InformationWeek: The Business Value of Technology

Cisco revealed on Aug. 9 that it would invest $1 billion in KPMG LLP, the privately held New York consulting firm. The next day, Lucent paid $3.7 billion for International Network Services (INS), the world's largest networking consulting company.

The moves push both companies into a crowded field already targeted by hardware and software companies. Cisco and Lucent will offer more services to customers while they battle for bigger shares of the network-integration market. According to Mark Cavallone, industry analyst for Standard & Poor's, Cisco's investment in KPMG was probably a preemptive strike, aimed at presenting itself as a strong services contender before Lucent's announcement.

"Because Cisco held a 7.8% interest in INS, they probably knew this announcement was coming," Cavallone says. "Cisco wanted to make sure it had another services deal in the bag before the Lucent-INS announcement."

Lucent's purchase makes the future of Cisco's relationship with INS uncertain. A Cisco spokesman says Cisco will likely sell its interest in the company.

CIO Jim Barry of Insurance Holdings of America in Beverly, Mass., a customer of both Lucent and INS, says the Lucent-INS deal will force Cisco to refocus its service efforts and be more competitive. "These two deals are what each needed to face off with one another," he says.

As a result of Cisco's investment, KPMG will hire 4,000 consultants with Cisco expertise, and Cisco has indicated that it may try to lure consultants away from Lucent-INS.

On the other hand, analysts say, the deal with Cisco may halt the consulting firm's intended initial public offering. According to one KPMG executive, the alliance with Cisco is one of many big deals the company hopes to sign in the near future.

Bill Lewis, vice provost of Arizona State University in Tempe, Ariz., uses both Cisco and Lucent products as well as their network-integration services. While he says the networking companies will ultimately be able to handle the diversification, he worries they will lose focus. "They are both trying to broaden their scopes," he says, "but I worry that companies broaden too much and dilute offerings too much so that things fall into the cracks."

Competitor Nortel Networks Corp. is still trying to figure out the deals' implications. Though Nortel won't admit to pursuing any similar relationships, John Roddy, general manager of carriers in Nortel's professional services division says, the company is always interested in new opportunities.