Two successful link-ups

FI Group's merger with Druid has received a lot of publicity

FI Group's merger with Druid has received a lot of publicity

Ian Mitchell

City Briefing

FI Group's merger with Druid has received a lot of publicity because of the £1m+ per consultant FI had to pay to secure the deal. That may sound steep, and certainly the market thought so. After some initial share price gains on the view that the two companies are a good fit, worries about the consideration wiped out most of the rise.

However you care to analyse the deal, the two companies are highly complementary. FI Group operates as an outsourcer almost exclusively in the UK, while ERP and front-office implementer Druid has customers in Europe, the US and Asia Pacific. Even within the UK, the two companies have very few customers in common. All of this means that the opportunities for cross-selling are enormous.

While the opportunities are significant, the main benefit of the merger may come from the protection it gives to FI Group. Its outsourcing customers were becoming twitchy that it did not have a sufficient consultancy base to be able to re-engineer their front-office systems to handle supply chain and customer relationship management systems, for instance. FI Group could have grown these skills organically through recruitment or retraining. But the purchase of Druid does the job much more quickly and sends out a strong reassuring message to customers.

I recently wrote that front-office systems would be a major focus for the year, and that users who wanted implementation skills would find them hard to secure if they did not move quickly. If you have outsourced your IT you should be asking some sharp questions now about how extensive your supplier's skills base is in this area.

In my view, concerns about the valuation FI Group placed on Druid miss the point. More pertinent is what other outsourcers are going to do to reassure their customers.

Two weeks ago I discussed the potential advantages of taking equity stakes in IT suppliers, citing how it could improve the relationship and provide real risk sharing - rather than the lip service some companies mean when they talk about working in partnership. Now the tables have been turned with the news that IT services company MMT has taken a 23.6% stake in start-up electricity supplier Imperial Power (now renamed Atlantic Energy).

The stake is in exchange for the supply of just over £1m of software and services. Under the terms of the deal Atlanta has appointed MMT nominee Jeff Percival, as its chief executive. MMT also expects to supply £400,000 of software and services to Atlantic in the next six months on a normal trading basis.

This imaginative deal is worth considering as a blueprint for other companies and their suppliers. Service level agreements and contracts have their place as sticks to ensure that you get the service or software you pay for. But unless companies find a way to reward suppliers whose work gives them a competitive edge there will be little in the way of carrot to provide motivation.

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