InformationWeek

BEWARE THE CONSULTANTS!

It could be a match made in techno-heaven: Computer manufacturers are fielding consulting teams and advising high-end clients on their technology needs. But they're also going over technology managers' heads.

By Bruce Caldwell
Issue date: Feb. 13, 1995

The information technology consulting industry is undergoing a radical transformation. A field once dominated by the likes of Arthur D. Little Inc., Ernst &Young, and the other Big Six accounting firms is growing crowded with new players. Many are computer equipment and services companies eager to branch out and tap new revenue.

In fact, nearly every major company in the computer industry now offers consult ing services. Rather than start from scratch, these new players are aggressively recruiting experienced consultants. For the five years ending December 1995, more than 10,000 information technology (IT) consultants will likely be recruited from old-guard consultancies by just three computer equipment and services companies: IBM, EDS, and Unisys.

According to these companies, Unisys and EDS both plan to hire 3,500 new consultants, and IBM has already hired about the same number.

Other computer vendors, ranging from BSG Corp., a $30 million systems integrator specializing in client-server systems, to $20 billion Hewlett-Packard Co., will lure additional thousands of consultants.

"There's a lot of movement of names, resumes, and capabilities," says Doug Aldrich, VP of IT practices at consultants A.T. Kearney Inc. in Chicago. "It looks like everybody's expanding." Indeed, Aldrich's group doubled staff and revenue in the last year.

Growing Up
Consulting is a huge and fast-growing business that is attracting computer makers. The worldwide market for IT consulting is worth $17 billion, and it could jump to nearly $29 billion in the next five years, predicts market watcher International Data Corp. (IDC) in Framingham, Mass.

Fueling that growth is an ever-tightening link between information technology and business reengineering, the radical redesign of business processes that has approached fad proportions. Computer product and services companies believe they can exploit that link by forming closer relations with the business executives who plan and map out corporate strategies. To reach those executives, computer makers are now becoming consultants. (For related story click here)

Computer companies figure that a consultant advising a business executive on corporate strategy can then offer to clients their company's systems-integration or outsourcing services to help ca rry out that strategy. Such business may not even be put out for competitive bidding.

Who You Know
Both consulting and systems integration are largely relationship businesses: Who a client knows and feels comfortable with is often the deciding factor in whom they choose as their consultant.

The term used throughout the computer industry for this two-pronged marketing approach is "pull-through." A consulting engagement is said to pull-through sales of hardware, software, or other services-and profits. Profit margins for consulting reach about 12%, compared with the 7% margin on systems-integration services, according to Paul Johnston, an industry analyst at IDC.

But this approach by computer makers could squeeze technology managers. They generally participate in shaping strategy but must often yield to senior business executives on the final choice of a systems integrator or outsourcer. Chief information officers (CIOs) who can't strategize at the corporate level risk being overl ooked-or run over-by hordes of consultants (for related story click here) .

There's another reason consultants of all sorts are eager to bypass the CIO for the CEO, says IDC's Johnston. While CIOs typically shop for consultants on a project-by-project basis, business executives with enterprisewide changes in mind are more likely to be one-stop shoppers. They look to just one source for everything from high-level strategic consulting to nuts-and-bolts planning and implementation. The spoils go to the firm that lands these all-in-one consulting plums.

To reach these high-level business executives--who, after all, are not the traditional customers of computer gear and services--the new breed of IT consultants are anxiously recruiting boardroom-class talent. "One headhunter who's recruiting consultants says he's really buying Rolodexes," Johnston says.

But they also can be buying court time. Consultants Arthur D. Little recently w on an injunction against EDS in California that bars EDS from recruiting any more of the Boston firm's consultants anywhere in the world.

"They stole our aerospace practice," claims Sam Gallo, general counsel for Little. Before the court ruled against EDS, the Plano, Texas, systems integrator hired Don Scales, former head of Little's aerospace practice, to run the aerospace division for its management consulting unit.

Coincidentally, EDS got Douglas Aircraft, a division of McDonnell Douglas Corp. and a client of Scales's while he was at Little, to become a client of EDS. The Douglas Aircraft consulting engagement was won by another EDS consultant and is not an issue in the lawsuit, say company officials (For related story click here) .

Innocence Proclaimed
Heidrick &Struggles Inc., the Chicago head-hunting firm retained by EDS, asserts it did nothing wrong. "EDS is looking for people who can build an organization," says Madelaine Pfau, a part ner at Heidrick &Struggles, which also was sued by Little. "They're not looking for people to bring client lists."

Nonetheless, there's a fine line between a consultant soliciting new business and interfering with a standing contract. The Little versus EDS lawsuit is now in a fact-finding stage to determine exactly what happened.

Regardless of what the court determines, Gary Fernandes, senior VP at EDS and the executive overseeing the company's management consulting services, leaves no doubt about the value placed on client relationships. "In the past, client relations were almost incidental to contracts," he says. "Now contracts are almost incidental to the relationship."

To get those relationships, EDS hired nearly 1,600 consultants last year. This rapid growth came at a high cost. EDS suffered mounting losses for its consulting unit: $1 million in the first quarter, $3 million in the second, and $11 million in the third, according to industry analysts. "We knew there would be a price," says Fe rnandes, "and it is tolerable."

EDS expects the consulting group to show a profit this year. Now halfway to its hiring goal, EDS will slow its recruiting in North America in 1995. But it is still anxious to hire overseas to expand world coverage.

Systems integrator Computer Sciences Corp. (CSC) has grown by acquiring entire consulting firms. In 1988, CSC acquired Index Group, the Cambridge, Mass., consultancy that helped spread the gospel of reengineering. Since then, CSC in El Segundo, Calif., has seen its total corporate revenue more than double, to $2.9 billion.

In December, CSC acquired German consulting firm Ploenzke AG, gaining some 1,400 employees; in August, it acquired Ouroumoff Consultants of France and its staff of 80 consultants. CSC's consulting operation now takes in more money than any other U.S. information technology consulting firm, according to IDC.

A similar strategy has helped IBM leapfrog Andersen Consulting to become No. 1 in the worldwide market for IT consulting.

Numbers Game
But rankings can be tricky. Often, IT consulting revenue combines funds taken for both systems integration and outsourcing activities. That's true even at companies that assign consulting, systems integration, and outsourcing to different business units.

Thus, while IBM captured the No. 1 slot worldwide, with $1.47 billion, Robert Howe--himself recruited from management consultancy Booz, Allen &Hamilton Inc. three years ago to expand Big Blue's consulting group--pegs consulting revenue at only $375 million. The greater figure is gained by including IT consulting activities, as defined by IDC, that were performed by IBM's vast field-services organizations and its Integrated Systems Solutions Corp. (ISSC), an outsourcing and systems integration subsidiary.

How separate do computer companies keep their consulting groups from the mainstream business?

It all depends. CSC and EDS prefer to maintain separate, identifiable consulting organizations, partly because of cult ure and partly because of different capital and accounting requirements. But others aim to integrate consulting with their other organizations.

Moving About
IBM, for example, moved its consultants into the industry solution units created last May for all IBM sales and marketing. Aligning consultants with industries was an evolutionary move that IBM started more than two years ago, says Howe, who left his consulting post last November to head IBM's financial industry solutions unit. "I spent a lot of money doing market research," Howe says, "and it was clear that clients really value industry knowledge."

Although IBM's 1,500 consultants are now dispersed, Chris Brown, who oversees IBM consulting activities in North America, keeps careful track of them.

Brown uses Lotus Notes groupware to share the consultants' "intellectual capital"--research reports, consulting experience, and other information--and monitor how much business they bring in. The latter figure is especially importa nt to Brown: It directly affects his compensation.

Brown holds great expectations for this year. "We would like to double our people and business," he asserts. The high end of consulting beckons as well, he adds: "People turn to the professional they have a relationship with, and there are no large companies who are not IBM clients." Brown says clients are urging IBM to extend its consulting services into corporate strategy.

Does the idea of IBM consultants in the boardroom sound unlikely? Consider the case of Lou Gerstner, IBM's chairman and CEO. He used to work for consultants McKinsey &Co.

Comments on this story?