Realising the value of IT

For many businesses, the pressure of the current climate has challenged IT functions to demonstrate savings and make cash readily available.

Historically, IT has been viewed as a necessary cost: at best, an enabler of services and a differentiator in the market; at worst, a monetary black hole that offers little benefit in return. These scenarios are emphasised during a transaction when costs, services, competitive advantage and automation all come under close scrutiny.

Through the work on transactions and general consulting our Technology team has extensive experience of the various ways that IT departments can function in all types of companies, both successfully and unsuccessfully.

Businesses that are owned by PE houses often set an example for cost control. A recent due diligence exercise of such a company showed that the IT expenditure remained unchanged for three years despite the global implementation of an ERP system.

The strategy of the IT team was to ensure that any new projects or initiatives would be self-funded by downscaling other systems or services no longer required.

This offered additional benefit as the volume of ageing legacy systems was controlled and consequently the size of the team required to support them was similarly economical. Other initiatives include regularly tendering outsourcing contracts and involving additional suppliers to ensure that pricing remains competitive.

Our experience of businesses suffering financial difficulties has shown that this cost conscious behaviour can be taken further. If a company has reached a point where it may breach banking covenants or it requires critical turnaround measures, certain steps can reduce costs and release cash. The most obvious of these is the reduction of headcount.

Other, more complex, measures include renegotiating with suppliers, downscaling services, removing non-essential systems and investigating alternative funding options of systems, projects and services. These actions are not for the faint hearted, requiring a combination of prompt action and strong judgement but are often critical to the survival of the parent company.

A recent engagement involved an IT department that had been given very aggressive savings targets, along with other departments within the company, to attempt to ensure the short and medium term survival of the company. We advised the client on options for releasing cash from the balance sheet involving sale and leaseback of assets, joint venture and outsourcing.

This is part of a new outsourcing approach developed by our team which can make cash available, while at the same time incentivising a third party ensure you still achieve your business aims. To learn more about this, read our publication Does cash prevent the right change?

The approach highlights the variety of ways in which an IT function can support the parent company in difficult times. At the heart of this is the understanding that a robust, efficient and essentially beneficial IT service comes through a balancing act between two areas of value - Realising Value through cost reduction and control and Adding Value by aligning IT to the business requirements and strategy. If this balance is lost, the IT function is unlikely to deliver any value at all.

Contact details
Email: Iain McKeith
Tel: +44 (0)7786 241157