The spate of corporate scandals and reports of colluding audit firms catalyzed the acquisition of PwC Consulting and IBM Global Services in July 2002. It also brought to the forefront the question of how to deliver better technology and management services for customers requiring smarter time to market and return on productivity. To put the chain of events in the right perspective, this is not the first time that an IT services company and a consulting firm have merged. In 1995, IT services major EDS acquired management consulting firm AT Kearney through a payout of $300 million. And more recently on a smaller scale, Wipro Technologies acquired the $20-million US-based financial consulting firm NerveWire and energy practice of the $1 billion American Management System. But the gamble appears to have the highest stakes for IBM.

“All of us have preferences based on what we face in the marketplace. And if I am competing with you, why would I want to recommend your products?” Abraham Thomas managing director, IBM (India)

Now a year into the merger, IBM (India)’s managing director Abraham Thomas pooh-pooh’s the continuing pessimism about the lack of visible gains from the merger. “You don’t pay $3.5 billion for theoretical experience,” referring to the cost of the acquisition. “You pay it for practical benefits and an ability to win in the market place,” implying that IBM would not have taken a financial gamble of this nature solely on the basis of a drawing board plan. The reality is that mergers of global service companies in the past have met with varying degrees of success. In the case of PwC Consulting and IBM Global Services, the benefits of the merger still remain controversial with IBM’s dominating market status clouding the possibility of working neutrally with other IT vendors, which is so necessary while playing the role of a consulting firm.

But there are other indications of the seriousness that IBM attaches to the merger, according to Thomas. For IBM to create another division within itself, faced in the past with scathing criticism of being disjointed internally, is evidence of the gains they expect in the future. But what are the gains that companies like IBM and Wipro recently, and EDS previously have been striving hard to attain?

Merger Litmus Test

Your preferred service vendor has been taken over. Here’s how CIOs can cope with the transition:

Put the merged companies to test. Build up an assignment that makes the companies work together for you Get the technology road map spelt out. Some options may open up, other may narrow Anticipate new sales pitches covering new technology options. Get involved in these rather than adopting a wait-and-watch approach Renegotiate contracts especially if you have previously worked with the merged companies. Possible opportunities exist in bundling and volume discounts The merger can affect deployment of managers on your project. Get clarifications on how will you be compensated

Continues Thomas, “One of the things this merger brings for us is business insight.” In fact, during the time leading up to the merger in 2002, IBM’s internal analysis of US government tenders indicated an increasing tendency to specify an end-to-end approach involving consulting, systems design and integration. With the merger, IBM can now go to a customer, start from the business process and then trail it all the way down to technology implementation. But an important difference after the merger is the company is now more accountable. “If these things do not go smoothly the customer will say there has been no value in my interaction with the organization. The customer can hold IBM responsible for the end result, which is the idea behind the merger,” spells out Thomas.

King customer
In India, IT services major EDS and AT Kearney merged in 1997. But unlike the IBM and PwC Consulting approach, they chose to retain their corporate identities after the merger believing this was the more optimum one. According to C Srinivasan, chairman, AT Kearney India, mergers of this sort are being driven with the customer in mind. “There are two concentric circles and the market place is dictating that those two circles move closer together—they are looking for the sweet-spot between the two circles,” Srinivasan says. According to Timothy Matlack, currently CEO of Wipro’s energy and utilities solutions group and previously senior vice-president at American Management System, “There is a significant amount of business in helping firms execute strategies and you can do an awful lot of work around that.” Adds Vivek Paul, president of Wipro Technologies and mastermind of their acquisition game plan, “We want to be in the interface of technology and business but we don’t want to be saying what your business strategy should be. We want to articulate the business outcome of technology strategy and choose a technology strategy based on business outcome.”

Customer expectations from technology and technology service firms are visibly on the rise. And the merger of consulting and technology service firms is one way to jump-start this learning curve. But it is not without pitfalls. The most cited counter-argument against the consulting firm-vendor merger-approach is the loss of neutrality in the final entity. But Thomas has a pragmatic point of view on how Business Consulting Services (BCS), the new division within IBM, is functioning. “You can say BCS will only recommend IBM products, but do competitors recommend IBM products as the best products. And if I am competing with you, why would I want to recommend your products?” While PwC Consulting had strong relationships with competitors Oracle and Microsoft, there appears to be little reason for IBM to change all that. “If a customer today has these technologies in place, it does not make good business sense to change from non-IBM to IBM.” However, though continuing to work with competitors is IBM’s intention, they may not reciprocate the same status quo, Thomas anticipates.

There are other pitfalls to circumvent and one of them is stark differences in organization cultures. For consulting business veterans, the thought of working in a hardware company like IBM is uncomfortable, though they admit it is based on perception and may not be reality. Explains Mani Bharadwaj from Deloitte Touche India, “Hardware companies are driven by numbers and are far more market oriented. Consulting firms are more niche based.” Big Blue’s famous slogan—“Think IBM, think computers”—is an example of how mismatched the merger appears.

Cracks appear
The stress on consulting professionals moving into IT service companies is higher if their involvement in pure play consulting was greater than that in technology delivery. For example, the global energy practice of American Management Services previously headed by Matlack and acquired by Wipro, offered a blend of consulting and IT delivery services. They were also smaller in number than PwC Consulting’s 35,000 employees and have, therefore, been able to smoothly make the transition into Wipro Technologies. “Each firm has its own unique situations and challenges,” is his learning point. As an extreme example, consider the merger of a pure commodity-based company and global consulting major McKinsey. The closer the actual companies are to these two polarities “decides the discomfort during the merger”, says a consultant from Deloitte Touche India. The merger model of IT services and consulting companies is, therefore, likely to work if “consultants understand what it means to work with and leverage the solutions delivery business”, says Matlack. “The more they have engaged in solutions delivery the greater likelihood they can interact well.”

“There’s a significant amount of business in helping firms execute strategies. And you can do an awful lot of work around that space itself”  Vivek Paul,  president, Wipro Technologies

While mismatch in organization cultures is one stress factor, relative seniority is another. “The main challenge is for veteran consultants who have been senior partners for long. They may find the transformation into a senior IBM executive not an easy one,” explains Matlack. Conversely, the typical IBM-PwC merger may be a boon for the younger workforce. “They have a chance to build their careers in a large organization.” However, Thomas continues to be skeptical about the offsets related to organizational cultures and people. “We are not telling PwC consultants who have joined IBM to stop business consulting and do only technology consulting.” For IBM, the only asset it has acquired from the merger is people. And in order to retain them, it is necessary to provide an environment they are comfortable in, which is an obvious corollary, according to Thomas.

But despite these difficulties change appears inevitable. While internal resistance is present even in companies optimistic about the end result, the scales are now tilted against it. Explains AT Kearney’s Srinivasan, “I would put it bluntly—cultural issues will continue to be there. But the circles are moving closer not because these cultures have started moving together but because the market place is moving that way.” IBM’s Thomas believes there is also a business upside to it. Since IBM does not have 100% share in technology the merger brings in customers using competitor technologies. “This is an opportunity to get revenue that IBM could never have got before.”

Drawing the line
While technology may have been a key driver of change in business over the last decade, it is not the only factor responsible for success in the marketplace. On the flipside, this has led technology companies to assume an overemphasized role in business strategy. Deloitte Touche India’s Bharadwaj points out the role that consulting companies play in a complex project involving multiple players, a role that cannot be substituted by technology companies. “There are companies like us playing a role from a process and change management perspective. We identify who is the right person for a particular area from the rationale of the project. A specific expertise has to come into play in delivery otherwise it just doesn’t have quality.” 

So are IT companies floundering rather than progressing? Wipro’s Paul explains his side of the company’s strategy. “Our goal is not to be an Accenture—there is little value that you can offer. If a business decision has nothing to do with technology then it is not our business.” Meanwhile, the niche for a few independent consultants, who have established an ability to do CEO-level strategic consulting, will continue to exist. “As a business it’s sputtering—not great, not growing,” clarifies Matlack. But the big question for everybody is will they be as dominant in the future as they have been in the past? Will they continue to exist as independents? Or is it their destiny to be part of a new breed of technology-based organizations, still in transition, being driven by demanding customer expectations.

Arun Shankar is a contributor to DQ

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