It seems that barely a week passes when merger news in one industry or another does not make headlines. Consequently, enterprises from energy companies to dot-coms are operating as though they're just a merger away from riches or ruin. Their question is not whether to consolidate, but when and with whom. Yet even in this marketplace, the underpinnings of how to form mergers, acquisitions and alliances haven't changed, even if companies' expectations have. The starting place for any company is still what it hopes to gain by consolidating. Cost savings? New skill and capabilities? New core areas for reserve growth? But after these questions are answered and the thrill of the merger- or alliance signing wears off, reality sets in: delivering on the promises and meeting the expectations of investors, staff, customers and communities. How a company approaches and carries out integration can have as much influence on the success of the endeavor as the deal itself. The oil industry has clearly responded to the pressure to consolidate. Although prices have recovered from recent depressed levels, more than 70% of senior energy executives expect alliances to drive half or more of their companies' revenues within a decade. The current round of megamergers helps ensure this outcome will be achieved even sooner. After more than a decade of savage cost cutting, oil companies face the truly vexing problem of finding new ways to restore and grow earnings. Industry executives are contemplating which business models will bring long-term success. Increasingly, mergers and alliances offer companies opportunities they simply cannot find anywhere else. But while hunting the big benefits of integration is increasingly common, the quarry is no less elusive. The vital question is whether two (or more) companies can in fact achieve the potential performance expected from the combined venture. Far too often, consolidation that is supposed to be a solution brings little more than disappointment. Half of all mergers and alliances fall short of expectations-often drastically short. In a recent Andersen Consulting survey, less than one-third of energy industry executives expect their companies to fully realize potential gains from integration. Of wise leaders and savvy companies, the question begging to be asked is why. Answers are often hard to find, and, once found, difficult to understand. The difficulties of integration may appear insignificant from a high-level perspective, but, as always, the devil is in the details. It's the details that can derail the achievement of merger gains. To get an understanding of the details requires an integration plan, and, though it may seem like common sense, the earlier an integration plan is created, the better. After all, it is hard to get anywhere without a road map. Successful integration usually begins with formation of deal strategy. Before a company can successfully integrate, it must decide why it is integrating and what are the skills, capabilities and assets of the proposed partner. Andersen Consulting believes that there are three basic waves of mergers, acquisitions and alliances. We call them waves because, like waves on a beach, we believe that the skills and capabilities required for success are different in each case. The first wave was the very simple, low-complexity, risk-sharing ventures, typical of the upstream business. We all know them. In fact, the oil industry may well have more experience in this area than any other industry. Forming the core of the upstream business, governance and control are often reduced to infrequent reviews and set contracts, and they are simple to handle. The second wave is new and is one that we are currently seeing. The goals and complexity of this type of integration have evolved from the risk-sharing motives of the first wave to goals of gaining skills and capabilities, improved efficiency, greater market share, increased traffic, enhanced political clout, and reduced costs and overhead. Obviously, these types of mergers and alliances are complicated deals that touch more areas of the company. In these areas, it is not only the hard financial inputs and outputs that have to be controlled, but other, softer areas and competencies such as knowledge sharing and technology transfer. For some years now, we have seen this wave growing bigger, bolder and more complex. There are ample examples in the upstream, downstream and retail areas. Deals such as Exxon and Mobil or BP Amoco and Arco fall into this wave. Second-wave alliances are gaining strength in the oil industry. However, we believe that, as in some other industries (such as high-tech and pharmaceuticals), the third wave is coming. In the tireless pursuit of stakeholder returns, third-wave alliances demand a complete paradigm shift on leadership and governance structures. They span multiple countries, multiple functions, multiple partners and even multiple industries. Whichever wave, mergers and alliances are happening at an increasingly rapid rate, even as companies expect more out of these deals. As this trend continues, speed will be no substitute for planning. Re-thinking the need for speed For the past decade, executives, academics and consultants have insisted that successful integration is fast integration. The truth is a bit more complex. Andersen Consulting recently surveyed 100 senior executives that were involved in large acquisitions between 1993 and 1998. We found that successful postmerger integrations do not necessarily depend on speed. Rather, it is the way in which speed is applied-where and when-that distinguishes integration winners from losers. Postmerger integration is like running a marathon: winners do not run as fast as possible from the starting line; rather, they envision how the race will unfold and choose their spots to pick up the pace. Just as a runner plans how to run a race, companies plan the integration of their acquisition. Companies can take one of three approaches to integration planning. Postdeal planning. Some companies plan integration only after the completion of the deal-making (which was itself planned and executed after strategy setting). The three stages-strategic planning, deal-making and integration-are done independently and in sequence. Late-deal planning. Another approach is to move integration-planning forward into the deal-making process, giving integration a head start once the deal is announced. Front-loaded planning. A third possibility is to front-load both integration-planning and deal-making into the strategy formulation stage. Survey results show that successful acquisitions are more likely when the planning has been done early-that is, during either deal-making or strategy formulation. One company president said, "We announced our deal in November and we won't close until March. But we've got 90% of the integration already done." Early planning has two clear advantages. One is that it forces companies to confront integration issues during financial valuation, thereby incorporating a more realistic assessment of value-creation opportunities in the price calculation. Such planning also helps deal-makers spot-and perhaps walk away from-deals that present overwhelming integration challenges. However, in an industry where the psyche still bears the scars of the Standard Oil breakup, it is vital to remember that early planning must not cross the line into early data-sharing, which can get the merging companies in trouble with regulatory authorities. This distinction is a fine line, and it needs to be closely managed. Another advantage to front-loaded planning is that the integration itself may run more smoothly. Andersen Consulting's survey showed that 89% of consolidation winners had a detailed integration plan. Companies that developed detailed plans during early stages were less likely to make substantial changes in the plans during the integration process. Andersen Consulting's experience in working with energy companies in the late-deal and front-loaded planning stages provides powerful evidence of the advantages of integration planning. In some cases, firms have been so successful that they've been able to achieve their benefits twice as fast as predicted. In these cases, a strong team is created in the late-deal or front-loaded plan stage to focus on developing integration plans across businesses and functions. This team comprises employees from both of the merging companies who can bring to the planning process an educated view of what is the best method for integration, given existing cultures, operations, locations and other characteristics of the company. They work closely to identify any potential issues that would endanger the integration plan, and develop solutions to address these concerns early (or in a few cases, determine that the integration issues would be too severe to continue with the negotiations). In one example, integration-planning teams worked together for four months before the deal was closed. The day after the deal was approved, the company then moved directly from the planning phase into the "doing" phase. This meant that merger benefits could begin to accrue from the very beginning. Given the scale of benefits in some of the deals under way, each day's acceleration can be worth more than $1 million to shareholders. As always, there is a caveat. Mergers and acquisitions can be made for a variety of reasons; one is to acquire skills. When an acquisition is skill-driven-that is, made primarily to gain new technologies or know-how, rather than to increase scale or market power-winners tend to plan integration later in the process. Fifty-five percent of winners in skill-based acquisitions plan integration after the deal is finished, versus only 21% of winners in scale-based acquisitions. Why the difference? In a skill-driven integration, success requires keeping the people who embody those skills. Winners take care not to kill the goose that lays the golden egg. The difficulty, though, is that planning the actions that will retain, integrate and motivate the acquired employees requires an understanding of the company and the people. This understanding often comes only with close and repeated contact with the people themselves-and that occurs after the deal is made. The third wave Some studies indicate that merger and acquisition activity will soon slow as more companies begin riding the third wave of consolidation by creating strategic alliances. These involve a different breed of integration challenge, but are no less difficult than full mergers or acquisitions. "Strategic alliance" is frequently misused and misapplied to many mutually beneficial arrangements: an agreement to do business is not truly an alliance; a true alliance represents a pooling of resources (people, assets, capital and know-how) in a collaborative effort. Alliances can include some joint ventures, joint research and development programs, complex outsourcing arrangements, comarketing arrangements and similar endeavors. Integration in these types of alliances tends to be continuous-partners will need to contribute people, assets, capital and know-how throughout the life of the partnership. In the last three years, virtually every major oil company has engaged in some alliance, and that trend will continue. An overwhelming 90% of energy executives believe alliance expertise will be a major determinant of future success, while 70% see alliances driving half or more of company revenues within a decade. Yet prospects for the success of alliances are no better than that of mergers and acquisitions. Two main reasons for this stand out. First, it appears that reducing costs, as opposed to growing revenue or market share, is the main impetus behind many alliances, particularly those that consolidate resources in markets. Yet, by definition, cost reduction cannot go on forever-at best it delivers a short-term boost to profitability. So, a more comprehensive, long-term strategy must be put in place or the alliance will run out of steam and its value will plateau. While the focus on costs is understandable in consolidation ventures, it alone cannot sustain an alliance over the long-term. Being the low-cost producer in a commodity market is a great goal, but it is a limited tool for creating real competitive advantage. Second, many companies are trying to manage alliances with the same management tools and approaches they use when they own all the assets or deploy them in single-operator ventures. These will not work. An alliance-based business model is structurally different from, and infinitely more complex to manage than, an own-and-control business model. New managerial skills and approaches are needed to effectively sustain alliances. Andersen Consulting's research demonstrates that to realize greater gains, alliance partners must identify and exploit more potential growth opportunities. While difficult, it can be done. Royal/Dutch Shell has used its venture with Bechtel and Enterprises Holdings Inc. (Intergen) to become a player in electric power generation. Conoco and Sime Darby have begun work on their new joint venture ProJet-a retail motor fuels outlet and convenience store in Malaysia. The deal marks the first time in 30 years that a foreign oil company has been permitted to enter Malaysia's retail motor fuels marketing business. And Enterprise Oil is partnering with Petrobras to develop two Brazilian oil fields as Brazil opens its oil industry to foreign investment for the first time. But those successes tell only part of the story. The transition from an own-and-control business model to alliance-driven models has not been smooth. As alliances have grown more invasive (bigger, more interactive, knowledge-intensive) companies are struggling with growing complexity and confusion while hoping to capture all synergies possible. Indeed, only 39% of executives believe that their companies are fully realizing the gains anticipated from alliances. How to move from cost reduction to revenue growth? Andersen Consulting's research shows that energy companies must develop skills in four core areas to successfully exploit alliance growth opportunities. These four areas are improving deal evaluation and decision-making; tailoring governance to the managerial tasks; creating balanced scorecards to measure performance; and managing alliances as portfolios. Without these skills, oil firms will encounter several issues. They may choose a partner that does not bring the appropriate skills to the alliance, encounter power struggles among partners to determine the governance model, or use the wrong governance style at the wrong time (strategic versus day-to-day operational). Also, they may be unable to measure the delivery of benefits from the alliance and make improvements, and find that not all alliances can be managed in the same way. Some companies have begun to put pieces of this in place. A number have appointed vice presidents responsible for alliance management and these individuals are wrestling with the challenges of governance, benefits measurement and portfolio balance. Companies that have not begun to build these skills will find themselves disadvantaged and will need to fall back on consultants or poaching staff from the leader to fill their gap. Oil companies, like other industries, will struggle mightily to create successful wave-three alliances. Ultimately, electronic business may be the battlefield where corporate remains are piled highest and where the challenges of governance, speed, performance management and portfolio management are thrown into sharpest relief. Companies that can't master technology-enabled alliances face a bleak future. For the companies that show themselves able to ride the merger and alliance waves, the single largest challenge will be scale. The new industry environment requires a talented, nimble organization that can respond quickly to change. With talent-particularly technical and managerial talent-hard to come by, even successful companies run the risk of being spread too thin to maintain the momentum they have built. Conclusion As mergers and alliances become bigger and more complex, so too will the expectations and the failures. In a hurry-up business environment, it seems planning and preparation have fallen out of vogue. But planning is not a drag on integration. It can make complicated changes happen with the rapid-fire precision of a race car. As the oil industry changes shape, the speed with which deals are done will accelerate. Notwithstanding the deal type, the pressure to deliver will drive more "unthinkable" deals. Even the national oil companies, which have largely sat on the sidelines, will be drawn into the fray. When it comes to maximizing the benefits of mergers and alliances, there is no substitute for careful integration planning. While the prevailing oil industry wisdom clearly is "bigger is better," the odds indicate that at least one of the current-wave major mergers will fail to deliver the full benefits that were promised. Unexpected implementation challenges likely will be the root cause of this failure. Consolidation presents significant opportunities to the industry, but, like in surfing, the bigger the wave the greater the danger of wipeout. As the stakes rise, it's best to go into any situation with an idea of what you're going to do next. M Paul Spence is a partner and Catherine Johnson is a senior manager in Andersen Consulting's energy strategy practice and are both based in London. Ed Fikse (Dallas), David Moore (Houston), Charles Kalmbach Jr. (Chicago), Charles Roussel (Boston) and Bud Moeller (San Francisco), all of Andersen Consulting, also contributed to this article.