Having ridden the merger rollercoaster with HP and Compaq over the past 10 months, this latest deal seemed relatively unimportant. (We’re journalists; when you’re writing about billion-dollar deals seemingly on a daily basis, you start to become a bit blasé. So please forgive the offhand tone.)
Why get excited about a deal less than a quarter the size of the HP-Compaq one? Here is the biggest computer company in the world buying a small -- by comparison -- consulting business. Surely this is just Big Blue making sure it’s not toppled from its position as world’s biggest by pretender HP?
There’s sure to be a grain of truth in that. Reputation, after all, is one of the factors on which analysts judge the investment merits of companies. And being the market leader is a good reputation to hold on to. But let’s not lose interest in the deal on those grounds. There are plenty of other points about it worth noting.
One, which will have struck those who remember HP’s abortive bid for PwC two years ago, is the consulting company’s phenomenal loss of value. The price talked about back then was about five times the sum IBM is forking out ($US2.7 billion of the $US3.5 billion total will be in cash, $US350,000 of which will reportedly find its way into the pockets of each PwC partner). Can the difference be attributed to disrepute that rubbed off on all the Big Five from the Enron and WorldCom fiascos? Without doubt. Just look at the trillions of dollars that have been wiped off US stocks as investors lose faith in corporate management.
Another notable feature of the deal is how it highlights a change in expectations of what you get when you hire a consulting company. The perception used to be that if you called in one of the big consultancies, you’d be getting impartial -- if costly -- advice on how to proceed with your mission-critical project. (I’ll resist the temptation to repeat any of those consultant jokes, and just refer you to this website -- there’s no fee for this.)
But there’s been a steady trend for consultants and vendors to strike partnerships which have diluted the notion of impartiality. IBM buying PwC Consulting takes this to the ultimate conclusion, eliminating any pretense that consultants work in isolation of hardware and software providers. (That said, the services arms of the big vendors will tell you they occasionally recommend a rival’s products, though such instances are rare.)
According to analyst IDC, the expection of impartiality is no longer relevant, as organisations increasingly see IT strategy and business plan as interwoven. The linking of the two was HP boss Carly Fiorina’s rationale for flirting with PwC two years ago. IDC US analyst Anna Danilenko in May spoke of the tendency becoming almost a matter of survival: during the dot-com period companies emphasised IT at the expense of the business plan, and many failed. Now, they’re looking for providers of IT that also have business consulting expertise.
Rival analyst Gartner explains it as a move toward a "real time enterprise (RTE)" approach to business, brought about by the need to satisfy increasingly demanding customers while at the same time keeping up with rapid changes in the IT market and wider business environment.
While like all good service organisations IBM will say the deal is motivated by a desire to better help customers, it also knows where the market growth is. According to IDC’s Danilenko, the IT and business consulting markets will expand at a compound annual rate of about 10% from 2001 to 2006. IBM Global Services, with PwC Consulting, will account for about $US40 billion of it.
Where does it leave New Zealand customers? With first Accenture’s departure from the market, and now PwC Consulting’s, it’s suddenly increased the visibility of smaller, local consulting and integration outfits like Simpl Group, Axon, gen-i and SolNet. You might want to check them out.