19 September 2002
Mergers and acquisitions can cause massive disruption to even the best-laid outsourcing plans, so it is vital that purchasers factor them into the calculations, says David Arminas
When the Bank of Scotland (BoS) merged last year with the Halifax to create HBOS, the newly merged financial services giant inherited the BoS’s 10-year contract with IT outsource supplier IBM. But HBOS has now decided to end the contract with only two years completed and bring mainframe IT work back in house.
The deal was to have saved £150 million over the 10 years. Terminating the contract is likely to cost HBOS a large one-off payment to compensate IBM for loss of income over the original contract period.
HBOS says that it was entirely satisfied with IBM as a supplier but the deal was based on the needs of the old Bank of Scotland. The merger created an organisation more than twice that size and a review of IT requirements proved the case for bringing it back in house.
As our news story shows, mergers and acquisitions can change the raison d’âtre for outsourcing and force the termination of even the best thought-out contracts. Mergers and acquisitions can bring up issues that invalidate the original business case upon which the outsourced contract was based.
By definition, they will force a rethink of organisational structures and needs. If the original business case for an outsourced service remains firm, then extending the contract with a supplier is in order and purchasers will be working with a well-known partner towards common goals.
If the business case doesn’t hold up, however, purchasers are faced with some tough issues when they terminate a contract and bring the services back in house.
Negotiations about termination bring with them the problem of remaining on good terms for future dealings and can be a test of partnership relations, especially if there are heavy penalty payments.
Only when a contract is terminated will a purchaser know if sufficiently flexible get-out clauses were written into the deal. Nonetheless, termination comes at a cost to the buyer. The earlier into a contract it occurs, the more the supplier will charge
An IT outsource supplier will often have taken over the client’s employees and trained them in the latest technologies and management techniques to give the supplier-client partnership a competitive edge. Termination of the outsourcing agreement could mean these employees return to the client company. The issue of how best to manage the return of staff and the in-house department should be a major concern.
Purchasers must work with other directors and managers to ensure the employees continue to receive training so that the in-house operation remains competitive and customer-focused. Poor management can have dire consequences. A sure-fire way to have a returning IT team look for a new company is if it is put under the same management as when it left, only to find management techniques have not improved.
These issues are all about keeping a good outsourced service at the same high level of delivery when it becomes an in-house service. Successful reintroduction is a testament to the skills of HBOS’s team of procurement professionals.
But the HBOS case raises another key question regarding mergers. Why sign a mega 10-year IT outsourced contract if the business strategy is to seek a merger in the next 12 to 24 months?
It is a major part of a purchaser’s skills to bring an outsourced contract back in house. But another part of their skill set is to include in business cases the consequences of a disruptive merger.
Knowing that the business’s strategy is to seek a merger could be a major risk for outsourcing and as such should be factored into the business case. Perhaps a five-year contract would have been better than 10 years. Maybe less stringent get-out clauses were appropriate.
Mergers and acquisitions will always be part of doing business - purchasers ignore them at their peril. Without some knowledge of the likelihood and timing of a merger, outsourcing is never a strategic exercise, merely a tactical move.