Making it happen
Charles Scott provides a finance director’s perspective on post-merger integration of the back office at Age UK
In the UK there are more people over 60 than there are under 18. Half of over 75s live alone and two million pensioners live below the poverty line. The number of over 85s will double in the next 25 years – next to climate change the age demographic is regarded as one of the most significant challenges our society faces.
Background to the merger
It took Help the Aged and Age Concern England six attempts to merge, finally succeeding to form Age UK at the end of March last year.1 Both legacy charities were of similar size and had similar goals but were funded and structured in very different ways. Each had grown up filling the gaps left by the other one, but it was clear that further growth was only going to be funded by moving into competition with the other for income. There was also a degree of duplication brought on by convergence, in the back office areas and in policy, campaigning and service delivery. Merger removed that need for competition, combined the complementary resources of each, enabled removal of duplication and produced an organisation better able to champion the growing needs of people in later life.
Both charities had shops, sold products and fundraised, albeit in different proportions. The merger created three similar-sized income streams for Age UK – the shops, fundraising and trading areas each generate about £50m of income. Age UK could also take the best from each organisation and maximise its impact – for instance rolling out ex-Help the Aged (HTA) retail gift aid and new goods sales into the ex-Age Concern England (ACE) charity shop network, or combining the fundraising database of HTA with the commercial expertise of ACE.
The brand
Age UK therefore has diverse income streams, partners delivering services locally and internationally, and our own service delivery, research, policy and campaigning activities. Developing a brand which could address the brand confusion suffered by HTA and ACE but at the same time communicate appropriately to our variety of different audiences was a major challenge for the new organisation. The brand also had to be accepted by our partners in the three nations and the federation of independent local Age Concerns so they could become brand partners. We think the ‘life loop’ of our new logo and the name ‘Age UK’ achieves this.
The executive team
Directors were selected about a month before merger – a key driver in progressing integration quickly to remove uncertainty. Interim directors were placed to provide expertise in the areas of most change – brand development and staff restructuring.
Upon merger we embarked upon a combination of integration and duplication removal. In order to minimise the uncertainty we needed to engage staff and move quickly but fairly through the period of change. At the same time directors and managers who used to be part of one charity suddenly had to absorb a whole other team of people and processes from the other charity as well as start the process of integrating, so workload increased dramatically.
Financial systems and processes
Our initial problem was the two year-ends of the legacy charities to contend with. The newly-formed organisation had six accounts departments on three systems and we had no mechanism of producing one set of numbers apart from manually typing them into spreadsheets. Age UK’s structure was different from either ACE’s or HTA’s so the charts of accounts for both ACE and HTA were obsolete. At the same time we were entering a recession, so knew our income was going to fall, and had to spend significant sums on redundancy, integration and brand launch. We thus had no budget and no prior year comparison, difficulties in reporting our financial position, two year ends to work through and with staff all under consultation and worried about their futures.
It is difficult to properly consolidate an accounts department until both year ends are complete and until you have one accounting system. The uncertainty amongst the staff was therefore something we had to live with for a few months, and the accounts department was one of the last to be restructured.It became apparent that we had to very quickly get a grip on the budget and reporting, and to do that we needed one system, which we had determined was to be Microsoft Great Plains, the ex-HTA system.2 I gave my accounts teams a deadline of two weeks by which time we were to have agreed a new cost centre structure with the directors and started processing all invoices onto Great Plains. Within the same two week period I also relocated the accounts staff so the ex-ACE and ex-HTA staff were sitting together.
Pulling all the numbers together when they sit on different systems in different and inappropriate cost centre structures needs a reporting tool. We found that the existing tool we had couldn’t cope with the increased number of transactions the merged charity had, notably from the much enlarged retail estate. We embarked upon a significant exercise to map the old cost centres on the old systems onto the new cost centres on the new system and put in a consolidation tool. Once we had that we were moving forward with all transactions on one system and could report historical transactions along with the new transactions onto the new chart of accounts.
Any transactions still being entered onto the old accounts systems could easily be dealt with by importing a trial balance from these systems onto the new system – then we had one set of numbers fed from the fundraising, retail and legacy team accounting systems which we could report from. The learning here is that on integration you do not have time to implement new systems that are the panacea, instead you have to put in ‘work-arounds’ to quickly adapt the existing systems to act as one. A second phase of integration happens after the first year, when you can put proper systems in place.
With one system we could start consolidating staff and properly budgeting. Also we had a means of tracking spend, important as we didn’t have a steady state organisation, had uncertainty over our income streams, large one off expenditure on integration, no prior year’s history to use as a comparative and managers without a clear view of the future activities of their departments.
We also selected new internal and external auditors and fund managers, developed a new reserves policy, established and agreed a new VAT recovery mechanism for overheads, implemented a new corporate structure for subsidiaries, merged payrolls and agreed cross-charges between legal entities in the Age UK Group.
It is also worth noting that both ACE and HTA were cash based organisations – charity shops, fundraising and the commercial income streams all produced cash, with minimal manufacturing, stock or debtors. The legacy charities were therefore not used to tight cashflow management – they never had to be. On integration large amounts of money were spent up front on redundancies, brand and website development, shop signage changes and in the face of falling income from the recession, so we had to develop tighter cash flow models.
Finally – VAT. Help the Aged had a higher recovery rate for non-attributable input VAT than ACE, so it meant that if we put an invoice on the ex-ACE accounting system we would recover a different amount of VAT than if we put it on the ex-HTA system. We claimed the lowest amount until we could determine the most appropriate method.
Integrating IT
The approach to IT was different in ACE and HTA. Age Concern England had outsourced their support whilst HTA looked after both first and second line support in house. Because of the size of the donor database HTA had 50 terabytes (one trillion short scale bytes) of data and had a virtualised environment with blade servers and a storage area network (SAN), whilst ACE had just three terabytes on individual servers. As well as the integration of applications used to support individual departments, one of the consequences of merger is that staff move location as departments become consolidated, and the IT department was involved in the relocation of 500 workstations. We also served notice on the outsourcer, as it was significantly more expensive than our in-house operation. The other action we took fairly early on was to put a gigabit ethernet link in between the ex-ACE and ex-HTA London head offices. Both serving notice on the outsourcer and waiting for the gig link took about six months.
The immediate post-merger work of IT was to put work-arounds in so that staff could access their email and files, and print, from any site. This is achieved by establishing what is called ‘trust’ between the HTA and ACE domains. IT has developed the new Age UK domain and is in the process of migrating everybody and their email histories and files into it. Before this can happen people’s user rights and work groups need to be identified and a huge clean up exercise undertaken so that we don’t transfer decades of old files into the new domain.
Property
A consequence of duplication removal is that you end up with too much office space, and as departments consolidate and come together staff move location to create their new departments. Age Concern England and HTA had duplicate services too, for instance both had call centres providing information and advice, as well as a number of other call centre based operations. One of the large areas of cost saving but also causes of disruption, and driver of cultural change, is the reduction of the property holding made possible by post merger integration.
Finances
In the first year Age UK removed £15m of duplication from ACE and HTA, fortuitous as our income fell £10m as the recession hit. It is clear that the high level of unrestricted income streams ACE and HTA enjoyed gave a significant amount of flexibility over their spend. For instance fundraising expenditure is made on both cold acquisition of new donors and warm development of existing donors. A focus on donor retention meant that although fundraising income fell, the total contribution increased, as the more expensive cold acquisition was cut out and we relied upon committed givers for our income. In the short term this meant we could increase contribution at the expense of longer term income, and could also ‘go quiet’ on the old ACE and HTA brands before the Age UK brand launch.
Although it is possible to reduce expenditure it can also take some time. For instance a programme of redundancy can take some months to produce savings by the time new structures have been designed, consultation periods completed and interviews undertaken. It also takes time to recover the redundancy payments as a salary saving. The majority of redundancies resulting from Age UK’s integration and removal of duplication were voluntary, which tend to come from longer serving staff who have larger redundancy packages. This is by far the most fair and favoured approach, but it is more expensive and takes longer to recover the cost in salary savings.
Lessons learnt
From a purely operational viewpoint, integration of the finance and IT departments takes more resource at a time when all other departments are consolidating. It also takes time before year ends and integration work can be completed, especially in IT, and so the state of flux is protracted. For this reason work-arounds must be found before a longer-term solution can be implemented, and this can include the use of interim staff.
Original plans are also likely to change considerably. What existed before has changed, the new managers have to get to grips with what they have just inherited from the other organisation and the future is changing as ambition and experience become more defined. However the planning process is vital, so as understanding of the past builds up and the future becomes clearer regular reforecasting is necessary.
Time is the resource in shortest supply as activities previously taken for granted suddenly stop. Financial control needs to be in place as soon as possible, the computers all need to work and the new organisation’s different priorities need to be accommodated. Reorganisation of staff is also vital as priorities and locations change and departments consolidate. This must be done fairly but quickly, and it must be recognised that staff may need to be brought in from outside as new skills are required. The quicker this can be sorted out then the quicker the new organisation can achieve its goals. Also, above all, be decisive – the pace of change, the removal of steady state and the need to put the basics in place mean that the luxury of procrastination or ‘soak time’ does not apply.
The new organisation
So, it has been a busy year. We have launched our new brand, and have created an organisation with income of £160m and 8,000 volunteers, increasing to £400m and 60,000 volunteers if you include all our partners. We make 14 million retail transactions a year in the third largest charity shop chain in the UK, deliver information and advice to 5 milion people, and have 1.1 million customers for our products. We are working in over 70 countries and 340 cities in the UK with our partners and support over 60 research projects in areas from incontinence to cognitive decline, as well as our work in policy and campaigning, grants and other direct service delivery.
Next year will build upon our first year of integration as we further consolidate offices, establish and further develop our brand and web presence, grow our commercial operations, build upon the relationship with the Age Concern federation and increase our efforts for people in later life.
Finally, a word of congratulations to everybody involved with the creation of Age UK, but specifically the people in my teams. Their ability to adapt to a changing environment and deliver to a higher standard whilst uncertain about their own futures has been remarkably impressive.
1. See also ‘Merger due diligence’ by Alana Lowe-Petraske and Rosamund McCarthy in Caritas, issue 19, July 2009 and ‘Mergers: civilizing the barbarian?’ by Clarissa Dann in Caritas, issue 1, November 2007.
2. www.microsoft.com/dynamics/en/us/ products/gp-overview.aspx
Author: Charles Scott
Charles Scott is the finance director of Help the Aged.
He has an MBA from Cranfield University, and is a trustee of the Cranfield Trust.
He is also chair of his local church's finance group, is an FCA and is a Fellow of the Royal Society of Arts.
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