Global IT Services scenario set to change

Stephanie Moore

On Tuesday, IBM Global Services (IGS) announced that it would acquire PricewaterhouseCoopers Consulting (PwCC) for $3.5 billion in cash and stock. The acquisition will strengthen IGS’s service delivery portfolio by providing it with much needed strategy, consulting, business process and vertical industry expertise. At the same time, the acquisition rescues PwCC from the perils of a dangerously weak IPO market.

The combined company of 180,000 employees will be the largest IT services company in the world with the greatest global reach. This is a brilliant acquisition by IGS. The combined company will have powerful and unmatched global IT and business process capability: from strategy consulting to business process re-engineering to system design and implementation to transformational outsourcing to infrastructure outsourcing to business process outsourcing (BPO) to a truly global delivery model. Clearly, the goal of the acquisition is not operational cost savings, as with the Hewlett-Packard/Compaq deal, but the strategic advantages that will be gained through the combination of the two discreet and complementary skill-sets and asset bases.

If IGS can successfully integrate PwCC into the fold, both PwCC and IBM clients will benefit tremendously and the global IT services landscape will be dramatically altered. IBM’s board of directors and PwCC’s senior partnership group have already approved the deal, but IBM is still waiting for regulatory approval as well as approval from the rest of the PwCC partners. IBM expects the deal to close by the end of the third quarter 2002, which would indicate that IGS views these approvals as a formality.

The new unit will be part of the Business Integration Services (BIS) division within IGS and Ginni Rometty of IBM, former head of IBM Global Services Americas, will run the group. Tom O’Neill, the CEO of PwCC, and Frank Roney of IGS will be in charge of the integration of PwCC into IGS. O’Neill’s participation in the difficult integration phase will be critical to making the deal work.

The success of this merger will be judged by how well IGS performs in the high-level transformational outsourcing business and the business process outsourcing arena.

Given the business process reengineering skills of PwCC, the outsourcing expertise of IBM and the technology and implementation skills of both firms, transformational outsourcing will be a natural for the firm. The challenge will be to craft a relevant BPO strategy. While the companies are poised to succeed in the market – in other words, they have all the component parts – they still have to create a BPO vision and execute on it. Neither PwCC, which brings with it only one large scale BPO client, nor IBM, whose BPO strategy has been only opportunistic until now, have strong expertise in this arena – at least not compared to a BPO firm like ACS.

However, before we count IGS out of the BPO market, it is important to understand that IGS will put all of its energy into making IGS BPO work. Indeed, it appears that the catalyst for the acquisition was purely to get into the BPO market and, secondarily, the transformation outsourcing market – which often leads to BPO engagements. IGS believes that its new value proposition is "value creation" for clients through the intersection of IT expertise and business process excellence. Interestingly enough, this is Accenture’s corporate motto right now and certainly the direction that tier-one global firms have to move in to compete in this business process-centric IT services market.

IGS would gain the following from the deal:

• Executive-level relationships and executive-level experience. This acquisition will automatically catapult IGS into the executive offices.



• Credibility and capability in the high-value consulting space, an area where IBM has been at a disadvantage when in competitive situations with vendors such as Accenture and EDS (which is supported in this arena with its AT Kearney Management Consulting division).



• Credibility and capability in the business process arena. With PwCC’s business process skills and industry expertise and IGS’s technology, infrastructure and outsourcing assets and expertise, it will be a formidable competitor in the emerging and lucrative transformational BPO market.



• Enterprise resource planning (ERP) credibility and capability. For example, the acquisition will double IBM’s SAP and Siebel practices and make it the No. 1 PeopleSoft integrator.



• Credibility and business process knowledge in several key vertical industries.

PwCC would gain the following:

• It no longer has to go by the ridiculous name "Monday." The name Monday has already made PwCC a laughing stock, and it would have damaged its brand recognition in the future.



• It no longer has to do an IPO in an extraordinarily weak IPO market.



• It now has access to IBM global finance. PwCC’s financial position would not have allowed it to move into the outsourcing arena – business process or otherwise – even after an IPO. And in order to survive and thrive, PwCC would have had to develop an outsourcing business (following the Accenture outsourcing model) to provide it with repeatable, predictable commercial relationships.



• The loss of leads from PwCC audit practice and the inability of PwCC to service PwCC audit clients has devastated its market share. IBM Global Services will give PwCC access to clients as well as access to 25,000 sales professionals.



• PwCC’s consultants will have access to IBM’s $5 billion research and development (R&D) might.



• Greater global reach. While PwCC is already a global consulting firm, IGS has a presence in 100 countries that PwCC doesn’t. Going forward, as global, lower cost delivery models (supported by labor arbitrage) are required to service most enterprise clients, the combined PwCC/IGS will have the strongest capability in this arena. Certainly, most global vendors will be scrambling to compete with the IGS and its ability to offer clients a combination of high-, medium- and low-cost options based on geographical placement of resources for all kinds of sourcing engagements.

Effect on Competitive Landscape

The merger of these two firms will have a dramatic impact on the IT services landscape and will cause consolidation as traditional IGS and PwCC competitors (EDS, CSC, Accenture, KPMG, CGE&Y, Deloitte Consulting) scramble to fill out their service portfolio to compete with IGS. For example, Accenture will come under significant pressure as a result of this acquisition. For the past 18 months or so, Accenture has been able to approach the IT services market as the only credible transformational outsourcing and transformational BPO vendor in the tier-one global IT services arena.

With this acquisition, IBM has surpassed Accenture’s capability. IBM has the infrastructure, and the infrastructure outsourcing and managed services expertise that Accenture lacks – both from an IT outsourcing and BPO perspective. While Accenture eschews the need for such infrastructure or commodity service capability, it is clear that going forward this infrastructure and expertise will be critical to accommodate enterprise clients’ outsourcing and BPO needs.

IBM has had an integration team in place for an "undisclosed" amount of time and it feels it has a head start on the task. In terms of integrating infrastructure, PwCC has already prepared itself for the split with its audit parent and its IPO. So, PwCC will not have to extract itself from PWC LLP before it integrates itself with IBM. To be sure, people integration will be a challenge, but because of the complementary rather than similar nature of the skill-sets, integration may be less painful. Still, IGS and PwCC cultures are different and IGS is going to have to concentrate on integrating PwCC consultants appropriately so that it can hold on to them and keep them productive.

To retain PwCC employees, IGS is offering retention packages. It realizes that without that human capital, the acquisition is worthless and so is being very aggressive in its offers to PwCC employees. Although PwCC announced headcount reductions in its S1 and these reductions will still be carried out, IGS has no intention of laying off more PwCC staff after the deal is signed.

Certainly one of the concerns from PwCC customers will be a loss in objectivity on the part of PwCC. Will PwCC be just a sales vehicle for IBM products? Interestingly enough, IBM Global Services is pretty objective in terms of its approach to technology implementation for clients – much to the dismay of the IBM software and server groups in some cases. Another interesting fact, and one that PwCC stressed on the analyst call, is the fact that 45 percent of the servers in IBM’s data centers are non-IBM. So, while PwCC/IGS may still be under some pressure to push IBM products, it is clear that PwCC will be able to retain at least the same degree of objectivity as IGS. Note that PwCC’s former partnerships with the likes of HP compromised PwCC’s objectivity at least as much as this acquisition will.

To augment its service portfolio, PwCC has been aggressive in creating partnerships with vendors such as HP and EDS. Obviously, these partnerships will be invalidated by the acquisition.

Current PwCC customers should be somewhat concerned about the potential upheaval as IBM attempts to integrate the firm. However, this upheaval or confusion will be minor compared to the turmoil at PwCC since the failed HP acquisition and the Enron debacle. At least PwCC staffers now know what the answer is – even if they don’t like it. And, given the economy, the job market and the dismal outlook for the IPO, PwCC employees are likely relieved by this turn of events. In the medium to long term, the acquisition will provide PwCC clients with a more stable consulting partner that can offer it a breadth of services and pricing models that were previously unavailable.

However, clients should be in immediate contact with their client partners and demand information related to the acquisition. They should also review contracts and negotiate with PwCC and IGS as necessary. IGS clients should not be affected in the short term. In the longer term, they can now look to IBM for more strategic advice, and more creative and valuable transformational IT and business services.