Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

Strategy

Accelerating IT Synergy Savings Following Mergers and Acquisitions


by John Marchisin

Company leaders need to prioritize savings and not let contracts simply default to existing vendors.

©z_wei/iStock/Getty Images Plus

Organizational mergers are full of opportunities for expansion, diversification, cost savings and many other benefits. In terms of lowering costs specifically, integrating the information technology department is an especially powerful process. It can begin relatively quickly, and provide cost savings on a short timeline. But all too frequently, internal delays take hold and momentum is lost.  Let's look at how CFOs, CIOs and other leaders can make sure they effectively, and quickly, act on these opportunities.

IT Costs Don’t Just Add Up, They Multiply 

In general, IT costs are a major and increasing expense for businesses, namely IT infrastructure improvements and complying with ever increasing regulatory and business demands. A recent report found that 64 percent of companies are increasing budgets to replace outdated tools to meet new business challenges, Spiceworks recently reported. In general, 89 percent of businesses planned to grow or maintain IT budgets in 2019. These are the most recent and specific indications of a general long-term trend in growing financial requirements for maintaining and improving the value from IT. 

Demand for IT services tends to rise rapidly inside businesses, and those pressures rise when significant regulatory concerns come into play. Data analytics needs also play a role. As companies grow larger, they need more in-depth - and expensive - tools and resources to analyze market conditions, operations and other core concerns. Additionally, as more investment goes into IT, the costs to keep it current and fully operational increase.

These cost reductions are commonly identified as a primary expectation from a merger or acquisition thanks to economies of scale and the ability to consolidate hardware, applications and vendors. However, internal alignment is key. IT synergy savings are often seen as difficult by IT department leaders due to the widespread changes involved. Other executives of the company, meanwhile, tend to see IT improvements as more restricted to a single department and less impactful on overall operations than, for example, changing business practices or optimizing headcount.

How To Realize IT Synergy Savings Early On

Internal agreement and a clear initial vision may be the most important universally applicable need when it comes to IT savings. Making sure all executives and decision-makers understand the impact of such changes is key for a smooth, positive transition. A plan for IT changes that recognizes the company doesn't need a totally complete an intricately detailed IT roadmap and portfolio is also vital. Businesses can't go into this process blind, but they often lose the opportunity for significant savings in the early years of the merger.

There's no reason to avoid an early assessment of current IT contracts in terms of established, major vendors providing standard services. Unless a vendor has a truly unique and beneficial application or piece of infrastructure among its offerings, there's no reason to delay reviewing these agreements to look for savings opportunities. That's true whether they come from the current provider or a different one. It's also crucial to avoid the trap of waiting to act until contract deadlines arrive. 

Choices should be driven by verifiable data and analytics based on the use rate of different products and the value they bring to the business. Even with software-as-a-service offerings, which charge a fixed price per user and can be hard to audit in the context of utilization versus cost, businesses can negotiate for the lowest current price among vendors that supply similar platforms. A utilization analysis that focuses on which elements of such programs are frequently and commonly used provides specific information that can also be used in negotiations to lower costs.

In relationships with vendors, buyers have a degree of leverage that suppliers will often try to dismiss or minimize. That leverage only increases as businesses merge and become larger. Many companies are likely paying more than they should in at least some areas of ongoing IT spending because they don't understand their individual market opportunities. This simple point is foundational when it comes to effective negotiations for merged companies. Successful planning for negotiations means keeping this power in mind and using it as leverage to find the most reasonable price. In many cases, it's easier to start with the vendors of more generic elements of infrastructure, then move on to those that are focused on their specific industry or provide specialized tools and support.

Saving money regularly and early is the foundational idea behind successful, early IT synergy savings following a merger. Making a plan to address each contract and performing related due diligence gives a business a stronger position from which they can negotiate. Company leaders need to prioritize savings and not let contracts simply default to existing vendors. With this approach, businesses can realize significant IT savings soon after a merger takes place.

 

John Marchisin is a managing director at AArete.