5 minute read 14 Jun 2024
GCC role in M&A

Preparing your Global Capability Center for M&A success

By Kunal Ghatak

Partner, Business Consulting, EY India, Global Business Services

Kunal has 18 years of experience in shared services and outsourcing strategy. He has helped multinational companies set up and optimise capability centers across the globe.

5 minute read 14 Jun 2024

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As CEOs and investors anticipate an uplift in M&A transactions in 2024, ensuring your GCC is prepared to support the transaction is crucial.

In brief

  • Early GCC involvement, updated SOPs, and insourcing frameworks maximize M&A success.
  • GCCs enhance M&A value through expertise in due diligence, integration, and cost efficiencies.
  • GCCs play a crucial role in change management by supporting cultural integration, employee engagement, and communication plans.

The recent EY CEO Outlook Pulse survey 2024 highlights that CEOs and institutional investors have a positive outlook for mergers and acquisitions (M&A) in 2024, compared to a subdued 2023 for deals. More CEOs are looking to make acquisitions, and even more are planning to divest assets. The majority of institutional investors (61%) anticipate a stable deal environment, with a third (34%) expecting an acceleration of deals. 

For any organization undergoing mergers, acquisitions, integrations or divestitures, key metrics include the speed of integration/separation, time to value and the impact on business operations. These metrics are critical for assessing success and minimizing disruptions.

Given the strategic nature of these transactions, a significant amount of an organization’s time, resources and leadership mindshare is dedicated to ensuring their success. Challenges that can lead to unsuccessful transactions include unmet synergy targets due to inadequate planning and monitoring, misalignment of final operating models and decision-making among diverse teams and cultures, personnel issues such as engagement, accountability and retention during restructuring, conflicts in blending company cultures and ineffective communication, lack of dedicated personnel responsible for integration success and subpar project governance and control mechanisms. 

Understanding GCCs in the M&A ecosystem

Global Capability Centers (GCCs) have long proven their capabilities by driving cost efficiencies, process optimization, scalability, data-driven decision-making, access to expertise, and improved governance. By implementing GCCs, organizations have achieved operational excellence, accelerated growth and increased shareholder value. 

Maximizing value from M&A transactions through GCC involvement

GCCs can assist with the due diligence process by conducting in-depth research and analysis of financial, legal, operational and other relevant data, including evaluating the target company's financial statements, contracts, customer base, intellectual property and regulatory compliance.

Additionally, GCCs can support integration planning by providing expertise in organizational design, process harmonization, technology consolidation and change management, helping to identify synergies and potential challenges in combining the two organizations.

GCCs can also streamline and optimize business processes across the merged entity by assessing existing processes, identifying best practices and implementing standardized and efficient processes, leveraging automation and technology to improve efficiency and reduce costs. Furthermore, GCC can facilitate the consolidation of shared services functions such as finance, human resources, IT, procurement and supply chain, enabling the organization to achieve economies of scale, reduce duplication and enhance service delivery.

In terms of technology integration, GCCs can assist in aligning and consolidating ERP systems, CRM platforms, DMS and other IT infrastructure, ensuring data integrity, compatibility and seamless information flow between systems. GCCs also play a vital role in change management initiatives, including creating and executing communication plans, designing training programs and supporting employee engagement, addressing employee concerns, promote cultural integration and facilitate a smooth transition for both organizations.

Cost optimization is another area where GCCs can add value by identifying cost-saving opportunities through economies of scale, eliminating redundancies and optimizing resource allocation. By centralizing and standardizing processes, the organization can achieve cost efficiencies while maintaining or improving service levels. Overall, GCCs can bring expertise, scalability and efficiency to the M&A process, helping organizations successfully navigate the complexities of integration and maximize the transaction’s value. Transactions conducted with multiples of EBITDA present a significant opportunity to unlock value, particularly if the acquisition target has no or limited offshore capabilities or expensive outsourcing contracts.  

Insourcing vs outsourcing in M&A: the GCC advantage

In M&A, the decision between insourcing and outsourcing is critical and should be determined based on the specific circumstances of the merger or acquisition. Insourcing offers enhanced control and tailored solutions but can also be resource intensive. Conversely, outsourcing provides cost efficiencies and flexibility, albeit at the potential expense of control and increased dependency risks.

Leveraging GCCs enable the companies to combine the benefits of both insourcing and outsourcing while retaining core competencies. Potential advantages of leveraging a GCC could include scalability, flexibility, standardization, access to specialized talent and risk mitigation. GCCs provide cost advantages comparable to outsourcing while maintaining control and alignment with the parent company's strategic objectives and culture. They have access to a global talent pool, offering specialized skills and expertise that may not be readily available in the parent company’s home country.

GCCs offer the flexibility to scale operations up or down based on the requirements of the M&A integration process, ensuring efficient resource utilization while standardizing processes across the organization, facilitating smoother integration and enhancing operational efficiencies. By retaining ownership, companies mitigate the risks associated with dependency on third-party providers while still benefiting from cost reductions.

Overcoming challenges and seizing opportunities

The number of organizations that leverage their GCCs in an M&A may not be as high as expected. Year on year, in EY’s annual GCC Pulse surveys, we have observed that only ~15% of the GCCs have a dedicated team for supporting M&A transactions. 

To optimize the role of your Global Capability Center (GCC) in accelerating value capture during mergers and acquisitions, start by identifying key team members from all GCC functions to participate in the due diligence and integration management offices. This ensures that the GCC’s expertise is leveraged throughout the M&A process. Creating a comprehensive learning roadmap for GCC teams to understand the various aspects of mergers, integrations, spin-offs and divestitures. This will enhance their ability to contribute effectively.

Companies should ensure early involvement of GCCs in the transactions and integrate the GCC team into your M&A playbook from the outset. Involving them early allows for operational expertise-based assessments on potential synergies, enhancing the overall strategic evaluation. Clearly delineate roles, responsibilities, governance structures and hand-offs to ensure efficient coordination and accountability during the integration process.

GCCs should take the ownership of updating and maintaining SOPs regularly for processes and technology to ensure that the GCC operates with the latest and most effective practices, facilitating a smooth integration.

Additionally, the GCC should always be ready to ‘consume and grow’, i.e., insource functions from service providers. An existing GCC can provide 25% to 35% of cost arbitrage over fully outsourced functions. The GCC should have a game-plan in place to insource functions and ensure limited business impact and 100% transition of functional and technical knowledge.

To prepare your GCC for insourcing during an M&A, you should develop and test a vendor assessment framework. Establish a well-developed and tested framework for assessing vendor relationships, including capabilities, capacities, contracts, historical performance, and knowledge management. You also need to ensure the ability to scale corporate functions such as HR, finance, payroll, IT, legal, and compliance on short notice to manage the insourcing effectively.

Review the GCC’s employee value proposition and employer brand to ensure alignment with its broader functional and technical skill sets. Plan communication across touchpoints, focusing on how the EVP is brought to life. GCC would also benefit by defining/ re-defining well-structured processes that comply with global guidelines, as insourcing typically highlights the ways of working at the GCC. Lastly, establish and maintain an efficient recruitment and onboarding engine to meet the significant pressure on the talent pipeline during insourcing.

Organizations with Global Capability Centers have a significant opportunity to leverage them during M&A transactions to ensure successful outcomes at the desired pace. GCCs can establish a specialized Center of Excellence to focus on end-to-end transaction lifecycles, thereby supporting the transactions more effectively. This approach allows GCCs to advance along the maturity curve and become more strategic assets to the organization.

Summary

With their unique capabilities, global reach and diverse talent pool GCCs are delivering large-scale transformations for organizations and have rapidly become change enablers from change acceptors. Change management teams within a GCC can use data-driven insights to understand impacts, identify cultural nuances and create tailored strategies to effectively land and sustain change across multiple geographies and cross-functional teams.

About this article

By Kunal Ghatak

Partner, Business Consulting, EY India, Global Business Services

Kunal has 18 years of experience in shared services and outsourcing strategy. He has helped multinational companies set up and optimise capability centers across the globe.