IBM Makes a Bold Move in a Weak Market to Bolster Its Services Strategy

International Business Machines Corp.’s $3.5 billion acquisition of the business consulting and technology services unit of PricewaterhouseCoopers is a giant step in IBM’s transformation into a services-driven technology firm. The deal fortifies IBM’s position as one of the world’s top providers of information technology products and services and deepens the IT giant’s business consulting capabilities. The combination of IBM and PwC Consulting creates an unparalleled provider of solutions to business and technology issues. Competitors, undoubtedly, are quaking in their boots. And rightfully so. While the transaction is not one of the sector’s largest – and is significantly smaller than the one IBM was blocked from completing with Hewlett-Packard Co. – it is one of the most consequential in recent times in terms of market dynamics, industry followers say. Both IBM and PwC Consulting clearly needed to make some changes. IBM had been bulking up its consulting capabilities over the years, although not quickly enough, in the view of some IT experts. One area where it has been lagging behind its competitors is in business process outsourcing (BPO), says Lorrie Scardino, Research Director at Gartner Inc., a technology research and advisory firm. BPO is the contracting of non-core business processes, like accounting or human resources, to an outside service provider. As result of this deal, IBM can tap into PwC Consulting’s deep BPO expertise and proven capabilities in business and industry consulting. PricewaterhouseCoopers had been planning on separating its auditing and consulting divisions with an initial public offering of its PwC Consulting division, but the public financial markets have been soft for some time. “We were planning an IPO, so this whole idea of moving from a partnership to a publicly held entity is an idea that has been on our minds for almost a year. We are enthused about morphing into something other than what we had been,” says Sehra Eusufzai, a PricewaterhouseCoopers spokeswoman. “One of the reasons we agreed to the deal, rather than doing the IPO, is that we feel it is better for our clients and for our employees. This deal certainly expands the professional development and career opportunities for our consultants.” Additionally, the PwC Consulting consultants “can’t wait to get their hands on capabilities of ours that they previously had to establish alliances to get. They will now have ready access to IT services and technology support through us,” says Ralph Martino, Vice President of Marketing & Strategy of IBM Global Services, the IBM unit into which PwC Consulting will be absorbed. In the absence of any serious integration issues, the deal would appear to be a win-win situation for both parties. The combined unit will have about 55,000 employees and is expected to generate about $13 billion in revenue. Meshing business and process know-how and information technology expertise, the combined entity can now deliver comprehensive “end-to-end” business and technology solutions to clients, ranging from business process, strategy, and change management consulting services to IT strategy development, implementation, and support services. Deep industry knowledge will benefit clients IBM’s ability to offer “end-to-end” IT and business services gives it a distinct advantage over many rivals. Commenting on the depth of knowledge that clients will now be able to access, Martino asserts, “All of the PwC consultants exist in a two-dimensional world of industry and business process. They live and breathe in your industry, that’s all they do; and they live and breathe in a specific solution area, and that’s all they do. When we will provide help in customer relationship management in the retail space, for example, we will provide people who live in the retail industry and breathe customer relationship management.” As impressive as the combined entity’s capabilities are, Scardino says she doesn’t think that the pairing of IBM and PwC Consulting will “immediately put the combined company into the CEO’s office or into the boardroom.” “It does give them a hall pass and get them closer to the CEO and CFO offices, but it is not the same as a company like McKinsey & Co., which has access to the boardroom.” While the deal has a lot going for it, there are a few areas of concern to industry followers. A rude awakening for PwC Partners Charles Rutstein at Forrester Research Inc., a firm that analyzes emerging trends in technology and their impact on business, expressed in company brief that he is not buying into the assertion from the two companies that their corporate cultures will blend easily. “For PwC’s 1,200 partners, it’ll be a rude shock to transition from being equity-holding business owners to salaried employees.” However, to Paul Hammer, Senior Vice President-Communications/Technology at Houlihan Lokey Howard & Zukin, thinks that the cultures seem similar. “Accounting shops are not exactly bastions of creativity and free thinking, and neither is IBM,” he says. As the PwC Consulting partners, who have grown accustomed to having a high level of autonomy and responsibility, enter the IBM corporate culture, they will have to get used to the way their new owner sells and delivers, says Scardino. PWC Consulting employees are responsible for their own sales and delivery activities. IBM has a dedicated sales team, which is different than the delivery team, she notes. “In IBM there are step review processes, a 25,000-person sales team, and people who promise something that the delivery people can’t deliver. PWC will just have to fit in with that sales model, because IBM is not going to change its sales culture. Too much is driven by it,” she says. Loss of objectivity on PwC Consulting’s part, in that it may end up heavily recommending IBM solutions to clients, is another issue that experts have been debating. But Scardino notes that IBM has spent years trying to put up an “iron curtain” between its products and services. The company does recommend, implement, and operate technology other than its own, although most of the products it works with are IBM products, she says. In Scardino’s view, however, the PwC Consulting partners “are going to have to go out early and recommend some non-IBM products and services” in order to establish credibility with clients as an objective source. “It is going to be a balancing act between being integrated into a new company and helping make the new entity’s presence known and establishing its credibility with clients.” As one of the most significant, recent transactions in the sector in terms of market dynamics, its affect on industry players will be deeply felt, the experts say. Companies such as Accenture Ltd., Deloitte Consulting, Unisys Corp., Electronic Data Systems Corp., and Computer Sciences Corp. are left trying to figure out how this deal is going to affect the competitive landscape, and determine whether it is going to set them back, says Scardino. “I think that the two companies that will be the most threatened competitively are going to be EDS and Accenture – companies that are not as strong in consulting and are more operationally focused. The deal certainly puts more pressure on EDS to get right’ the integration of A.T. Kearney, so they can deliver seamless services,” she notes. Hammer agrees, saying that IBM would not directly compete against companies like Accenture, “but at the end of the day, companies like Accenture don’t provide a full package. They don’t get as deep into a system as IBM does,” he says. Similar pairings are sure to follow Scardino says that companies should expect to see similar deals as IBM/PwC Consulting in the next two years, but she declined to make any pairings predictions. EDS not long ago announced that it was forging a partnership with ABN AMRO NV to run some of that bank’s technology operations. The proposed partnership would rank among the largest agreements in the IT services industry this year.