August 14, 2000

Printer ready

Smooth Transition

Will newly merged Cap Gemini Ernst & Young's strategy retain and attract customers?

By Larry Greenemeier

More on outsourcing:

sidebar: DareStep Takes Steps To Expand Scope Offshore Outsourcing Nears Critical Mass (6/12/00) InternetWeek Outsourcing Trends: A Secure Place (6/12/00)

Send Us Your Feedback

hen Agilent Technologies Inc. chose to outsource customer service and accounting to Ernst & Young Consulting in January, it had no idea that an overseas consulting firm would become part of the deal. "I was shocked when I found out Ernst & Young Consulting was going to be sold to Cap Gemini," recalls Stuart Baird, global program manager for Agilent's global financial services division.

Like many Ernst & Young Consulting customers, Baird wavered between concern and comfort. On one hand, he figured the integration of two $4 billion companies would result in major chaos, and he didn't want Agilent to suffer the consequences. But on the other hand, Ernst & Young's expertise in financials was exactly what Agilent, an $8 billion supplier of test equipment and design software in Palo Alto, Calif., was seeking. Baird already had passed on Arthur Andersen, KPMG Consulting, and PricewaterhouseCoopers. And he had spent two months negotiating with Ernst & Young to handle Agilent's European accounting from a facility in Glasgow, Scotland. "We built a strong relationship," Baird says.

As Baird was mulling his options, he learned that the deal he had negotiated fell through. Ernst & Young sold its Glasgow facility and couldn't make arrangements with the new owner to continue using the space. The troubles were starting already--or so it seemed. But things turned around when Cap Gemini stepped in and found room for Agilent in one of its call centers in Edinburgh, Scotland. "We could have backed out of our deal with Ernst & Young," Baird says. But prompt service like that shown by Cap Gemini--before the merger was finalized--convinced him to stick around.

Baird's initial concerns and subsequent experience are representative of those of several other customers. Most initially questioned the reasoning behind the merger, revealed in February, but later discovered unique benefits. For some, the move looked like an easy way for Ernst & Young Consulting to avoid Securities and Exchange Commission probes into potential conflicts of interest between its tax/audit and consulting businesses. The merger also came across as an aggressive attempt by Cap Gemini to buy its way into the North American IT services market, where only 15% of its more than $4 billion 1999 revenue came from.

The company's CEO sees things differently. "The bottom line on the acquisition of Ernst & Young Consulting is that it provides Cap Gemini with a greater breadth of offerings and expanded geographical coverage," says Geoff Unwin, CEO of Cap Gemini Ernst & Young. Whereas Ernst & Young Consulting's expertise has been weighted toward strategy development and project management in North America, Cap Gemini's focus has been systems and technology integration in Europe and the Asia-Pacific region.

The newly merged company becomes the world's third-largest consulting company, with $8.2 billion in revenue, behind IBM Global Services' more than $9.7 billion and Andersen Consulting's $8.9 billion. Cap Gemini Ernst & Young is fifth in terms of employees, combining 40,000 from Cap Gemini with 17,000 from Ernst & Young Consulting, operating in 30 countries worldwide. This compares with PricewaterhouseCoopers' 160,000 employees in 150 countries and IBM Global Services' 138,000 employees in 160 countries (download chart as PDF file).

Ernst & Young Consulting is the only Big 5 consulting firm that chose to merge with an IT services provider. Such a move is now a possibility for Andersen Consulting, which last week won its independence from Arthur Andersen after more than three years of arbitration. That leaves Andersen Consulting free to pursue its E-business services strategy without being hampered by Arthur Andersen's more conservative image. But Andersen Consulting's victory came at a cost--it must drop any affiliation with the Andersen name by the end of the year and pay Arthur Andersen $1 billion.

While Andersen Consulting sought its independence through litigation, Deloitte Consulting and KPMG Consulting opted to create strong identities for their business consulting practices without divorcing their tax and audit heritage. PricewaterhouseCoopers remains the only Big 5 firm that hasn't revealed plans to separate its primary tax and audit business from its consulting practice, though it's considering a restructuring.

It will take time, though, to see how successful Ernst & Young Consulting's approach will be. "It's hard to say if the merger strategy will be more effective than splitting off as a separate part of the existing company," says Stephen Sprinkle, global director of strategy, innovation, and eminence for Deloitte Consulting. From the customer perspective, Sprinkle says, the most important factor to keep in mind is that Cap Gemini is globally integrated, whereas Ernst & Young Consulting's operations from country to country weren't integrated by a common set of services.

Before its merger with Cap Gemini, Ernst & Young Consulting's global presence resembled a collection of decentralized franchises rather than an integrated global business. Chuck Ketteman, former global manager of business consulting for Arthur Andersen and current CEO of SiteRock Corp., points out that Arthur Andersen, like Andersen Consulting and McKinsey & Co., has organized its consulting practice as a single unit linked by a global management structure located in the United States. "Global integration is important for delivering a consistent message to customers, potential employees, and existing employees," he says.

Several customers say they're eagerly awaiting the global reach and centralized oversight of the merged company. Cap Gemini's market penetration in the United States has needed help for a while, says Alex Daisley, who, after a five-year stint with Cap Gemini in the late '90s, is now president of Riggs Enterprise Solutions, a Washington division of Riggs Bank, whose net earnings for 1999 were $31.6 million. "I was always surprised when businesspeople in the U.S. hadn't heard of us," he says of Cap Gemini.

continue on to page 2, 3

Photo of Baird by Stuart Hamilton

Back to This Week's Issue
Send Us Your Feedback
Top of the Page

---