The large-scale consolidation that has reshaped the express delivery and contract logistics sector in recent years has presented some major integration challenges.
The largest and most complex to date was triggered by Deutsche Post World Net’s acquisition of the UK’s Exel Supply Chain in December 2005 and the unit’s merger with a previous acquisition, the US group DHL Solutions, to form DHL Logistics.
As a measure of the size of the integration task, the takeover brought together 110,000 staff from Exel with around 30,000 from DHL. And with the ramping up of staff levels post-acquisition, the user community grew to 164,000, spread across 3,000 locations in over 100 countries. More than 900 IT projects were initiated as part of the integration programme, as DHL unified its core forwarding systems, contract logistics services, the companies’ mail systems and networks, and began the standardisation of 75,000 PCs and countless field devices.
Setting itself a three-year timescale and E70 million investment for the integration, DHL managed to draw a line under the IT integration at the beginning of 2008, having come in under budget and ahead of target on the projected savings from the merger.
For those past two years, that strategic IT transformation has been the main preoccupation of DHL Logistics CIO Nigel Underwood. Information Age asked him about the challenges that lay behind such a positive outcome.
As a coda to the completion of the integration programme, Deutsche Post announced in January that it is planning to transfer responsibility for parts of its global IT operations to Hewlett-Packard.
If the deal goes through, HP will inherit the 2,500 employees who currently provide the services for Deutsche Post World Net’s global data centre operations in Arizona, Malaysia and the Czech Republic, as well as IT operations in a number of other European countries, covering information and data management, infrastructure and network management, and application management.
However, Deutsche Post World Net has stressed that all applications used by its customers will continue to be designed, developed and governed internally. It will also retain the professional services and customer integration supply management components of its IT services unit, including project management, project consulting, application development and deployment services, as well as electronic data integration for its messaging and supply chain programmes.
Information Age: When Deutsche Post acquired Exel and merged it with the previously acquired DHL Solutions group, to what extent was the senior management of all three companies aware of the IT challenge that would result from a merger of that scale?
Nigel Underwood: On the Deutsche Post side, the company has a long track record of executing acquisitions. And the CEO of Deutsche Post’s logistics business prior to the acquisition of Exel was responsible for both the logistics division as well as the IT function in the Deutsche Post organisation and so was very IT literate. On that side of the house, there was very much an understanding that IT was critical to a successful integration.
And the same was true at Exel, which is the side I came from. I sat on the acquisition review board for the previous five years and had been involved in Exel’s acquisitions of Tibbett & Britten, Fujitsu Logistics and similar companies.
So I think the business awareness was high. As we went through the planning cycle, it was evident that a lot of the investment was going to be on the IT side. But that was where a lot of the value was to be created. The synergy was dependent on the capability of IT and its integration.
IA: So what were the critical success factors in this case?
NU: A lot of the challenges were not about the technology but about the people. The biggest challenge at the business level was cultural integration: when you are operating in so many countries, how you bring people together from each of the different heritage organisations – because each acquired business has a background of acquisitions in its own right.
Despite the acquisition’s size, we wanted it to have the characteristics of a merger, taking the best from both organisations. Exel was around e10-11 billion in revenues and DHL was e9-10 billion. But the IT numbers were very different: if you looked at the DHL side coming from Deutsche Post, there were probably only 50 dedicated people focused on DHL’s IT. Mostly it was being provided by the shared services function or by the Express organisation [an earlier Deutsche Post acquisition].
So in reality, it was not the coming together of two IT functions, it was the coming together of six or seven IT functions into one new organisation. From the top of the organisation to the bottom, we appointed 2,200 people.
And the aim was to remove uncertainty as quickly as possible; integration was really a people agenda, [dependent] on some very critical people, very critical knowledge and skills, and commitment to work some very long hours.
We were also trying to crew up with additional resources because one of the other principles we had was that the integration was our problem, not our customers’. The nature of the business means that a lot of the IT folk spend time with the external customers – the retail companies we are providing logistics solutions to. So, alongside delivering an integration agenda, it was absolutely critical that we had teams focused on customers’ projects.
IA: The sheer scale and geographical distribution of the businesses must have made this particularly difficult.
NU: This was the biggest integration in our industry’s history, and probably across many other industries if you look at the size of the network, the number of countries involved and the number of locations in each of those (3,000 in over 100 countries).
If you look at the volumes of shipments, we were already the leader in contract logistics, and the coming together of the airfreight and seafreight services put us at number one in terms of scale in those two [areas] as well. We were handling over 10 million shipments a year through our combined forwarding systems.
The integration has been a little like rewiring a house with the electricity turned on; you could not afford to drop any transactions while bringing the systems together. At the same time, we were trying to save money. Deutsche Post had set a e220 million synergy target and we knew that IT was on the critical path for enabling a lot of that.
To give you an idea of the scale, across the business in IT we kicked off 900 projects specifically for integration. So establishing good project governance and global project management was essential.
IA: Was setting a relatively conservative three-year timeline for the integration an important factor?
NU: We [managed to] achieve almost everything within 24 months. We are ahead in terms of quality, cost and time, and the benefits at the other end. We are spending less than we originally anticipated.
The critical systems are pretty much complete – forwarding systems, email, networks and so on – and we have policies fixed for contract logistics. Really the question now is: how do we embed our operating model, and how do we complete the standard deployment of things like desktop [Exel had a Dell-based standard, DHL an HP one]?
IA: What were the biggest lessons learned from the integration exercise?
NU: The fact that the business community and the IT community were lined up is the biggest single lesson for me here. I didn’t candidly believe we could go at the pace we set, without that.
We had an agreed approach with the business: you can either go the long way round on an aeroplane journey and avoid the thunderstorm or you can go through it. And we decided to fly through a series of thunderstorms. As it happened, they were not as turbulent as we thought they would be.
We set some fairly bold targets, saying that by the end of 2007 we would have primarily completed the integration of our two forwarding systems. In fact, we had completed 95% by the end of the first quarter of 2007, putting us ahead of schedule.
Of course, inevitably, there were issues to deal with – a group of people resigned [in Asia following the acquisition] and we had to put in interim management; we had a troublesome implementation in one particular country, which involved two-hour calls for seven days until we turned that one around.
IA: So what were the costs and benefits associated with the integration?
NU: The prize here [for Deutsche Post] is e220 million in synergy savings on the business side, and of that the IT number was tens of millions of euros. We have certainly exceeded the IT synergy target.
From an IT perspective, we initially set an integration investment amount of e70 million. Again, during the first year we spent less than we had factored in. That meant that in late 2007 we closed down the majority of those integration investments and there will be no integration investment in 2008.
So we expected to close [the integration] in 36 months; instead it [was] more like 24 months.