Co-op's takeover of Somerfield may present serious IT challenges

Ethical Co-op may face challenges in integrating with private equity-owned Somerfield

News of the £1.57bn purchase of supermarket chain Somerfield by rival The Co-operative Group (Co-op) may signal a string of challenges related to integration and outsourcing management.

In 2005, an intensive integration project began as the IT of Co-operative Group and the Co-operative Financial Services (CFS) were merged. Since then the consolidated group has worked on streamlining systems infrastructure for back and front office operations.

Around the same time, private equity-owned Somerfield announced a £70m IT-driven transformation scheme which intended to replace a number of legacy operational systems onto SAP platforms and gain a sharper focus on the use of business technology tools.

The supermarket chain then signed a pair of significant outsourcing deals. The first, a seven-year £50m agreement with Indian supplier Tata Consultancy Services (TCS) covers IT management and planning, as well as maintenance and service delivery to its stores and distribution centres.

The second, a multi-year £18.6m outsourcing contract for managed telecommunications services with virtual network operator Vanco was signed in 2006 to connect its commercial locations, depots, the retailer’s head office and a disaster recovery centre, all located in the UK.

Co-op’s initial outsourcing arrangements date back from 1994, when CFS signed a £22m deal with supplier Xansa, which has already been extended twice, most recently in 2003.

Last year, another extension was signed as part of a wider review of the Co-operative Group’s sourcing model, and will include the outsourcing of software development for Co-operative Insurance Services.

‘The rebuilding is going to involve a much higher outsourcing component and we are in negotiations at the moment,’ Co-operative Group chief information officer Gerry Pennell told Computing at the time.

Pennell said the main motivation to increase the number of outsourced staff is fast access to increased capability.

‘Attempting to modernise rapidly requires access to a broad set of skills, so attempting to do that solely in-house would be very expensive and slow,’ he said.

Other challenges linked to the Somerfield acquisition are expected to stem from cultural differences between the two businesses.

Widespread industry opinion is that since private equity-owned Somerfield may have been focused on short-term strategies up to now, it may take some readjusting from the acquired group to fit into Co-op’s long term IT strategy.