Deutsche Telekom and France Telecom — Can Procurement Mergers Work? (Part 1)

Earlier in the month, Deutsche Telekom and France Telecom announced they were merging a certain set of procurement activities in an effort to reduce costs -- some €1.3 billion in annual savings they claim (which, given the current direction of the dollar, could amount to some $2 billion in annual savings). The Financial Times summarized some of the highlights of the announcement, noting that the joint venture will be established in Q4 2011 and "will combine procurement in areas such as network equipment and IT infrastructure." The combined shared service organization "will employ 200 people and will cost about €35m to set up." The FT also notes "although they are among Europe's biggest mobile operators, the companies compete in only five countries in the continent, including Poland, Austria and Romania."

The deal raises a number of questions and possibilities regarding the collaboration of companies in the pooling of spend and resources. On a personal level, having been involved in demand aggregation and related projects in the past -- and analyzing trends in group buying organizations and leveraged contracts on a regular basis -- I would argue that it's certainly not a given that simply bringing like spend together will result in savings, especially when volume numbers are already high. Spend Matters believes that the success of any operation such as this will depend on a number of factors, included but not limited to areas like SKU/item rationalization.

Just because Deutsche Telekom and France Telecom buy similar items in the network equipment and IT infrastructure category areas does not imply they buy identical items from the same vendors. Moreover, unless business and IT stakeholders are fully bought into the notion of standardizing on the same type of servers, desktops, notebooks/laptops, switches, hubs, routers, etc., and will then buy off of jointly negotiated contracts, the amount of savings from volume leverage could be nil. Moreover, without common transactional contract execution and transactional P2P systems -- simply standardizing on SAP SRM, for example, without investing in the right type of buying enablement (e.g., catalog content management, search, comparison), compliance controls and network connectivity -- identified savings are likely to go only partially implemented, at best.

Stay tuned as we continue to look at the prospects for this procurement merger -- and potentially others like it.

Jason Busch

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