Can IT survive out on its own?

Liffe's IT spin-off re-opens the debate about IT departments as independent consultancies, writes Nick Huber

Liffe's IT spin-off re-opens the debate about IT departments as independent consultancies, writes Nick Huber

The decision by the London International Financial Futures and Options Exchange (Liffe) to spin off its IT department as a consultancy has reignited the debate over the role of IT departments within companies.

Liffe plans to boost its revenues by reinventing its IT division as a separate technology company within the Liffe holding structure over the coming year.

The new company will aim to bolster the exchange's revenues through offering consultancy services to other companies and exchanges as well as offering managed services. Liffe also plans to offer its Liffe Connect in-house trading system for sale to other companies.

More than 300 staff who work in Liffe's IT division are set to transfer to the new company over the next year. Mark Hemsley, Liffe's chief information officer, said that IT staff will benefit by having more freedom to work on external as well as internal IT projects.

But Liffe will not be the first organisation to spin off its IT department and the case for doing so is still far from clear cut.

Analysts remain unconvinced over the merits of companies spinning off their IT divisions. They argue that these half-way-house divisions perform better when they become totally independent from their parent company.

Richard Holway, director of IT analyst Ovum Holway, cited Cadbury Schweppes and IT Net as an example.

In 1988 Cadbury's spun off its IT department as IT Net. IT Net remained a wholly-owned subsidiary of Cadbury's until a management buy-out in 1996.

Holway was also sceptical over Liffe's plans. "If I was a customer of a Liffe-owned IT services company I would say that, when the chips are down, they will give priority to their parent company. With Cap Gemini Ernst & Young you are at least equal to any other customer," he said.

Rod Watts, managing director for IT Net, countered that IT Net still managed to grow as a subsidiary of Cadbury Schweppes. But he admitted that semi-independent IT divisions can struggle to break free of their parent company's shadow.

"The classic case is if the [IT department spin-off] wants to make an acquisition but the parent company is not keen," he said. "They could try to block it. Liffe is looking at five years before its IT department becomes truly commercial."

But there are other ways to restructure IT departments. Take oil giant Shell, for instance. Back in 1998 Shell revamped its internal IT department and called it Shell Services International. Its main role is to provide IT support and services to the group's IT company but it also services external customers.

The efficiency drive meant that Shell's IT department had to justify every service to the Shell Group or risk having work contracted out. And more change could be on the horizon for IT staff at Shell.

A spokeswoman for Shell said the structure of Shell Services International was under review.

Last month Shell Services International also created a separate software company, called Kalido, to sell its internal datawarehouse product.

Aimed at global companies, the Kalido product is based on an in-house Shell product. It is used in over 85 countries, mainly by organisations in the Shell Group but also by external customers such as Unilver.

But the transition from an in-house package to a commercial product took time and relied on outside support from other software suppliers. Only a handful of IT staff from Shell will transfer to the new company.

Major changes were made to the in-house product before being offered as a software package, explained Andy Hayler, chief executive officer of Kalido.

"Some spin-offs do not work because people misunderstand the difference between internal and external IT services and internal and external software applications," he said. "The rule of thumb is that an external application will cost 10 times more to build than an internal application. It's a completely separate product."

But spin-off IT departments in general face higher hurdles to clear, according to Hayler.

Other key challenges for spin-off IT departments include acquiring enough new customers rather than relying on the parent company and competing with the six-figure salaries offered to experienced consultants by market giants such as EDS and Accenture, formerly Andersen Consulting, Hayler added.

A growing number of large companies, such as Liffe, have taken the plunge and doubled-up their IT departments as internal and external service provider. Other companies, like IT Net, have become totally separate companies from their former parent companies.

There are strong commercial reasons for spin-offs which can also add weight to the CVs of IT staff in the new division.

However, IT directors should not view a spin-off as an easy option. Analysts have warned that many new ventures have struggled to juggle the roles of consultancy and internal IT department.

nick.huber@rbi.co.uk

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