Mergers Squeeze IT

Target of efficiencies, tech often gets outsourced.

Procter & Gambles $57 billion purchase of Gillette and SBCs bid for AT&T signal that its open season on Wall Street for mergers and acquisitions. But events that get the adrenaline of a Gordon Gekko pumping are more often than not a downer for IT execs because IT usually falls into the category of the "operational efficiencies" that the two merging companies hope to realize. Typically, little thought is given to the mechanics of merging IT operations.

P&G, of course, is outsourcing the bulk of its IT operations to Hewlett-Packard, with IBM Global Services getting the human resources piece of the pie. The logical question arises: Will Gillettes IT operations also be outsourced to HP?

Gillette in recent years has been very close-lipped about its IT operations, although its known to have implemented SAP applications and RFID. While some companies roll out the red carpet for reporters, Gillette has greeted attempts to interview company IT execs with a polite but firm refusal. Neither Gillette nor HP nor P&G nor IBM would comment on the IT implications of the acquisition.

P&Gs aggressive acquisition and divestiture strategy has been testing the flexibility of its primary outsourcer, HP, which has been busy digesting the IT operations of Wella, which was acquired by P&G for $7 billion last year. Now it appears that HP will get a chance to take stock of Gillettes IT shop and come up with an outsourcing pitch. You can figure that IBM will want a piece of the Gillette action as well.

"If the acquiring company has a more progressive stance with regard to outsourcing, I would imagine that strategy would prevail on the new company," said Beth Hayes, senior business adviser for The Hackett Group, a business advisory company based in Atlanta.

The Hackett Groups research has found that the best-performing companies in the world tend to outsource more of their IT operations than those that dont. They also have found that top performers have considerably simpler IT operations—fewer data centers, fewer applications and fewer vendors—than do the bulk of companies. "The business case takes cost, complexity and redundancy out of the two entities," said Hayes.

/zimages/7/28571.gifClick here to read Senior Contributing Editor Wayne Rashs column: SBC-AT&T Merger Would Require Wall Streets Patience.

Following this line of reasoning leads to one conclusion: It makes sense for P&G to consolidate—and outsource—Gillettes IT operations.

Out and about

In another kind of acquisition, IBM snapped up application hosting firm Corio for $182 million. It was probably the best outcome that Corio could have expected, having endured the boom and bust of the ASP market a few years back. From an initial price of $21.50 per share five years ago, Corios stock shriveled to 63 cents before rebounding to $2.78, a swing that reflected the fortunes of ASPs in general. IBM is paying $2.82 per share.

Mike Riegel, on-demand director for IBM Global Services, said his company was interested in Corios technology and intellectual property for rapid deployment of hosted applications, which he said could be applied to IBMs hosted implementations of SAP, PeopleSoft, Ariba and other applications. "Well be able to deploy SAP more quickly for larger customers than we can at present," said Riegel.

Riegel also said George Kadifa, who will become general manager of IBMs hosted applications business, will be a welcome addition, with his broad résumé, which includes a stint at Oracle.

Corio has about 100 customers, many of whom have been hosted from the same Equinix co-location facilities from which IBM has been serving its customers, said Riegel. "Customers wont experience any disruption," said Riegel, who added that IBMs application hosting business is now generating more than $1 billion annually in revenue.

So why is application hosting a better business to be in now than it was a few years ago? According to Gartner analyst Ben Pring, technologies such as virtualization and Web services are available now. And many software companies are optimizing their applications for hosted environments. "Siebel and others are writing multitenant versions. Clients are looking for this capability now, where they werent before," said Pring.

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