IBMs, PwC, consulting, acquisition

IBM's PwC acquisition: what's ahead

02 Sep 2003 | (Thinking Point)

After a surprise announcement, IBM will acquire PricewaterhouseCoopers (PwC) Consulting for $3.5 billion in cash and stock. Here is the analysis of the situation: the combination of PwC Consulting (recently renamed "Monday") with the Business Innovation Services (BIS) unit of IBM Global Services is a combination of strengths. PwC Consulting extends BIS's vertical-industry expertise, particularly in four industries: pharmaceuticals (where PwC Consulting is a dominant player); oil and gas; aerospace and defense; and automotive.

Furthermore, joining PwC Consulting's strengths in business consulting--which focuses on the implementation of technology to achieve strategic business goals--with IBM Global Services' traditional capabilities in systems integration and IT outsourcing (and, more or less implicitly, its hardware and software products) fits well with the industry trend toward more comprehensive and integrated consulting and outsourcing offerings.

The two firms combine hardware, software, business process skills, industry knowledge, and outsourcing resources. On paper, this deal makes IBM the leading global player that provides a continuum of services, from business consulting to outsourcing. In particular, the acquisition will result in IBM gaining a substantial lead in the rapidly growing application outsourcing market.

However, as with all major mergers, the devil is in the details. IBM will face a major challenge in integrating two different cultures. PwC Consulting has a partnership-based approach to sales, with individual partners owning their relationships with clients. Recently, PwC Consulting's culture has been changing in preparation for its now-cancelled IPO, including changes in partner earnings and account relationship mindsets. IBM has traditionally been a top-down sales organization, with IBM sales executives owning the relationships with clients. Although IBM has had a "managing director" role, which is roughly analogous to a partner, there still remains a lot of detailed work to decide what will happen with each client. Inevitably, this will require significant adjustments for both organizations.

In addition, although much of what these organizations do is complementary, IBM's BIS group must be carefully mapped in PwC Consulting from the standpoint of methodologies as well as service packaging. Even though IBM has had reasonable success integrating its acquisition of Mainspring, driving meaningful synergies and value from an acquisition as large as PwC Consulting will take time and require flawless execution.

Previous attempts to merge such diverse organizations have not fulfilled expectations. Most recently, Cap Gemini and Ernst & Young have encountered great difficulty merging Cap Gemini's IT service-centric organization with Ernst & Young's IT and business-centric capabilities. After several reorganizations, CGE&Y shows little sign of overcoming obvious cultural gaps between the two organizations. Similarly, the union of EDS and AT Kearney has been occasionally fractious and has fallen short of the business results envisioned five years ago. Although these previous mergers do not necessarily mean that the IBM/PwC Consulting combination will languish, integrating the two organizations will be a major hurdle that must be crossed to maximize the benefits.

However, regardless of how well the merger goes overall, it will open doors for IBM's business consultants. "At one-fourth the price offered by HP in 2000, the PwC Consulting acquisition improves IBM's ability to conduct serious discussions with CIOs willing to go Big Blue," says Meta Group analyst Jonathan Poe. "Although currently 90 percent-plus of all mergers and acquisitions fail, this deal will raise the bar of expectations significantly for systems integrators."

We believe this merger has its greatest chance of success if there is reasonable balance in the new political structure between IBM BIS executives and PwC Consulting leaders. The acquisition will even have a chance if PwC Consulting management predominates. If the organizational structure that results from this deal is lopsided in favor of IBM's existing consultants, we believe the combination will fail.

Maintaining product agnosticism is another challenge. IBM Global Services has done a reasonable job of balancing client preference for competing products with pushing IBM solutions. Striking this balance will become even more critical with PwC Consulting--and its existing client base--joining the fold.

We expect it to take 18-24 months for IBM to complete this merger, giving competitors (e.g., Accenture, Deloitte Consulting [recently renamed "Braxton"], KPMG Consulting [whose new name is expected soon], EDS, CSC, HP, CGE&Y) time to react and possibly benefit in the short term at the expense of IBM BIS and PwC Consulting. Longer term, however, IBM's competitors will be forced to respond, which will drive further consolidation in this marketplace.

Existing clients of IBM BIS and/or PwC Consulting should keep a sharp eye on their consultants to see how the politics of the merger evolve. Project delivery should be monitored carefully, because executive attention will, by necessity, focus on the details of integrating the acquisition.

Everyone in both organizations realizes that this merger will result in some attrition. Interestingly, the large audit and tax firms realizing that they must spin off their consulting arms, combined with the current slowdown in the IT marketplace, makes this an ideal time to execute on such an acquisition. Not only did IBM get a great deal of talent for the price paid, but it also has a very good chance of retaining most of that talent, because there are few places for consultants to go in this environment.

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