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Will IBM Buyout Spoil PwC?

By Sean Gallagher  |  Posted 2002-09-16 Print this article Print

PricewaterhouseCoopers used to give unfettered advice on which hardware and software to install. Now, it's being absorbed by IBM. That doesn't make customers happy.

You be the judge.

Your brother-in-law runs a consulting business, and as part of that business he recommends your products to a customer of his.

Is that a conflict of interest or just a convenient case of "synergy"?

IBM's announced plans to acquire PwC Consulting, the business consulting and technology services unit of accounting firm PricewaterhouseCoopers, may make sense to IBM and PwC. But it isn't sitting so well with some of PwC's customers and partners, who are looking for independent guidance on the right products and services to deploy in their companies.

Providing that independent advice on the best hardware and software used to be Pricewaterhouse- Coopers, which was not tied to any single vendor of hardware and enterprise services—such as IBM. But now PwC's consultants become part of IBM Global Services, the services provider arm of the information technology giant. The independence of their judgment is already being called into question.

Technology executives at four large companies that Baseline spoke to expressed a range of concerns, from fears that PwC consultants they worked with would become "just IBM salespeople," to worries that their projects would be disrupted by shakeouts in personnel and possible layoffs of consultants. Because of their existing relationships, none of the four would go on the record.

"It's hard to imagine them [PwC] going into a meeting with a prospect as part of IBM Global Services and not have a mandate to push other IBM products," though, says Dana Stiffler, analyst at AMR Research in Boston.

The purchase of PwC Consulting, for about $3.5 billion in cash and stock, should be completed by October. At the announcement of the deal at the end of July, IBM President and CEO Samuel J. Palmisano said the needs of corporate customers are the driving force behind the deal.

"Clients are not only looking for innovative ideas to improve their businesses, they are seeking a partner with deep business expertise and the ability to exploit leading, open standards-based technology to turn these ideas into bottom-line business benefits," he said.

And PwC, for its part, will be saved from having to follow through with the initial public offering it had planned and the rebranding campaign it had announced—to relaunch PwC Consulting under the new name, "Monday."

In noting that the deal would fulfill a commitment to fully separate PwC Consulting from the larger accounting services firm PricewaterhouseCoopers, CEO Samuel A. Di-Piazza Jr. noted that the move would "unleash the consulting unit from the regulatory restraints of our industry, and will allow the business to reach its full potential."

But not all customers are excited about seeing that "potential" unleashed. Many customers hire large consulting firms for the very purpose of knowing the true performance characteristics of companies and their products—and thereby keeping vendors honest.

Yet more and more, as technology vendors covet the close relationships with companies that consulting firms enjoy, some customers are starting to wonder how independent their consultants really are—and whether they can really trust them to recommend solutions without a bias.

Competitors, of course, would like to take advantage of the melding of IBM and PwC Consulting. Hewlett-Packard, which was willing to pay an estimated $18 billion for PwC Consulting in fall 2000, says the merger will be difficult.

"We understand how hard it will be to integrate these two businesses because of the PwC partnership model," says Juergen Rottler, vice president of marketing, strategy and alliances for HP Services, in a written statement to Baseline, "and that some customers will perceive this as a loss of independence."

Hewlett-Packard's bid for PwC Consulting—which was five times as great as what IBM paid—came as it maneuvered to build a "one-stop" professional-services practice to rival IBM Global Services. Instead of buying PwC Consulting, HP paid about $19 billion to acquire Compaq Computer—and absorb its thousands of consultants that came with the Houston company's own acquisition of the former Digital Equipment Corp.

HP also works with systems integrators such as Accenture, KPMG Consulting, Deloitte Consulting, and Cap Gemini Ernst & Young. Even with Compaq instead of PwC, HP now has the third-largest professional services group in the world, behind IBM and Electronic Data Systems.

"Customers want an alternative to IBM," HP's Rottler contends. "This announcement (of the acquisition of PwC Consulting) does not change that."

Major software and hardware vendors have long coveted the relationships that large technology services firms have with their customers, and see them as a lucrative sales channel. The trend toward vendor ownership of integration and professional firms has been gaining steam over the past few years. While HP courted PwC, Compaq acquired a number of smaller consulting firms, including Microsoft platform specialists Rainier Technology of Minneapolis. HP acquired Compaq; these smaller acquisitions are now part of the HP Services organization.

In April 2000, consulting giant Accenture formed Avanade, a joint venture with Microsoft created specifically to handle Microsoft platform implementation projects. While it is an independent company, Avanade draws on Accenture for human and financial resources and industry knowledge, among other things.

In some cases, the partnerships that consulting firms form with vendors are fairly platonic.

"What we've observed is that consulting firms generally are forming lots of alliances with lots of vendors," says Darlene Yaplee, Sun Microsystems vice president of global system integrators. "They're partnering with vendors, but also evaluating each vendor to see if they're best of breed."

Analyst Stiffler agrees. "It's not evil for them to have [vendor partnerships]," she says. In fact, the number of relationships can be "a good gut-check indicator" of how balanced a firm is. "Certainly, if they only had one partnership in a given area, it would give you pause."

But because the nature of those partnerships can vary widely, from simple marketing agreements to reseller relationships, customers need fuller disclosure.

"It's up to the customer to ask what the nature of relationship with vendors is," says Stiffler.

Sean Gallagher is editor of Ziff Davis Internet's enterprise verticals group. Previously, Gallagher was technology editor for Baseline, before joining Ziff Davis, he was editorial director of Fawcette Technical Publications' enterprise developer publications group, and the Labs managing editor of CMP's InformationWeek. A former naval officer and former systems integrator, Gallagher lives and works in Baltimore, Maryland.
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