Deutsche Telekom and France Telecom — Can Procurement Mergers Work? (Part 4)

I wasn't planning on writing a fourth part in this series (See Part 1, Part 2, Part 3) looking at the procurement collaboration between Deutsche Telekom and France Telecom, but I realized that in digging into the details of where savings may emerge, plus the risks any type of centralized transformation program like this could bring, that I overlooked a more fundamental question: why? In other words, why would two giant organizations opt for this type of joint venture -- of the type that previously failed in the B2B marketplace days -- rather than turning to other options like an internal shared services group or procurement BPO? In fact, the latter option may have been lower risk, had a BPO like IBM or Accenture offered to guarantee certain savings levels, even potentially writing a down-payment check up front.

My guess is that there were a number of buying and non-buying reasons this joint venture program ended up becoming the chosen strategy to reduce costs. On the most basic level, it extends the partnership of both firms. And procurement, despite what I hope nearly all readers of this blog believe, is a relatively low risk place to do it, at least as CFOs and management teams look at the function. Unlike finance/treasury, HR, IT or another area of the business, I'd wager that a procurement merger was more palatable than the alternatives. It's likely that some close to the early strategies that went into the joint venture felt -- wrongly, I would argue -- that the potential fallout from a less-than-stellar execution would not create material adverse harm to the business.

From a procurement angle, it's likely that the procurement, finance and executive management of both organizations believed their spend in the designated areas (IT and network equipment) to be unique enough that a BPO with deep category experience in other areas would be unlikely to apply category knowledge in these specific areas. In other words, a BPO would be learning on each organization's dime, rather than applying what it had already done elsewhere, including lessons learned. And compared to a shared services environment alone (without the pooling of spend), it's highly likely that the management of both organizations believes that a combination of demand aggregation, SKU rationalization, enhanced processes and technology platform leverage will contribute to savings success.

Regardless of how the venture turns out, it will be fascinating to watch the implementation and execution of the effort. Given all the risks involved, I would hope that other CPOs of large, global firms learn from the initiative rather than diving in head-first and pursuing similar ones of their own before the JV procurement verdict is out.

Jason Busch

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