March 20, 2000

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E-Services Scramble
Vendors, including a new Microsoft-Andersen Consulting partnership, race to grab a share of the growing market for E-business systems

By Aaron Ricadela, Jennifer Mateyaschuk, and Larry Greenemeier

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n the flower business, where opportunities wilt if you move too slowly, American Floral Services needed to set up a retail Web operation quickly. The technology-support organization for 24,500 independent retail florists plans to introduce its online shopping service, Eflorist.com, on April 1-just 10 weeks after it started development. American Floral credits the quick turnaround to its IT services provider, IBM Global Services.

Where was Microsoft, American Floral's all-important software supplier? It didn't get the job, says American Floral senior VP and chief technology officer Terry Byers, because Microsoft's Consulting Services group "just isn't there yet" when it comes to integrating E-commerce operations with back-end systems. "I see them as specialists in very finite areas," says Byers.

Microsoft has heard similar complaints before-and last week, it did something about them. The software developer finalized a $1 billion partnership with Andersen Consulting to create an IT services company called Avanade that will help businesses deploy Microsoft products for E-business. Now, says Microsoft president and CEO Steve Ballmer, "there's no customer we have to walk away from and say, 'We don't have a way to come to market with you.'"

Microsoft's timing couldn't be better. The E-services market will nearly double this year to $19.5 billion, according to Forrester Research. The growth is being fueled by increasing demand for E-business consulting, development, systems integration, and support. Businesses "know they have to do something to get on the Internet, and they feel they have to do something big, but they don't know how to get there," says Christopher Lochhead, chief marketing officer at Scient Corp., a consulting firm that specializes in building E-business systems.

General Mills, Nestlý, Procter & Gamble, and other consumer-products companies had something big in mind when they decided earlier this month to build an electronic marketplace for their industry. PricewaterhouseCoopers, one of the Big Five consulting firms, helped facilitate the discussions that led to the initiative, disclosed last week, and will continue to advise on the project (see story, p. 24). "Grocery manufacturers wouldn't do this without help from the outside," says Nick Riso, VP of E-business at Nestlý. "Our business is to manufacture and sell food."

At American Floral, IBM developers worked around the clock. With the likes of FTD, Hallmark, and Martha Stewart flexing their own online flower power, speed was imperative. "We're trying to keep the local florist from getting disintermediated," says Byers. Getting outside help was the key to moving fast. "We're a small company in Oklahoma City," she says. "That kind of talent isn't running up and down the street."

The call for help with E-business initiatives from companies of all sizes has created a flurry of activity among IT services providers. Ernst & Young Consulting last week created a 150-consultant division called DareStep to focus on strategic planning, technology choices, and systems integration in business-to-consumer Web commerce. E-services represents 30% to 40% of new business for Ernst & Young Consulting-a figure that could grow to 80% in three years. "Ernst & Young has been working primarily in business-to-business E-commerce," says Mark Rankin, DareStep's managing director. "We wanted to create a team focused on the business-to-consumer E-commerce market."

Also last week, Deloitte Consulting took an undisclosed equity stake in Personify Inc. Deloitte says it will work on E-business projects involving Personify's Web-site usage-analysis software.

Busy Month In E-Services
Companies	Developments
Cap Gemini	Moves to acquire Ernst & Young Consulting for $11 billion
Deloitte & Touche	Invests in Personify, a Web-site software developer
Ernst & Young	Creates DareStep division for business-to-consumer E-commerce
GE Information Services	Reorganizes to focus on E-services
Groundswell	Receives $100 million in venture capital
Microsoft, Andersen Consulting	From services company to focus on E-business
USWeb/CKS, Whittman-Hart	Plans to disclose new name and E-services strategy
DATA: INFORMATIONWEEK

As the fastest-growing market segment for IT services-IBM's E-business services revenue grew 60% last year, while Computer Science Corp.'s jumped 200%, according to Lehman Brothers Inc.-E-services is drawing newcomers, as well as causing partnering and consolidation among established companies. Groundswell Inc., flush with $100 million in venture funding from Behrman Capital, next month will introduce E-services for business-to-business and business-to-consumer marketplaces.

This week, newly merged USWeb/ CKS and Whittman-Hart will lay out its plan to become an E-services powerhouse. Ian Small, chief strategist and knowledge officer for US Web/CKS, says the combined entity will be better-equipped to help build business-to-business exchanges. "Our customers need help in all different areas," he says. "The only way we can grow fast enough and throw enough bodies on each project is to acquire other companies."

This free-for-all atmosphere means companies will find a wide variety of E-services providers vying for their business-from boutique firms to large companies such as Compaq, EDS, Hewlett-Packard, and Oracle. "One day we may compete against a hardware firm, another day a Big Five consultancy, sometimes the traditional outsourcer, or another company like ours," says Kenneth Tarpey, CFO for Proxicom Inc. "There still isn't a regular crowd."

Specialty firms such as iXL, Proxicom, Scient, Sapient, and Viant focus solely on services such as E-business strategy and the development, deployment, and maintenance of E-business systems. Most have grown gradually and have assembled talented, well-assimilated services teams.

But there are drawbacks to using small firms. They don't always have the resources to take on new projects, and consulting firms with roots in Web design may be ill-equipped to handle back-end integration work. "Services companies have a challenge, because it takes great breadth of knowledge and skill for end-to-end systems architecture," says Kim Orumchian, VP of product development at Fatbrain.com Inc., an online bookseller in Santa Clara, Calif.

Acquisition-hungry companies such as Cap Gemini, the French management-consulting and IT services company, and USWeb/CKS have their own challenges. "When you start stitching consultancies together, the culture can get lost, and oftentimes you lose the best people you acquired," says Yankee Group analyst Chris Selland.

The Microsoft-Andersen Consulting venture hopes to avoid those pitfalls. Avanade will start with 1,200 Andersen consultants and 350 contract workers from Microsoft. Avanade CEO Mitchell Hill, a managing partner at Andersen Consulting, says head count will expand to 3,000 within two years. Andersen will dedicate an additional 3,000 internal consultants to a new Microsoft practice and train 25,000 of its employees on Microsoft technology.

Microsoft will inject $385 million into the venture. Andersen is kicking in about $600 million, and the partners are splitting equity. Microsoft will also spend "several hundred million dollars" to train Andersen's consultants and about $200 million to market the venture, and it plans to assign several dozen employees to Avanade, says Geoff Nyheim, Microsoft's director of global partners.

Avanade ranks as Microsoft's most ambitious attempt ever to provide full-service IT consulting and support. Microsoft's 2,700-employee Consulting Services unit doesn't operate as a profit center and depends heavily on partners such as Compaq and HP.

"One of Microsoft's issues right now is how they can speed deployment of Windows 2000," says John Enck, a research director at Gartner Group. "Its fear is that Windows 2000's changes are so significant-and require a level of technical expertise that's not there-that it will affect sales."

That may be doubly true in the area of E-commerce, where Avanade hopes to make a difference. "Windows 2000 is great, but we've never configured all this clustering and this extremely complex hardware and software," says American Floral's Byers.

Microsoft can now approach customers with a tiered offering that includes business-strategy consulting from Andersen, Web-to-back-office design and implementation from Avanade, and Windows-specific expertise from Microsoft Consulting Services.

Meanwhile, Andersen will quickly expand its Windows platform expertise. "I've seen very few E-commerce projects in the past couple of years that don't have some kind of NT component," Hill says. "By taking this job at Avanade, I'm betting that Windows 2000 is going to win the war on the back end" of Internet applications-an area dominated by Sun and Oracle. Avanade's specialty will be building E-business portals, transaction-processing systems, and high-availability environments on jobs that require 10 to 20 consultants.

Microsoft is also partnering with other services companies. Last month, it unveiled agreements with KPMG Consulting and Cap Gemini. KPMG formed a practice called Microsoft Dot.com and plans to hire 500 consultants in the next 18 months. Cap Gemini will Microsoft-certify 1,500 engineers and developers for enterprise application infrastructure, retail, E-commerce, and knowledge-management projects.

IT service providers say that as E-business operations grow at many companies, E-services will eventually overtake other kinds of IT consulting and support work. "Within a year, we won't differentiate between E-services and other types of services," says Carol Lindstrom, Deloitte Consulting's managing director of E-business services. "It will all be E-services."

-With Additional Reporting By John Foley

Photo Dan Morgan

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