InformationWeek: The Business Value of Technology

"The fact that our consultancy was tied to our audit practices hurt our ability to grow in E-services," says Ernst & Young vice chairman Dale Wartluft. He recalls with frustration an occasion when Ernst & Young wanted to invest in an Internet company, only to learn that one of the startup's board members was an auditing client. "We were looking for a way to grab a big piece of the E-business solutions pie, and we couldn't do that while we were still attached to the auditing practice."

A split from the parent company should solve that problem. The combination of Ernst & Young Consulting and Cap Gemini would create one of the world's largest IT consulting and services groups, with 58,000 professionals. The goal is to blend Cap Gemini's expertise in legacy systems and project management and its European presence with Ernst & Young's E-business offerings and U.S. footprint. Their practices span the telecommunications, finance, retail, manufacturing, life sciences, travel, administration, and utilities industries.

Cap Gemini had been focusing on Y2K remediation projects and is now working to retrain its IT professionals in E-services skills. "E-services is a major market that we want to play in," says Cap Gemini CEO Mike Meyer.

In E-services, Ernst & Young and Cap Gemini will compete with smaller specialized firms. Kevin Hickey, CEO of Homebid.com, a real-estate Web site, evaluated several large IT services providers--including Ernst & Young Consulting--to develop the company's Web site but opted for the more nimble Scient Corp. "With Scient, I had access to top executives, and the entire company understood my needs," he says. Hickey worried that larger firms would assign novices to his projects.

A marriage of Ernst & Young and Cap Gemini would help alleviate those kinds of concerns, says Dataquest analyst Bruce Caldwell. While Ernst & Young has a reputation for hiring many of its IT staff straight from college, says Caldwell, "Cap Gemini has a very good project-management staff and veteran engineers."

Ernst & Young Consulting managed an SAP implementation for Fluor Corp., and Fluor VP and CIO Dennis Benner is optimistic about the combination. "We build projects for our clients that span up to 80 countries," Benner says. "It can be very helpful to have a services firm that understands the cultures of all different countries."

That competency was a driving factor in the deal. What started out as talks about a potential partnership turned to merger negotiations last summer after both sides recognized global synergies. Cap Gemini's Meyer was concerned with the firm's lack of presence in the United States, while Wartluft says Ernst & Young needed to expand its European presence. Wartluft expects the Ernst & Young board to vote in March; Cap Gemini shareholders will vote in June. The deal is subject to Securities and Exchange Commission approval.

A Cap Gemini acquisition would extend Ernst & Young's global reach and technological depth, says Ken Moskowitz, CIO of Standard & Poor's Ratings Services, a worldwide provider of credit analysis and information in New York. "This is important because I run a global organization," he says.

Standard & Poor's Ratings Services has worked with Ernst & Young for more than three years developing and improving RatingsDirect, a subscription service through which it makes research and ratings available to clients over the Web. Ernst & Young provided the development methodology for the project and managed Standard & Poor's relationships with technology providers Oracle and Sun Microsystems. Says Moskowitz, "The way I see it, Ernst & Young has added more than 1,000 employees focused on E-commerce for Standard & Poor's use."