Strategic Cost Optimization
Research firm Gartner has found that when chief information officers (CIOs) focus on strategic cost optimization prior to and during corporate restructurings, organizations stand a better chance of achieving their goals and driving value.i
In fact, companies that focus on cost synergies during restructurings reap long-term rewards. For example, a January 2020 EY-Parthenon Buy & Integrate Global Pulse Survey of technology, media, and telecommunications corporate development executives found that, “tech companies that link their integration strategies to (cost) synergy planning during diligence are usually rewarded with richer value creation opportunities.”ii That’s doubtless the case across industries.
It’s yet another reason enterprises need a strong partnership in the realm of telecom expense management (TEM). During a merger or divestiture, a skilled TEM provider can efficiently manage an enterprise’s telecom services and technology with minimal disruptions while freeing up internal enterprise resources to stay focused on their core responsibilities.
Telecom Cost Optimization: Easier Said than Done
So why hasn’t telecom cost optimization been more of a priority during periods of corporate change? First, consider that even under normal circumstances telecom usage and cost is a tricky realm to track for any organization. There are multiple providers and carriers across geographies, each with their own offerings, each with varying voice, data, and network costs. Information overload and decentralized invoicing make for difficult processing. No wonder so many enterprises overspend on telecom services, even with commoditized pricing.
Now consider what happens with telecom cost control when something like a merger enters the picture. While mergers and acquisitions (M&A) have the potential to generate significant business value through the combination of complementary assets, even large enterprises with the resources to manage carriers and services relatively well may neglect to focus on cost optimization.
The technology sector from the aforementioned EY survey offers one example of missed opportunity. According to EY, when it comes to M&A, technology companies tend to focus on identifying revenue synergies while overlooking synergies in cost-savings. M&A deals are time sensitive and short-term priorities often take precedence over strategic cost optimization. As time goes on, longer-term strategic plans for cost optimization tend to fade, creating the potential for inefficiencies in the newly combined entity.iii
In addition, it’s not unusual for an acquirer to misunderstand the target company’s approach to telecom and IT, which can lead to inaccurate cost assumptions for those investments. Indeed, an acquirer might fail to complete a comprehensive assessment of a target company’s telecom and IT systems, processes, infrastructure, staffing and competencies, risks and controls. Too often, a full analysis of resources, compatibility, replacement of systems, and potential capital and operational expense is an exception rather than the rule.
This is where an experienced TEM partner can make a real difference. “The first thing we do is build an inventory of existing services and collect all available contracts,” notes Reginald Johnson of Sakon, a SaaS company that helps global enterprises organize, understand, and intelligently manage their communications and cloud services. ”Then we analyze all contract-related issues, from the network to mobile policy. Only then can you begin to prepare an optimization analysis on current plans and determine how best to leverage spend to meet the overall combined enterprise carrier commitments. It’s a complex process.”iv
Such complexity is precisely why it’s so important to work with a high-quality partner you can trust.
Pursuing Cost Optimization & Value Creation
Clearly, CIOs that prioritize strategic telecom and IT cost optimization will have an advantage during any M&A or divestiture process. And the first step is to form a planning group that involves a skilled TEM partner. Leadership should aim to study all relevant complexities and then execute on a detailed plan within a specific timeframe.
After all, mergers, divestitures, and split-ups might demand strategic moves in a limited time. While entities await deal approval pre-close, the two parties involved should exchange all confidential customer and contract data pertinent to integration or divestiture planning. This type of approach tends to have the most stakeholder buy-in because it’s based on actual internal data.
In fact, deal assumptions and analysis of telecom and IT costs and synergies should be based on bottom-up benchmarking that taps real-time data. In that sense, a quality TEM partner can be a defacto source of truth in helping to understand and optimize existing telecom investments in areas like carrier contract optimization, subscription and service optimization, compliance monitoring, and demand management.
“Our aim is to be strategic in our to-do list,” explains Reginald Johnson of Sakon. “We want to identify people, places, and inventory that should no longer be billed starting on a specific date and review each month. We want to look at any active services for employees who are targeted to leave as a result of any M&A. Similarly, we want to look for active services/devices for people that are no longer with the organization. Then we can assist with the building of the business case related to potential savings of consolidating services under Sakon’s managed services.”v
Consider that according to CIO Magazine, compliance monitoring and demand management yield average savings of 3–10 percent, while contract optimization yields savings of 15–30 percent and subscription/service optimization yields savings of 10 to 25 percent.vi
As such, it’s imperative to gain early access to a seller’s telecom and IT systems from the start of a process of reorganization. Having solid, actionable inventory-related and resources-related data is critical, and the right TEM provider can help compile that type of information. Identifying the target company’s current telecom and IT infrastructure applications and services will help match the target company’s components with the acquiring company’s existing processes, applications, and platforms. It’s all about due diligence and thorough resource planning. A skilled TEM provider takes full accountability throughout the planning process.
Obvious synergies will flow from that kind of data visibility, which also improves accuracy in accounting. Transparency also will eliminate redundancies, asset overlaps, and hidden costs in the telecom and IT infrastructure portfolio while minimizing operational disruption (such as cutting certain services too soon). A more standardized approach to telecom and IT procurement and deployment is the result.
In the case of a divestiture, telecom and IT professionals must deal with a host of similar issues, ranging from infrastructure, connectivity, and technology to multiple vendors, contracts, sites, and locations. Collecting all relevant technology-related and pricing-related data quickly and effectively can be a challenge. Piles of confusing business spreadsheets devoted to real estate, networking, and technology are not uncommon. But a reliable TEM partner can make sense of it all while helping secure the best carriers and services for the restructured entities’ needs. That kind of support is a difference maker in a chaotic, fast-moving environment.
In one recent example, Sakon went through a process of detailed vendor review to help a large global enterprise customer with a complicated divestiture. That customer was able to improve the overall financial performance of network spend through everything from the elimination of unused/unneeded services and the consolidation of services to newer, lower-cost solutions, as well asimproved association of contract rates and terms with network services and the validation and adjustment of cost allocations to business units.
In that case, notes Steve Santoro of Sakon, “The team was excited to be able to make a strong contribution to our customer for such an intricate corporate organizational transformation. And that example confirms that our processes and methodology can be adapted to handle the unique and complex needs of our customers.”vii
Interestingly, this approach is akin to what consulting firm Deloitte calls “Synergy-capture diligence,” a bottom-up approach to restructuring that gets management involved from the beginning in understanding the operating model that will emerge from the combined or divested entity and identify opportunities for cost optimization throughout. Mergers offer a case in point. As Deloitte notes, it’s all about “due diligence for cost synergy capture”:
Unfortunately, diligence teams often gloss over cost reductions that are perceived as easy to achieve: the ‘magic 10 percent.’ This oversight can have huge ramifications on realized value and management credibility if those synergies do not occur or are delayed. Prospective acquirers may be able to negate this issue by performing synergy-capture diligence – a vital piece of operational due diligence that can be done alongside typical financial and commercial diligence.viii
This process also tends to reveal costly technology that has assumed an increasingly prominent role in most deals, and that value creation therefore has as much to do with operational cost optimization as it does income generation. Technology-related cost issues during a merger or divestiture will include things like the decommissioning of legacy services and installation of new infrastructure, as well as office consolidations or relocations. New technology implementation not only improves the top line by replacing legacy systems, but also helps minimize IT integration costs by avoiding duplication and wasted resources. Theoretically, the successful integration of technology can create significant profit and growth opportunities.
Finally, planners also should develop estimates of one-time integration/divestiture costs and the post-deal operating budget. Acquiring CIOs should therefore work closely with chief financial officers (CFOs) to compare pre-integration/divestiture telecom and IT costs to post-integration/divestiture costs.
This approach provides tangible evidence of precisely how the organization has managed the budget and succeeded in folding or separating two organizations. Naturally, CIOs need to be on the lookout for delays and overspending. The right TEM partner will be invaluable throughout the entire process.
i From: Gartner, “Make IT Cost Optimization a Key Component of Successful M&A,” July 22, 2019.
ii From: EY Parthenon, “Three Actions Technology Execs Can Take to Unlock M&A Cost Synergies,” October 12, 2020.
iv Interview with Sakon, June, 2022.
vi From: CIO Magazine, “Telecom Cost Control – How to Get the Most Savings for the Least Amount of Effort & Risk,” June 14, 2017.
vii Interview with Sakon, June, 2022.
viii From: Deloitte, “Due Diligence for Cost Synergy Capture: Building Deals on Bedrock” (M&A Strategy Series), 2016, p. 1.