When IBM Corp. bought the management and technology consulting business of PricewaterhouseCoopers for $3.5 billion last fall, it gained an important asset that it visibly lacked: strategic business consultants with BlackBerries filled not just with the names of CIOs and IT department heads, but the names of CEOs, CFOs and senior vice presidents of sales as well. These relationships drive the strategic IT consulting business, and with project-based IT on the decline, IBM’s leadership decided that “strategic” was the place its service business needed to be.
Combining that operation with its existing consulting group enabled Big Blue to create its new Business Consulting Services unit. BCS, as it’s called, is intended to complete IBM’s lineup and allow it to become an IT mega-vendor akin to those spawned by the consolidation trend in financial services. Now, there is only one problem left: Do clients actually want one-stop shopping?
Racking Up Big Wins
Some signs indicate that they might. IBM’s outsourcing group recently has had a string of impressive wins: a seven-year, $5 billion pact with J.P. Morgan Chase & Co., a 10-year, $1.1 billion deal with British pharmacy giant The Boots Group PLC and a 10-year, $2.6 billion agreement with Deutsche Bank AG. The service allows major corporations to transfer their IT operations-including physical IT infrastructure, employees and all service needs-to IBM for a monthly fee. IBM provides resources, such as key employees or server capacity, as needed at peak demand times. It also performs automatic maintenance and upgrades.
Even before the combination, Big Blue led the field in overall IT services with $36.4 billion in services revenue in 2002, or about 8.5% of global services spending, according to the Yankee Group, largely attributable to its huge base of hardware clients that also purchase IBM maintenance services. However, with the addition of PwC Consulting’s approximately $5 billion in net revenues, IBM poses the threat of becoming an IT services juggernaut: In 2003, IBM’s service group is expected to collect about 10% of the global spending on IT services, nearly twice its largest competitor, Electronic Data Systems Corp. (EDS). And given IBM’s resilience to downturns, analysts expect IBM’s services revenues to grow steadily in the single digits over the next few years.
But much of the hoped for growth in the new BCS group will be dependent on the revival of IT services spending. So far this year, the signs point to still more stalling by corporate buyers. There are no signs that spending on IT consulting services–or even IT services in general, for that matter–will grow dramatically this year. After two years of declines in higher-level consulting work, which sapped both the top and bottom lines of consulting firms like PwCC, 2003 doesn’t look much cheerier. A Yankee Group survey in 2002 indicated that both global IT services generally, and consulting services spending specifically, would increase about 6% in 2003, with the bulk of the gains in the second half. Now, due to the sagging recovery and anxiety over a potential war with Iraq, the Yankee Group doesn’t see IT services coming back to life until early 2004.
If IBM is to grow, it will most likely have to do so at the expense of others. Fortunately for IBM, most of the limited consulting outlays this year and next are expected in areas in which IBM’s new BCS has considerable expertise: customer relationship management systems, supply chain management systems and IT securit
y. Plus, IBM has strong ties to the few sectors with money to spend–financial services, government and manufacturing.
“Market conditions are clearly causing a shakeout and consolidation in the IT consulting space, with many of the small players getting bought or closing up shop,” says Yankee Group’s Andrew Efstathiou, an IT services analyst at the Boston-based tech consultancy. “This kind of market favors the largest players with the most stability and the broadest array of offerings for clients. In that sense, IBM should have a better time than most in maintaining or gaining market share in 2003.”
To gain ground, IBM first needs to best its biggest competitors in the consulting and services field. Top on the contenders’ list is EDS, which has long wrestled with the integration of management consultancy A.T. Kearney Inc., purchased by EDS in 1995. At present, IBM and EDS are going head to head in the auto sector, a traditional EDS stronghold, and IBM appears to be gaining some ground. On Feb. 6, Ford Motor Co. announced that it had signed a large consulting and implementation contract with IBM for product life cycle management software, while maintaining PLM ties with EDS, a move analysts see as a way for Ford to leverage both service providers.
Checking Out the Competition
Other big competitors include Accenture Ltd. and Cap Gemini Ernst & Young. Accenture has long fielded a strong team for financial services companies, also a strength at IBM, and is seen as a leader in the automation of human resources needs, a skill set IBM added with the PwCC purchase. And Cap Gemini, through its 2000 purchase of Ernst & Young Consulting in the U.S., has a broad presence with many midsize manufacturers and a large practice with utilities, neither of which have been an IBM strength. Only time will tell whether IBM’s full lineup of services will allow it to grab market share from these formidable opponents.
Even if IBM beats back its biggest foes, it will still have to contend with the hundreds of smaller consulting outfits that compete on independence, focused expertise and price. Executives at large companies say that the door is still wide open for such firms, largely because of concerns about the independence of advice handed out by any part of IBM. “Adding PwCC definitely brings a little finer cut to the strategy side of what IBM already did, and I think they are doing a good job of integrating their services. We do expect to use them occasionally,” says Dick LaFave, CIO of Nextel Corp. in Reston, Va., which already uses IBM as an outsourcer for customer care services.
Still, LaFave isn’t convinced that the $8.5 billion in revenue provider of mobile phone services would be well served if it did significantly more business with IBM, particularly for sensitive or highly complex consulting projects. “We will still have a need for a completely independent view around here for some consulting work, and we will be open to the expertise provided by highly focused smaller vendors,” he says. “I think you have to be aware of what you’re buying, and when buying from IBM, I would expect the views to come back biased in favor of buying more from IBM.”
At McKesson Corp. in San Francisco, executives are even more skeptical of the combination. Cheryl Smith, senior vice president and CIO of the $55 billion pharmaceuticals distributor and medical software company and a member of IBM’s corporate advisory board, is concerned that the PwCC purchase may not enable IBM to offer as much independent consulting advice as it hopes. “If you need consulting services, you often need an unbiased source for advice. As I’ve said to the folks at IBM, I think it will be very difficult for their consultants to deliver unbiased opinions now that they are part of a hardware and software vendor,” says Smith. “Plus, I want the highest quality, best cost consultants on a project, and sometimes smaller, more focused firms do a better job at a lower cost. With big firms, you never know if you’re going to get experienced experts or consultants who’ve never done a similar project. As a result, I predict that the PwCC purchase won’t be as successful as IBM would like.”
Integrating the New Guys
To win over skeptics, analysts suggest that Big Blue must first demonstrate to clients that it has successfully integrated the 30,000 PwCC employees and more importantly, the top 1,000 of PwCC’s former partners, without destroying the independence of their advice. Clients are seeking that proof by offering IBM small projects right now that demand cross-disciplinary skills from various parts of the BCS unit, analysts report. Indeed, IBM says that it signed contracts in the fourth quarter with 99 of the 149 former PwCC clients that were forced to sever ties with the firm due to auditor independence rules, because they were audited by the consultant’s former parent company, PricewaterhouseCoopers.
But only hard examples of unbiased consulting work will win over doubting execs. “The day I hear that IBM consultants are recommending EDS or Cap Gemini for a major outsourcing deal, or another hardware company for infrastructure, is the day I believe they are truly independent,” says Smith.
IBM’s consulting leaders insist that objectivity and open sourcing of technology will be as crucial to BCS as it was to PwCC. “Objectivity in consulting is very important to us,” says George Bailey, a former PwCC partner who is now global head of the BCS electronics industry group. “Well over half of IBM’s existing consulting work is done on non-IBM platforms, often with non-IBM software. We’re offering integrated solutions that are objectively the best there are to offer.” He admits, however, to some IBM bias. “If components of a solution are similar and we offer a product that’s just as good as a competitor’s, sure, we’re going to favor IBM.”
Integration of client and industry coverage was also a top priority. Leaders from both IBM and PwCC went to extensive lengths, prior to the Oct. 1 deal closing, to configure a cohesive new system. That has resulted in a coverage map that more closely follows IBM’s industry definitions, while maintaining PwCC’s functional definitions, such as its human resources and supply-chain practices, says Bailey, who led the first phase. Bailey points out that considerable effort was spent on identifying the right consultants to lead various industry and practice groups. The result has been a fairly even split in key positions between legacy PwCC and IBM employees, a factor that has expedited integration. “In most mergers, there is a pattern of winners and losers. In our case there’s been a very even allocation of jobs,” he says.
Perhaps, but the egalitarian hand is not providing a guarantee that IBM can retain the senior PwCC consultants. Not only did former partners and senior consultants swallow pay cuts of 10% to 20%, but IBM has made up to a third of their remaining pay performance-based. As an incentive to stay, IBM structured an annual stock option plan for BCS that pays back employees as much or more than was sacrificed in the merger. The options vest over several years with new grants yearly.
At present, IBM asserts that 99% of the 1,000 partners offered a role in the new BCS decided to come on board. Three years out, however, experts in IT services predict that IBM will be doing well if it holds onto 50%, particularly if corporate spending revives enough to stimulate senior level hiring at IT service competitors.
IBM readily acknowledges that the proof of success will come only from winning assignments and delivering results over the next year. “Our clients and contacts see what we’re doing, and [they] like the new combination. But the reality is we have to deliver on this vision,” says Bailey.
For now, IBM is in “delivery mode,” as Bailey puts it. But given the current economic environment, it may take longer than IBM would like for big wins to come rolling in.