Kraft and Cadbury: Managing SAP Through a Takeover

Following any merger or acquisition, the companies involved look for synergies and savings. Having paid £11.5bn for Cadbury, Kraft is hoping to save £430m annually, largely by integrating the companies' IT systems. But how easy is it to merge the IT systems of disparate companies, and what should other companies look out for before embarking on mergers and acquisitions?

Both Kraft and Cadbury rely on systems provided by SAP, one of the world leaders in enterprise resource planning (ERP) systems. SAP also provides financial planning and human resources (HR) systems, called ERP Financials and ERP Human Capital Management respectively.

Kraft upgraded all of its SAP systems in 2008. Cadbury, on the other hand, has had a trying time with SAP. Before demerging from Schweppes, Cadbury reported that trouble with its SAP implementation had impacted on performance and contributed to its £12m deficit. It seems to have been sorted out since.

Kraft expects to spend £827m integrating the two companies' production, management and IT systems and a large part of that will probably go to SAP, or one of its integration specialists. Obviously it is keeping the details to itself, and SAP is notorious for giving away as little as possible, even to its customers, so we spoke to Clive Taylor, a director at Sesai Consulting Ltd, who explained some alternative strategies and common pitfalls, not specifically related to Kraft and Cadbury, but applicable to any company planning a merger or acquisition. Sesai specialises in consolidating IT systems following mergers and acquisitions so Taylor has seen the good and had to sort out the bad within such situations.

How to handle a merger

The initial work should happen long before any merger or acquisition is planned. A company that is growing should ensure that its IT is flexible and able to support its growth plans. If growth involves buying another company, the due diligence process should include an assessment of the target company's IT to quantify any risks to business continuity, outline the required operational and capital expenditure for the first 12 months following the acquisition, identify the opportunities for synergy and define the high level integration plan.

Sounds good, but it's an unfortunate fact of business life that mergers and acquisitions are often controversial, whether it's two small companies merging amicably or a hostile takeover of a large corporation by an even larger one, the tendency is for negotiations to be conducted by a very small group of people, often just the proprietors in the case of small companies, or a handful of directors and the chief financial officers in the case of larger ones. The IT manager (CIO in a large organisation) is often one the last to know.

How IT integration proceeds after the merger or acquisition depends on many factors, not least the relative sizes of the companies. Where a larger company takes over a smaller one, it is common to export data from the smaller company system and merge it into the larger one. With SMEs this can be relatively straightforward, though time and money will have to be spent retraining the staff from the old company to use the new system.

With Kraft and Cadbury the principle is the same, but the sums a lot bigger. The fact that both rely on SAP gives them a slight advantage, but SAP and other ERP systems are usually heavily customised to suit different situations, so it's not going to be like a "compare document" operation on two word processed files!

Where similarly sized companies merge, it maybe that one has the more flexible, extensible system that can be used by the new merged company, but they will need help from their supplier to migrate the data and adapt the network infrastructure to incorporate legacy hardware from the other system.

Taylor says there are now good data aggregation tools to provide management reporting, so totally integrating the systems may not be necessary. Large holding companies operate in this way. Each of the companies in the group continues to run as a separate entity with data uploaded to head office as and when necessary for the group management's use. Not only does this avoid the expense of integration, it also means that the company can be sold on as a standalone unit any time a decent offer comes along.

Saving through diversification

Another alternative for many companies is to integrate at a lower level where there are savings to be made by eliminating duplication. Kraft, for example, isn't big in chocolate but it does own Terry's so it might make sense for them to create a "chocolate division". Even if they keep all the Cadbury, Fry's, Green & Black's and Terry's manufacturing sites open, integrating the IT will create "back office" savings in things such as purchasing, sales, marketing and HR, and, of course, it simplifies any future rationalisation of production.

Customer-facing IT is another important issue. Companies that operate in the business-to-business sphere generally prefer a single corporate identity, it makes them a bigger, more important-looking fish in their particular pond. In the retail world things are different, people paying premium prices for Green & Black's chocolate probably don't want to be reminded of some of Kraft's bargain basement snacks so the brands will very likely remain separate.

Either way, the IT integration work can be considerable. New large corporate websites emphasising the new "superbrand" are needed in the first instance, with new email addresses for staff acquired from the taken-over company. Where brands are kept apart for marketing reasons, their websites may need moving to new servers and at some level they will link to the group site. Decisions have to be made about how this is all structured.

Taylor gives some bullet point examples of companies doing it right. Such companies:

• provide a consistent brand message to customers, suppliers and shareholders (website, email addresses, consolidated corporate directory)
• go for the low-hanging fruit, merge divisions, consolidate procurement, and provide consolidated finance, HR and other business information
• implement the long-term post-merger plans.

Doing it wrong includes:

• not conducting IT due diligence
• waiting 18 months before addressing any integration activities, losing the momentum of the merger and allowing the business to adopt newer "old" ways of working
• not stopping all in-flight IT projects until their value to the new organisation could be assessed
• not addressing the integration of the IT organisation as a priority. People uncertain of their own future will not perform to their best, and the legacy IT organisations support the old ways of working.

Sesai has often been called in after the event to work with businesses to resolve issues that arose from "doing it wrong". In each case, it has been more painful, more costly and more time consuming for the organisations concerned than it need have been. It remains to be seen how smart Kraft is.