Channel programs News
Inside the Deal That Rocked IT Services
No matter how you look at it, IBM's decision to integrate the organization into its $35 billion IBM Global Services (IGS) division is a major move by the technology and services behemoth that can affect the entire solution-provider channel. On one hand, IGS has an opportunity to widen the gap in both size and capabilities over rivals like EDS, CSC, Accenture and Hewlett-Packard Services, building on a strategy started several years ago and continued with the purchase last year of e-business consulting firm Mainspring. On the other hand, some industry-watchers say Palmisano and company are taking a huge risk by chasing the Holy Grail of "end-to-end" at a time when the weak demand for IT solutions just doesn't support it.
Meanwhile, solution providers of all sizes are watching anxiously, trying to figure out whether IGS' new capabilities will bring them more partnering opportunities or just create a bigger, more powerful foe for them to deal with. "That's the biggest question out there right now,whether it takes [business off the plates of other companies," says one midsize solution provider who requested anonymity because he does the majority of his business in IBM solutions.
Putting It All Together
The acquisition, which the company expects to close by the end of this quarter, will add 30,000 employees to IGS' stable. Most of them will be integrated with IGS' consulting and integration arm, Business Innovation Services, to form a new entity. Headed up by Ginni Rometty, former general manager of IBM Global Services, Americas, this new unit will leverage IGS' existing services offerings to provide solutions combining technology expertise with business process and industry insight.
While the news surprised some in the industry, it's not completely out of left field, because IBM first considered buying PwC Consulting two years ago, when the initial rumblings from the SEC over auditor independence sent Big Five firms searching for exit strategies for their consulting divisions. At that time, IBM executives could not justify the company's high valuation. (HP, which went a step further and offered to buy the company for $18 billion, backed out of the deal after it, too, decided the price was too high.)
For PricewaterhouseCoopers and its partners, the upside is clear: It eliminates troublesome conflict-of-interest issues that have been simmering for the past few years. And for PwC Consulting, the deal saves it from a shaky-at-best future, because the organization has been on a revenue slide for much of the past year and would have faced a multitude of barriers to growing as a public company.
The good news for IBM, of course, is getting PwC Consulting,a respected entity with offices in 52 different countries and strong relationships with countless Fortune 500 clients and government agencies like the U.S. Postal Service,for a steal: Fiscal year 2002 net revenue should come in at $4.9 billion,$1.4 billion more than IBM is actually paying.
Both companies say they expect to see several short-term benefits from the acquisition, including cost synergies derived from operating within the IBM infrastructure, sharing corporate resources and new revenue drivers based on PwC Consulting's expanded vertical market expertise. With restructuring changes, IBM expects the transaction to reduce earnings-per-share by almost 30 cents in the fourth quarter of 2002, but it believes the acquisition will be accretive to earnings by the fourth quarter of 2003. By the end of 2004, the company expects the PwC Consulting unit to contribute double-digit revenue growth "and a profit margin comparable to the rest of IGS," CFO John Joyce says.
But more than the economics of the deal, the acquisition "has just raised the bar of what we can deliver to our customers," said Doug Elix, senior vice president and group executive of IGS, who hosted a call with analysts the day the deal was announced.
According to Palmisano and Elix, the driving force behind the deal was client demand for a new entity within the consulting division that can combine technology and business strategy to help clients simultaneously increase efficiency and become more competitive. "No longer do people think of just using a consultant to do a project with a set of recommendations," Elix said on the call. "What they want is someone who will stay with them through the effort of doing the transformation and technology work that is associated with it, and to hang around to help them realize the benefits."
Specifically, PwC Consulting brings a new level of expertise in areas like business-process outsourcing and strategy consulting, as well as industry-specific solutions in ERP, CRM and supply-chain management. What's more, analysts say PwC Consulting's expertise in the packaged outsourcing space will be a good complement to IBM's existing custom-outsourcing offerings. "Those are all areas where IBM is pretty under-represented, given how big it is," says Christine Ferrusi Ross, an analyst with Forrester Research.
In Search of End-to-End
The downside to the strategy, analysts say, is that IBM may be overestimating the demand for a combined technology and business-strategy solution provider, and is chasing a Holy Grail in trying to position itself as a one-stop shop for IT services. In theory, it's safe to say a client would pick the same service provider for all its needs,that is, if the service provider could prove it were equally competent at everything. But the truth is, most corporations don't see that as a realistic option, Ferrusi Ross says.
"Will IBM create this beautiful vision that they've laid out for us? I don't think so," she says. "If you can't be end-to-end with 150,00 employees, I don't see how another 30,000 is going to make the difference."
But IBM executives are downplaying the physical increase in consultants and resources that will join IGS, saying the acquisition is not about increasing the scale of what IGS already has or growing its top line. What's more, they have shied away from the topic of potential layoffs (or defections) that could result from overlapping services.
"This is not about combining two consultancies," says Ralph Martino, vice president of strategy and marketing at IBM. "This is about creating a powerful new capability to help clients solve their business issues with deep industry and process skill and experience with world-class technology. It is not about more consultants, greater scale or greater numbers."
John Madden, senior analyst at Summit Strategies, thinks there is merit in the strategy, saying that in the end, IGS' connection with the larger Big Blue infrastructure and technology leadership will pave the way for more consulting work. "IGS' strategy has been to tie consulting into things like e-business-on-demand and technical expertise," he says. "Is it a risk? Sure, but at the same time, they are on the right track when they say customers are looking for guidance and help with strategic planning."
But there's another potential roadblock: Local PwC partners that do not agree with the global decision can technically still pull out of the deal, weakening its overall value, some analysts say. According to IT services research firm Pierre Audoin Conseil (PAC), it happened in 1999 when KPMG Consulting's French partners disagreed with the global plans and left to merge with CSC, and then again in 2001 when the Denmark office of Ernst and Young Consulting objected to joining Cap Gemini and sold its business to a Norwegian company. And considering that PAC estimates the average PwC partner will get only about $700,000 from the IBM deal (compared with the $3.5 million windfall that Ernst and Young partners got from the Cap Gemini merger), expect competitors to use the money issue to steal influential partners away from the new entity.
The Partner Question
IGS executives say the acquisition won't change their oft-repeated mission to get closer to solution providers, and will, in fact, give partners a stronger ally when it comes to go-to-market solutions. "For partners looking to resell IBM hardware, software and services, we'd argue that the stronger team we will have in place will set up more opportunities," Martino says, noting that the opportunities are just as strong for ISVs, services firms and integrators whose solutions complement IGS' capabilities.
Solution providers like Jack McDonald, CEO of IBM business partner Perficient, think the acquisition will bring new opportunity in the way of industry-specific solutions that partners can latch onto for more business. "This deal further bolsters IBM's vertical-industry expertise, and it will enhance the existing solutions that IBM's extended team of business partners can deliver to enterprise customers," he says.
But the majority of solution providers who spoke to VARBusiness say that while they aren't too concerned about increased competition, they're not holding their breath for more partnering opportunities, either. Despite the rhetoric about new synergies being created, the reality, they say, is that the IT services slowdown has all but destroyed those kinds of partnering opportunities.
Other solution providers who focus on high-end consulting and integration say the move may ultimately improve their chances by rolling two of their largest competitors into one. And if the new entity has trouble combining disparate cultures, those solution providers will be ready to move in on any business that falls through the cracks.