Mergers and Acquisitions - Don't End Up With Too Much Tech

7 minute read

There’s a widely quoted figure that, on average, organisations are overspending on cloud software and services by 30 per cent.

Question: If two companies are overspending on cloud software by 30 per cent, then if the two companies merge, does that mean they are overspending by 60 per cent?

The maths may be (very) questionable to say the least, but there is a seed of truth in this. Software is a major cost item for most organisations now, and when a company merges with or acquires another company, then their combined software estate can present a major opportunity or a huge financial drag.

A merger or acquisition offers a chance to stand back and look at the organisation’s technology landscape. In particular, the software and cloud services that now usually represent the lion’s share of a company’s technology spend. Getting this right can deliver a big bump to the bottom line.

Due Diligence

Before getting into that, it’s worth stating that you can save a lot of time, effort, and probably discomfort, if you do a good job with your technology due diligence ahead of an acquisition or merger. If this isn’t something you do regularly, you would benefit from using a partner that has the expertise to identify any potential pitfalls. We’d recommend working with a consultancy like Evolved Ideas that regularly does technology due diligence.

What a technology due diligence exercise won’t do is identify the extent of cost savings that could be made through optimising the merged organisations’ cloud software estates. A due diligence process will spot any technical “gotchas”, but it’s not focused specifically on optimising the software costs of the post-merger organisation.

Post-Merger or Acquisition

There are some parts of a technology integration across two previously separate organisations that are complex and will take months or even years to complete, e.g., where a manufacturer needs to decide how - or even if - to consolidate the software used to control manufacturing processes. There are some other tasks that needn’t be too lengthy, but which could create significant cost savings.

In order to identify the cost-saving opportunities, there are a number of stages –

• Create a complete inventory of Software as a Service and Cloud Services (like AWS and Azure).
• Identify common applications, i.e., that are already in use in the two companies.
• Identify where there are overlaps across different software applications, i.e., where two or more applications with similar functionality are in use.
• Identify software that isn’t being used.
• Identify what quantity, e.g., seats, users, will be required for applications going forward.
• Review cloud services deployments to identify scale or architectural opportunities for cost reduction.

The last one is quite involved and requires a lot of technical input, but progress can be made on the other items surprisingly quickly if you work with a partner with the right tools and expertise, as we’ll illustrate below.

Side note: one factor that can slow things down is deliberating over which software application to use when there are two in use with very similar functionality, e.g., Office 365 vs Google Workspace, or Microsoft Teams vs Slack. Unless there is a very clear cost advantage or other over-riding consideration, I’d recommend that you always pick the application that’s in use at the acquiring organisation.

You can spend a lot of time and effort evaluating the pros and cons of a couple of applications, and each application will have its champions. You might as well use the principle of using the acquirer’s tools to short circuit what can become a protracted debate. However you do it, someone’s going to be unhappy with the choice, so you might as well reach the point of unhappiness as quickly and cheaply as possible. If it’s not an acquisition but a true merger of equals, then you may of course want to be more collaborative, but keep in mind that collaboration in this type of scenario has a price, so time-box or otherwise bound the decision-making process.

The other factor to bear in mind is that you might find that each organisation already had more than one application in use to carry out similar functions, so that’s another level of rationalisation and cost savings you can make. It’s particularly likely to be the case in the sales and marketing areas, but other business functions can find themselves over-purchasing software as well. The growth of shadow IT  has made this a common problem, with software sometimes even being bought on credit cards and expensed, so carrying out the kind of exercise described here is likely to flush out savings within as well as across organisations.

Cost Optimisation

However you’ve arrived at what the merged organisation’s application portfolio is going to look like, once you’ve done that you can then look at making it as cost-efficient as possible. Don’t assume that if everyone was already using, say, MS office, then you can just consolidate on a new number of seats. You need to look at:

• Were all the licences being used?
• Were the appropriate levels of licence in place, e.g., were there occasional, basic, users with “advanced” licences?
• Does the expanded headcount present an opportunity for volume discounts?

Obviously if you’re moving one group of users onto an application that’s replacing the one they formerly used then you need to ensure appropriate levels of licences as well as volumes. There’s often quite a steep price increase between tiers of software subscriptions, so you need to be wary of getting someone a higher level of licence because they just potentially might need one of the functions included in it – watch out for the “nice to haves”.

Where you are consolidating on to one application where previously two or more were in use, you’ll need to factor in renewal dates and termination clauses – and make sure you don’t miss any deadlines for giving notice.

SaaS Versus PaaS and IaaS

As it’s likely that the quick wins will come from the SaaS software, I’d suggest that should be the initial focus unless you have enough technical resources to tackle the PaaS and IaaS areas like AWS and Azure in parallel. Getting these areas optimised cost-wise is a large topic, and the specifics are very dependent on the particular technologies that are in use, but here are a few pointers about how to avoid overspending on services like AWS, Azure, or Google Cloud –

• Do you really need all that storage? Is there data that’s been around for a while and that can be discarded or moved to a lower tier of storage?
• Does that need to be running all the time? Some services can be set up to be paid for purely when they’re running, but sometimes they are set up so that they are being paid for 24x7.
• Do you need all that memory / CPU? Or do you need it all the time, or just at month end? If the latter, why are you paying for it all month?
• Are you using the right service, or using it in the right way? This can be a post-merger problem when services are consolidated onto one platform from two or more. Doing something in a way that was optimal for Azure may be expensive and inefficient on AWS, and vice-versa.

Again, experience here can make a big difference to the speed and scale of results. Working with Evolved Ideas at e-bate, a software company that provides rebate management solutions, we were able to deliver a £10,000 a month saving in AWS costs for e-bate within a few working days of looking at e-bate’s platform.

In Summary

Organisations are so dependent on technology now that tech has to be a major focus area when looking at a merger or acquisition. The good news is that there’s undoubtedly going to be synergies and cost-savings arising from bringing together two companies’ technology portfolios. However, to maximise those cost and efficiency benefits fully and quickly, specialised expertise is required.

So, if you’re looking at a merger or acquisition, or if you just want to make sure that your current cloud software is cost-efficient, please get in touch with us at enquiries@costimised.com.

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