FRAMINGHAM (07/24/2000) - On July 1, 1998, TransCanada PipeLines Ltd. and Nova Chemicals Corp. completed the biggest merger in Canada's history. But for their information technology organizations, the challenge was just beginning.
Although the two giants of Canadian wholesale natural gas had complementary businesses, you'd be hard-pressed to find two more radically different IT shops.
"Somebody said it was like the Care Bears meet G.I. Joe," recalls Irene Lumsdon, planning and training coordinator for information systems at TransCanada, whose merger with Nova was valued at $15.51 billion (U.S.).
In the following 18 months, Russ Wells, the new CIO of the merged company in Calgary, Alberta, had to meld the two IT organizations while supporting the business, completing mission-critical applications and resolving year 2000 issues. And, as often happens in the heat of a merger, the IT consolidation had to be accomplished before there was a clear sense of where the new TransCanada was headed.
Lay of the Land
Most of TransCanada's 250 IT employees were distributed among the company's business units. Each business unit had its own IT organization. All IT business teams had to answer to a central standards and architecture group, and a companywide infrastructure organization provided common services like telecommunications.
Meanwhile, Nova was in the first year of a seven-year, near-total outsourcing agreement with DMR Consulting Group Inc. in Edison, N.J., and IBM. DMR provided applications development and support, while IBM hosted Nova's telecommunications, server, desktop and infrastructure services. Nova's 18 internal IT employees handled architecture and governance.
The companies had some common desktop technologies, such as Windows NT and Microsoft Office. But Nova was in the midst of a multiyear SAP AG R/3 implementation, while TransCanada used best-of-breed applications. The infrastructures were widely divergent, with Nova running Oracle Corp. software and Microsoft Corp.'s Internet Explorer, Windows NT and Visual Basic, while TransCanada used Sun Microsystems Inc.'s Forte and Java, as well as applications from Sybase Inc., Netscape Communications Corp. and Novell Inc.
When the new management team promoted Wells, formerly a customer service vice president on Nova's operations side, his first steps were to form a transition team with employees from both organizations, research other mergers and develop a merger philosophy.
Next, Wells prepared senior management for what was to come. Although companies enter into mergers expecting efficiencies, Wells says, executives should know that IT costs typically rise 20 percent to 30 percent during the first 12 to 24 months because IT is running redundant systems until it consolidates them.
Later on, costs should sink 10 percent to 20 percent below original expenses as efficiencies kick in.
Connecting the Pipes
By September 1998, Wells had a plan. He would attempt to merge systems and platforms but would hold off on restructuring the IT organizations for another year, allowing them to work in tandem as they were. He wanted to concentrate on the business rather than on the structure of the IT organization, and he hoped that as the merged company developed a vision, he could use that as a guide in melding the IT organizations later.
But paranoia struck. The internal IT people feared they would eventually be outsourced, and the outsourcers feared they would be shut down.
By October, Wells says, he knew he would have to merge and reorganize the respective IT groups sooner rather than later.
So he devised a plan that included elements from both of the original organizations' setups. TransCanada's distributed IT structure would remain - with modifications. Solution teams would still live in each business unit, and DMR outsourcers - previously responsible for Nova applications - would support IT resources under the direction of internal IT people. Infrastructure strategy and architecture, including vendor decisions and relations, would be owned by TransCanada, while commodity services such as desktop, server and telecommunications support would be outsourced to IBM.
In an effort to address staff concerns quickly, TransCanada, DMR and IBM renegotiated the outsourcing agreements within two months. Achieving that speed meant leaving a few areas unsettled, most notably service-level agreements.
"But we said we could negotiate that later," Wells recalls. "We had the framework, and the priority was to get it in place quickly. You've got to let people know where they live. Then they can start working hard."
The need to constantly update staff on the status of a merger "is a very serious issue," says Edward M. Roche, vice president of research at The Concours Group Inc. in New York.
If you don't address those concerns right away, he says, IT people will leave.
"We've seen cases in the energy sector where [management] failed to address personnel problems up front," he says. "In six months, their organizations had been gutted of skilled people, so when it came time to implement what they had planned, they didn't even have the people to do it."
When TransCanada's new IT structure went into effect in February of last year, about 100 jobs shifted from internal to outsourced or vice versa. Only a handful of people left.
In an attempt to remove emotional biases from big companywide systems decisions, Wells set up a decision-making structure that worked through the spring of last year.
A decision board that included Wells and the business leaders from the newly merged company defined the scope and decision criteria, most of which revolved around the bottom line. "It was not a question of which system is better; both were good," Wells says. "It was more a function of cost."
A working committee evaluated the alternatives, interviewing advocates from both sides, sketching out risks and costs and trying to keep passions out of the decisions. "They couldn't say it was cooler or they liked it better," Wells explains. "They couldn't talk about features unless they could quantify some [dollar] value for a feature. So people were forced to be objective."
In each case, the team had to make a recommendation to the decision board within four to eight weeks, and then the board made a decision.
Despite Wells' preoccupation with speed, he says, the decision-making process was worth the time it took because it served political as well as practical purposes. It allowed everyone to see how the decisions were made, and it enlisted strong advocates from both sides. "We made sure that the debate happening in the coffee rooms got aired in the room where we were going to make these decisions," he says.
It worked. Once a decision was made, it was accepted. "Nobody was saying, I'll go along, but everybody is going to know that I hate this decision,' " Wells says. "In this kind of work, that's a terrible force to try to overcome."
Wells also emphasizes that "no matter how much you communicate, you can't ever communicate enough." Occasionally, communication fell short at TransCanada, and trouble followed. Sometimes, decisions were implemented before everyone was informed that they'd been made; other times, messages got garbled as they passed down the chain of command.
In both cases, rumors flew, most of them involving conjecture about total outsourcing, total insourcing or whether SAP or best-of-breed applications would win the day. In the end, all those decisions involved compromises.
To stanch rumors and present a unified message, Wells and his team used e-mail and instituted an anonymous but public question-and-answer forum.
But in retrospect, says Jim Brignall, a director in TransCanada's IT group, a single person should have been responsible for communications to keep messages timely and consistent. Roche says he agrees. "Putting into place a communications plan to tell people what is going to happen on a very fast and thorough basis is another critical best practice," Roche says. "Word of mouth is the worst way to go."
Devilish Details
Two years after the completion of the business merger, the biggest problem has been that the devil really was in the details of the outsourcing negotiations.
The items that weren't completely nailed down - such as service-level agreements - have come back to haunt TransCanada, and some of the issues have yet to be resolved.
"Because we were inexperienced, we didn't address some of the potential pitfalls until they came up and bit us really hard," Lumsdon says.
For example, dissatisfaction over service levels occasionally led to friction between business people and IT, she says. Since the business staff doesn't differentiate between internal and outsourced staff, that dissatisfaction reflected on everyone. "Our [internal] IT folks, who really pride themselves on doing an exceptional job, feel they're taking unwarranted criticism," Lumsdon explains. Many of these problems could have been avoided if TransCanada had settled the service-level agreements up front, Roche says.
But Wells says that any problems are minor compared to the accomplishments and that the new structure is working pretty well. During the merger, Y2k projects were completed and two mission-critical systems were delivered on time and within budget. And other efficiencies are kicking in: The IT budget for fiscal 2000 is 12.5 percent less than the actual expenses of premerger fiscal 1998.
Next year should yield even more cost savings.
Looking back, Wells says the hardest thing was accomplishing all the organizational and systems integration and planning without a real business framework. "You don't get to say, What's the target architecture we want to have when the smoke clears?' " he says.
TransCanada PipeLines Ltd.
Lessons Learned
TransCanada's management gained the following insights from the merger:
-- Develop a philosophy up front. It will keep you focused.
-- Let internal staff and outsourcers know where they stand early on.
-- Use the opportunity to identify low-priority systems that should be removed and get rid of them.
-- Save implementation time by getting the whole IT community aligned on critical systems decisions.
-- Communicate, communicate, communicate.
-- Articulate roles, responsibilities and service levels clearly.
-- Think strategically. Try to pick the system that best supports the direction of the new company.
-- Get ahead of the wave. Merging companies should pick a CIO well before the merger is completed and let him start planning the transition.
TransCanada PipeLines Ltd.
Calgary, Alberta
Asset base: $426 billion (Canadian)
Revenue: $17 billion (Canadian)
Net income: $426 million (Canadian)
Employees: 4,500
IT employees: 250 internal, 600 outsourced.