Did lack of IT involvement at outset doom LCH.Clearnet’s grand vision?

Did lack of IT involvement at outset doom LCH.Clearnet’s grand vision? Analysis: Clearing house’s troubles offer lessons for making IT-driven merger gains

David Hardy’s resignation from LCH.Clearnet earlier this month appears to be a rare example of a chief executive stepping down over an IT issue.

His departure comes less than three years after the merger between London Clearing House and Paris-based counterpart Clearnet to create the pan-European clearing business. Technology-driven savings lay at the heart of the deal.

From the moment the contract was signed in December 2003, the plan was for the newly formed clearing house to replace the 30 or so legacy systems it inherited with a single platform for clearing trades based on Java and Oracle technologies.

But the Generic Clearing System (GCS) project, which was meant to take three years to achieve this aim, has at no time looked like coming in on time or achieving the two boards’ vision of streamlined processes on a single platform bringing about dramatic cost savings.

Despite a development programme costing tens of millions of pounds and involving four key suppliers – Hewlett-Packard, BEA, Oracle and Atos Origin – by May last year, 16 months into the project, it had already missed a series of internal milestones and one public go-live date.

The situation was sufficiently bad at this point for LCH.Clearnet to call a temporary halt. On 5 May 2005, it suspended work on GCS and cut the number of staff on the project from 140 to 40. It also called in consultancy Accenture to conduct a review of the project.

Hardy claimed at the time that the system that had been developed was “fundamentally sound” but it had become over-complicated in its implementation. However, personnel changes revealed something of the scale of the problems, with the firm’s CIO leaving at short notice, and his responsibilities transferred to chief operating officer Peter Rowland.

In the year since, matters have hardly improved. At the end of 2005, LCH.Clearnet made a write-down of £13.9m against the project, and in May 2006, Gérard de La Martinere stood down as chairman. (He has recently been replaced by Chris Tupker.)

So how did LCH.Clearnet get it so wrong? And what lessons can be gleaned from its experience?

Sunil Harji, a senior manager who works on corporate finance transactions for the consultancy arm of Deloitte, said the most likely cause of LCH.Clearnet’s problems was a lack of direct involvement from IT throughout the due diligence process prior to the deal being agreed.

“Generally, we find that where IT is not a fully conceived part of the thought process, firms run a risk,” he said.

“When mergers are being considered, we still find far too often that IT savings arising from systems integration and consolidation are factored in by the would-be buyer, but the significant costs and risks associated with achieving these IT synergies are overlooked.”

Harji said CIOs were still too rarely involved in preliminary merger discussions, since only top board members were generally privy to a prospective takeover or merger, and few firms place a high enough value on IT for a CIO to feature.

In terms of IT, crucial issues that need to be considered in any merger include whether either party has business-critical bespoke technology and whether that technology is fully documented.

“More often that you might think, firms are extremely reliant on a handful of key IT staff who understand their systems, and the knowledge they have resides nowhere other than their heads,” said Harji.

“Once a merger is signed, that can lead to staff departures, but firms need to be aware from the outset of the need to retain key staff.”

Cultural fit between organisations is another potential difficulty that is often overlooked, and some commentators have speculated that LCH.Clearnet may have struggled to reconcile the competing interests of its London and Paris operations once the project got underway.

Chris Skinner, associate director at analyst firm TowerGroup, said LCH.Clearnet’s problems could have been exacerbated by the firm’s ambitious decision to replace the key IT systems that it inherited with an entirely new platform.

“In a merger situation, one of the best ways to limit the risk of IT failure is to choose between the existing systems and migrate onto your preferred platform, rather than create something new. If you do not take this approach, you may be missing out on the most straightforward merger efficiencies.”

But Leslie Willcox, professor of technology, work and globalisation at the London School of Economics, said it was still the case that few organisation have a clear organisational strategy around mergers and acquisitions. This, he said. frequently led to decisions being taken without a clear enough sense of the IT challenge that awaits.

“Firms that have worked out an M&A strategy, such as Cisco, generally have a blanket policy of ¬imposing their own IT systems on an acquired firm, which makes it easier to standardise. It seems unwise in terms of risk management to try to develop an entirely new platform.”

 

LCH.Clearnet and the clearing process

Clearing is the process of reconciling both sides of a trade and passing on the instructions necessary to complete the transaction.

In financial services, this generally requires a well-capitalised financial institution, known as a central counterparty.

LCH.Clearnet is such a counterparty, clearing trades for exchanges including the London Stock Exchange, Euronext.Liffe and the London Metal Exchange, as well as other UK markets for derivatives, energy, interest rate swaps and euro- and sterling-denominated bonds.


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