Case
Measuring the Impact of IT Costs
A global financial services company was considering lending money to a private equity
firm to support its acquisition of a large direct marketing company that served millions of
customers through more than two dozen carefully managed marketing campaigns. The
private equity firm had already done its due diligence on the target company. However,
because of the essential role information technology plays in such an operation, the
potential lender sought a second opinion about the target company’s IT environment to
make sure it was adequate to support operations, sales, and marketing.
Of particular importance to the lender was validation of potential cost savings identified
by the target company. In addition, a number of IT projects underway suggested the some
issues existed surrounding the stability of the system.
The outside advisor’s analysis addressed:
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Reasonableness of operating and capital expenditures related to IT including a
review of the company’s forward looking capital expenditures budget and
identification of potential opportunities for reduction in expenditures.
Adequacy of the existing IT environment used to support the company’s
operations, including its resilience and business continuity planning.
Sufficiency of the company’s information systems used for sales marketing, and
mailing acitivities.
Major IT infrastructure and applications projects and/or initiatives underway or
planned that could potentially affect the stability of the company’s existing It
environement
As a result of the analysis, the outside advisor told the financial services company that it
should not expect the target company to achieve any short term reductions in IT costs,
given the state of the company’s implementation plans.
With this advice in hand, the financial services company modified its financial models o
reflect the impact of delayed cost savings and established a process for monitoring
progress on implementation of a mission critical distribution system. The company and
the private equity firm renegotiated the terms of the loan, and the deal was succsssfully
completed.
IT is a common mistake to oversestimate cost savings and synergies with respect to IT. In
this case, the individuals involved did not originally understand the “real” IT spend
associated with the integration and had the projected cost savings not been adjusted
downward before conclusion of the deal, they would have severely overstated their
potential savings-and the overall value of the deal.