ongoing Process

Integrating the Linksys network with the Cisco global IP network has given the new division higher network performance, greater security, and increased capabilities — all at lower cost. And, Linksys now has an infrastructure that can support its most ambitious growth plans.

But working out the optimal integration balance is an ongoing process. "The pendulum can swing between two extremes: 'Leave us alone' and 'Assimilate us completely,'" says Merrifield. "Processes and procedures address known items. A strong relationship between the two organizations enables us to jointly respond to unforeseen challenges."

One area that can present a particular challenge in such an integration is vendor relationships, which should be closely coordinated to prevent replication and avoid upsetting existing relationships. Another is governance issues, especially when it comes to deciding the boundaries of what a division can do without coordinating the parent. "How do you maintain a relationship with a unique entity like Linksys so that the entity gets the benefits of a certain amount of independence — agility, quick response, and speed of implementation — as well as the benefits that Cisco provides in terms of services and scalability," says Merrifield. Finally, Cisco has found that full integration of new employees into the HR system is probably the best way to go. With Linksys, in this area, while the selective integration approach paid short-term benefits, it has presented long-term challenges, and Cisco is re-evaluating the appropriate level of HR integration for the next division it acquires.

When Cisco acquires other companies at the division level, the acquisition integration team will again apply the selective integration approach piloted during the Linksys acquisition, seeking opportunities for integration that create value, synergy, cost savings, and productivity, while leaving the other areas intact. "As we integrate other divisions," says Merrifield, "we'll foster a team approach and remain receptive to brainstorming to find new areas of leverage, opportunity, and partnership."

For more information on the Cisco IT acquisition integration of Linksys, see:

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