IT departments hit hard by high hopes for huge savings

In tough economic times mergers are signed with feverish optimism. But it is the IT leaders, who are often faced with complex...

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.

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