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Tuesday, May 10, 2005

Services + Consulting: Good Match Or No Match?

If breaking up is hard to do, getting together might be even tougher for IT services and consulting businesses. Last week, three services vendors that previously acquired consulting firms provided evidence that such marriages can be rocky.
- IBM, bought PWC's consulting unit in 2002; Capgemini, took over Ernst & Young's consulting group in 2000; and EDS, which acquired A.T. Kearney in 1995 - all showed signs that the mergers weren't working out as planned. The consulting acquisitions were supposed to boost services sales because consultants could convince clients of the need to use IT to restructure their businesses. "Outsourcing and consulting are two very different cultures," notes Moors & Cabot analyst Cindy Shaw. "Consultants don't necessarily want to sell IT outsourcing services." IBM, which has 330,000 employees worldwide, said it would slash up to 13,000 jobs. As much as 80% of the cuts will come from its Global Services unit, The services unit, which had hoped for an ongoing boost from the PricewaterhouseCoopers acquisition, saw lackluster year-over-year growth of 3% in its most recent quarter.
- IBM also plans to make greater use of its shared-services centers, many of which are in low-cost regions such as Eastern Europe and Asia encouraging the idea that some work should be done close to the client, but other work can be done from any location
- Capgemini's chief operating officer Pierre Danon said the company will cut 200 mostly senior-level jobs in North America and close 19 offices. To take up the slack, Danon said he wants to increase the amount of IT work done for U.S. clients from its offshore facilities in India from the 20% it does now to 30%. The moves will help Capgemini slash IT costs in North America by 30% and facilities costs by 45%.It will reduce North American operating costs by $100 million.EDS last week said it's looking for ways to spin off A.T. Kearney, possibly selling it to the unit's partners sometime this year. The unit's first-quarter revenue declined 12% to $204 million, with an operating loss of $11 million.Brad Feld has an interesting perspective on the Consulting Vs Service Firm theme.
My Take: In IT Professional Services,the key distinction to make is are we a consulting firm or a technology shop( This is tricky - as IT is becoming inseparable from business).This reflects on the business model. In a consulting model, the firm employs experts, not flashy freshers, skilled professionals that know the tricks of the trade and the best practices . The legacies and cost structure will be higher due to the larger payouts for the experts. The client realization should also be higher - but with generic sales force selling both consulting and professional services, carrying aggregated targets – sometimes it can create pressure on the system. Also in the western firms quoted here- there’s a double whammy effect – forst differential is cost structure between consultant and technical expert – with technical expertise becoming cheaper – largely due to offshoring the difference widens quite considerably and hurts – So it would not be counted too bad to argue that best managed offshore firms with enlightened management would invest heavily in building consulting capabilities and potentially compete effectively and move on pulverize the blue blooded consulting firms – this is a real possibility – but the offshoring firms need to approach this far more seriously and make concerted investments to realize this – along with economical offshoring technical pool – this is the deadly combination that western firms need to watch out – western firms – you have not seen much of this type of competition thus far – this is indeed a formidable one!!

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