It strategy - Mergers misfire in people business

The IT industry has always been merger crazy. In good times and bad, companies race to acquire, to sign up major partners, to gain critical mass in the market. There are discernible patterns to this activity.

In times of recession, big companies try to snap up bargains – often companies with a breakthrough technology but insufficient cashflow. And companies tend to stick within their established markets, hoovering up rivals where they can.

In healthier times, like the past year, the acquisitive IT vendors become more adventurous, starting to look beyond their own garden fence and to shore themselves up for future bad times via diversification. Recently, the two largest potential mergers the IT industry has seen have both focused heavily on services. As traditional sellers of hardware and software cast their eyes over services, they are inevitably starting to encroach on the territory of the management consultancies.

This is particularly true of software giant Computer Associates’ hostile takeover bid for Computer Sciences, an IT services monster with its own management consultancy arm, CSC Index. CA’s determination to buy the company in the face of CSC’s outright rejection of its overtures – and of the obvious difficulties in managing a merger of such size and complexity – shows how importantly it rates expansion into corporate services.

The planned merger of Compaq and Digital Equipment, similarly, has a strong services element. One of the key attractions for the PC maker is Digital’s services division. Although the older company has not made inroads into the traditional hunting ground of the Big Six to the extent that IBM or Unisys have, its massive corporate contacts and user base and the range of consulting and strategy services it offers will add a whole new dimension to Compaq’s currently product-only offering.

IT suppliers have talked about services for years, most loudly when the margins on their core products have fallen or they have been short on a new strategic direction. But this time they are not just looking at traditional technology supplier services – maintenance, bespoke software, technical advice – but business strategy, corporate organisation and other staples of the management consultancy.

CA claims it needs to buy a company like CSC because it sees its future increasingly on the services and consulting side. Its largely corporate user sites want to rationalise the number of suppliers with which they deal, it says, so that they can have a small list of key partners that really understand all aspects of their business. Large users have been calling for such “one-stop shops” for years, and companies like IBM have worked hard to provide them – at the expense of the same sites sometimes condemning them for trying to control them and, in effect, run their business.

But can companies like CA and Compaq really fulfil this role? IBM, Unisys, Digital and others have a history of dealing with board level directors, rather than just technical people-dating from the days when technology was a massively expensive purchase and one that involved large amounts of education and complex selling. As computers and software became more commoditised, the newer vendors found themselves dealing almost exclusively with the IT specialists and getting very little look into the mainstream business of the customer.

Although in the past few years customer sites have demanded that IT be purchased with the business needs clearly in mind, they have generally not turned to their PC and software vendors to provide that commercial and strategic link-instead they have called in either the Big Six or a services/integration specalist like CSC, EDS or IBM.

So the attraction of CSC to CA is clear – but the services company’s objections cannot be ignored. Its primary concern is that CA does not know the business, that it would be a merger of complete opposites and that both would lose focus and success. It is also very conscious of CA’s reputation for acquiring software houses, reducing their staff drastically and concentrating on the maintenance and upgrade revenues from the products rather than new development.

CA points to its recent record, claiming it has developed the database it acquired with Ingres far more aggressively than Ingres’ former owner ASK would have done; and that it has kept nearly all the people it inherited with its takeover of Cayenne. It claims it now realises the value of skills and people rather than just adding to the product catalogue.

But even if CA takes an entirely different approach to this takeover, CSC’s doubts ring true. Can a software house and a high level services company combine and if they do, can they pose a real threat to the consultancies with their powerful contacts and experience of corporate IT projects?

The cultural differences between CA and CSC are massive and CA – and other IT vendors attempting to cross the divide into non-product offerings – have to learn the hard lesson that consulting is all about people. CA may not have to lay off CSC’s consultants if its bid succeeds – many of them will probably walk out and find jobs in a market that is crying out for skills. And without those people with their experience and customer contacts, CSC will be a far less useful unit for CA.

The logic behind product companies expanding into consulting seems clear but, if they are to do it successfully, they either need to stick to technology specific services such as bespoke software, or buy a consulting firm but keep it at arm’s length, with its own brand, working practices and staff conditions intact. That would be a big step for a heavily controlling company like CA to take, and would not achieve the knock-on boost for sales of its core products that it hopes to gain by adding more strategic services to the sale of software such as the Unicenter systems management suite.

If software and services companies are to marry, they will have to be prepared for a long period of adjustment and effort before they see the results they crave.

Caroline Gabriel is a group editor in VNU’s IT portfolio.