In tough economic times mergers are signed with feverish optimism.
But it is the IT leaders, who are often faced with complex
integration projects, that must deliver the synergies and huge cost
savings that shareholders expect from day one. Daniel Thomas
reports
The competitive UK retail sector is going through a period of
intense consolidation - a number of high-profile mergers and
acquisitions have been announced in recent months.
Last week, retail group Gus announced the £900m purchase of DIY
chain Homebase, while earlier this year, the convenience store
sector saw a major shake-up with supermarket chains Tesco and Co-op
taking over T&S and Alldays respectively.
This flurry of activity has highlighted the difficulties faced by
IT departments landed with complex integration projects intended to
achieve the ambitious cost savings that businesses often use to
justify mergers to their shareholders.
Gus, for example, expects to achieve cost benefits of £20m within
three years by combining the infrastructure of Homebase with its
Argos Retail Group (ARG) division.
Merging ARG and Homebase will exploit the existing ARG
infrastructure and capabilities in e-commerce, supply chain,
logistics and financial services, a Gus spokesman said. The current
ARG brands share many common functions, including IT and e-commerce
systems and a home delivery and call centre operation.
While savings on this scale might be laudable objectives,
businesses tend to expect too much too soon, IT directors have
warned.
Business executives set unrealistic targets because they are often
unaware of how a merger or acquisition affects the IT department,
according to a recent Vanson Bourne survey of 100 UK-based IT
directors.
Abut 68% of the respondents, which were drawn from the retail,
transport and distribution, financial services and manufacturing
sectors, said cost savings from IT consolidation seldom materialise
as quickly as the board expects.
IT industry expert Colin Beveridge, who has experienced a number of
mergers and acquisitions during his time as an interim IT director,
said the lack of awareness about how mergers and acquisitions
affect IT and can compromise the success of the project. "Companies
usually have serious cost saving ambitions, but this can be
undermined by disparate infrastructure and systems," he said. "I
have experienced prospective mergers that have been abandoned
because of system problems."
IT directors should ensure that their companies' IT systems are
flexible enough to guard against potential problems, Beveridge
said. Post-merger, IT directors must ensure that they are fully
engaged with setting target he added. Seconding key staff from IT
to focus on seeing through the merger has worked well in the past,
he said.
About 80% of the IT directors in the Vanson Bourne research warned
that additional short-term IT investment is usually required before
cost savings can be realised.
Beveridge agreed that there is a general lack of awareness about
the how much money is committed to IT projects. "Companies think
they can make immediate savings by turning certain systems off but
costs remain - because of long-term licensing agreements for
example," he said. "Another major aspect is when suppliers take the
opportunity to see the merged body as a new customer and try to
re-negotiate contracts. All you can do in this instance is pass
contracts on to lawyers."
Conversely, the newly merged company could use its extra weight to
put pressure on suppliers, pointed out Tony Hart, managing analyst
at research firm Datamonitor. "It could be an opportunity to reduce
the number of suppliers and clean up the infrastructure," he said.
Complex integration projects and pressure to cut costs make mergers
and acquisitions one of the most stressful periods for IT staff,
according to 85% of the IT directors from the Vanson Bourne
research.
Indeed, perhaps the most significant factor affecting the success
of merging two IT systems is the clash of cultures between the
different IT departments, Beveridge warned. "I experienced a
situation where one IT department was nailed down and very
inflexible and the other was very laissez-faire which led to
serious friction," he said.
To overcome such problems IT directors should attempt to improve
overall processes rather than opt for one approach over the other,
Beveridge said. "IT departments can guarantee their own futures by
adopting best practice rather than saying, 'what I do is better
than what you do'," he said. "And rather than going for full
integration straight away, go for interoperability."
Although the IT integration projects that follow mergers and
acquisitions are often painful, some retailers are beginning to
reap the rewards of restructuring.
Asda, for example, will achieve cost savings of up to £150m per
year now that US parent Wal-Mart's IT systems are fully integrated
with the supermarket chain's own systems, analysts have predicted.
Deutsche Bank analysts recently said efficiencies that Wal-Mart has
brought to the supermarket chain will cut costs and boost sales
figures by improving levels of stock availability.
The success of the Asda Wal-Mart project shows that integrating
systems can produce amazing savings, Hart said. "Integration is the
number one project IT directors want to invest in because of the
amazing savings that can be achieved," he said. "The size of Asda
and Wal-Mart means savings on this scale are potentially
achievable. Wal-Mart is a massive player in the market and has lots
of influence over suppliers."
Asda and Wal-Mart have shown that IT integration projects can be
successful for the business as a whole, but mergers and
acquisitions - despite the undoubted difficulties - can be
beneficial for IT departments themselves, Beveridge said. "You can
quickly bring together a wide range of skills and experience," he
said.
It is also a chance for the IT department to shine, according to
Hart. "It could be a way of exposing the IT department as being
vital to the business," he said. "And it will also allow staff to
increase their skillsets."
With the economic outlook still gloomy, more consolidation is
expected next year. IT directors would do well to keep a close eye
on their markets, and ensure that they are not surprised when they
are told their biggest rival is about to become their right-hand
man.
Be alert for the possibility of a merger
IT directors' club Impact launched a Prepare and Prosper Guide for
Chief Information Officers earlier this year, offering tips on how
to prepare for a potential merger or acquisition:
- Understand the shape of the industry you work in, and what
business drivers are operating as regards merger and acquisition
activity in your sector
- Understand what your chief executive's objectives are for the
next three years and how IT can meet them
- Start information gathering on all the likely candidates, both
target and predator, and study their IT - systems, costs, strategy,
people
- Tighten any slack in your department or IT strategy
- Check out your software contracts for any "stiffing" clauses
that will cost you a fortune if your company merges
- Identify what resources you would need should a merger or
acquisition be announced, and know where you can get them from;
identify staff with experience of mergers and acquisitions and
external experts
- Contact other chief information officers who have survived a
merger or acquisition. Impact, for example, provides a mergers and
acquisitions mentoring service.