FLYING THE INTEGRATION EXPRESS
A CFO's bold approach and flexible touch helped DHL's post-merger integration plan take off.
By Niles Lo

Deutsche Post, which owns DHL worldwide, has long been a company where integration skills were tantamount to survival skills, and Gritz has, by necessity in his job in finance, become a specialist. The US$40 billion company began a prodigious series of rollups in 1998, acquiring shares in parcel delivery companies in Europe and the US, including 25 percent of DHL. In 1999, Deutsche Post bought Swiss-based logistics giant Danzas Holding, which is where the company picked up Gritz, who was working in finance at a Danzas unit in Seattle. The mergers kept on coming. The German postal giant acquired the Swedish freight forwarding company ASG, and the distribution and logistics unit of Royal Nedlloyd, a Dutch transport group. It followed with a quick grab of QuickMail, a New York-based carrier, and then Air Express International, a US airfreight forwarder. In 2002, Deutsche Post raised its stake to attain full ownership of DHL.

The buyouts made economic sense. The courier business has notoriously thin margins. Returns on capital are low and there's a high dependence on seasonal business. What's more, the Asia Pacific region - currently at 11 percent of DHL's global business - is the greatest area for growth in the courier industry, and a region where competition is mounting. The dominant player in the Asia Pacific region, Federal Express, has 39 percent of the US-China express market. DHL has a tentative hold on the number-two position, at 29 percent market share, whereas UPS holds 28 percent.

In such a competitive, thin-margin industry, attaining economies from large scale is essential to success. In Asia Pacific, this strategy is crucial for DHL, which stands at a slight disadvantage to its two primary competitors. Federal Express and UPS own their air fleets, while DHL leases space from commercial airlines, a practice that leaves the company exposed to greater volatility in prices than its rivals. "You can't really survive unless you're big," says Gritz. "You make most of your money through economies of scale. Scale becomes the key to the value added."

Rolling them up

Mergers may reflect inevitable economic logic, but it's never been easy to be in the middle of one. In his stint in the Asia Pacific, Gritz has played a principal part in two. As an executive of Danzas, he oversaw the integration of the finance department after Deutsche Post completed its acquisition of Airborne Express in 2001. This smaller merger served as a dress rehearsal for the integration of Danzas with DHL, which began last year and won't be complete until 2006. (Gritz was promoted in January this year to become CFO of DHL's US unit.) In the Asia Pacific region alone, this merger involved 20,000 employees and 2.5 billion euros worth of business.

There's no academy to teach best practices in merger integration. And despite the volumes written on the subject, there's no science to making the process run smoothly. Part of the problem is that while the economic goals of mergers are hard and clear - improved profit margins, greater market share, economies of scale - the means to achieve them are largely 'soft' in their execution. These include management and leadership skills, planning and 'cultural' issues, all terms calculated to be annoyingly vague to those bid with making the merger succeed.

Last year, the US Federal Trade Commission's economics bureau presented a pr«ecis of the consulting-firm and academic writing on the subject (see box, this page). Several criteria emerged as necessary to a successful integration. Deciding early on a strategy and sticking to it turns out to be essential. Early planning for the integration of the new physical and human assets improves the chances for success, and so too does a fast pace and gaining early 'wins' in cost savings. Appropriate incentives to meet merger targets are also seen as helpful.

Gritz agrees with these pointers, and adds that it's necessary to hire outside help. "As much as you like to pretend that you don't like consultants, you're going to need them," he says. "Because mergers by their nature are extraordinary. Something on this scale doesn't happen all the time.".

Getting Started

Early last year the merger steering committee met and assigned an outside company to review where the likely synergies would emerge. Gritz wouldn't reveal the name of the consultant, as he says they decided to "change horses" in the middle of the integration, dissatisfied with some of the consultant's work. The assessment involved careful analysis of conditions, including a review of personnel and technology in both companies in key markets in the Asia Pacific, and took several weeks. During the process, consultants interviewed managers and employees to identify where synergies might be found.

Meanwhile, the steering committee opted for a strategy of dividing the integration into three stages. It selected a single head of the combined finance department - in this case, Gritz - and established Singapore as its location as a first step. Next, it scheduled a group meeting of company managers from both sides of the merger to look for the best areas where a 'quick win' to reduce costs might be garnered. The committee then sifted options for savings over the longer term, and decided that installing a common management reporting and financial transaction system, eventually leading to the establishment of a financial shared services center, would provide the best shot at delivering value.

Before being struck by disaster in December, Phuket, Thailand was long seen as one of the more pleasant spots in Southeast Asia to conduct a corporate get-together. A group meeting of officers from the merging companies, DHL and Danzas, was held at the seaside garden spot in March 2003. Gritz decided to take the podium at the outset and declare the obvious: that there would be some pain. "Prepare everybody for what's going to come," he advises. "Hiding it isn't going to make any sense; it's going to happen anyway." He adds: "I said we are in for a tough ride. But we have a charter here, we have a mission, and we want to get that right, and we want everybody's input." To ease the inevitable tension, the managers attended workshops that described the business models of each of the companies, followed by competitions to establish who understood the other company's business model the best. Awards were given at a dinner. On the following day, managers turned to the serious business of identifying the 'low-hanging fruit'. After examining each others' businesses in detail, the group established that the most promising tack was to merge the customer accounting, receivable and collection areas, unifying practices for the two major businesses: the logistics business inherited from Danzas and the express delivery business brought in from DHL.

It was clear there was room for improvement in receivables and collections. Because the customer dynamics of the two businesses differed, each had approached collections in a different way. The logistics unit was made up mostly of major, long-running accounts, comprising 60 percent of the total. In this unit, the accounting department had learned to interact with the sales team to collect money more quickly, and systems had been put in place to closely track days sales outstanding (DSO). The express business had never developed a system of equal diligence, partly because the great body of customers were individuals and businesses that paid immediately on a one-off basis. But 20 percent of the customers held major, long-term contracts, and it was in this portion where the DSO performance needed a boost. The quick win involved transferring the better processes of the logistics business over to express.

"Logistics and freight forwarding are customized and very customer specific," explains Gritz. "You cannot leave the process to the accounting department. What we had developed in the systems environment allowed the sales force to be involved." Eventually, applying these better practices to the express business gained the company a 5.6-day reduction of days sales outstanding, says Gritz".

The Soft Skills

Following Phuket, the staff hung up their Hawaiian shirts and returned to their regional offices. In Singapore, Gritz and the committee received the assessment, and convened to decide what the integrated company would look like. That meant beginning the painful process of determining who would stay and who would leave in the merged organization. Recalls Gritz: "All were trained finance people, and we knew they had professional skills. But we had to decide who could bring those skills into the environment of a much larger organization. The organization was eight times larger after the integration than it was before. So in the end, the selection process was based on soft skills." Gritz declined to reveal the number of finance employees that were laid off, but says that the final selection included an equal proportion of workers from Danzas and DHL.

Another key decision was in the offing: how to handle the merger of ERP systems. Gritz asked the assessment group to look at several options, including the unusual one of scrapping both systems in favor of buying and installing a new one. Having gotten the report back, Gritz opted for a new ERP system entirely. After commissioning another report to establish which system would be best, he opted for SAP-REM for management reporting and SAP R/3 for processing financial transactions.

The move now looks to be the boldest of the merger process, delivering an upgrade, along with efficiencies garnered by running a single system over the much larger merged business, in one fell swoop.

Forward Momentum

When CFO, CFO Asia's sister publication in the US, visited Gritz last autumn, he sat at a desk before a complex timeline dominating the wall behind him. The chart was laminated and featured a multiplicity of bars indicating where various projects stood and where they should be. Most were on target. Still midway through the process, the systems integration was under way.

Gritz had opted for Malaysia as the best target for the future shared services center. With a self-deprecating smile, Gritz attributed the team's efficiency at deadlines to his Germanic sensibility which dictates that "when things are done, they are done 200 percent." Yet if anything has characterized his tenure, it's the ability to build enough wiggle room into the process to allow for flexibility. "As long as there is forward momentum," he says, "you can afford to be generous and delay something for a month." He adds: "But you cannot be generous all the time; sometimes you have to order somebody to do something."

Change midstream may be necessary in certain cases, he says, but it has to be orchestrated properly. "If you don't inform the people of the changes that are going to come, you basically erode the authority of the managers that you need to drive the process further," he says. Do this enough times, and you can stall the integration.

Basically, he admits, integrations are hard work. And this is one of the good ones."

Niles Lo writes about mergers and acquisitions and human capital issues from Hong Kong. got the Slim Slam.