Services And Consulting: Not A Match Made In Heaven - InformationWeek

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Services And Consulting: Not A Match Made In Heaven

If breaking up is hard to do, getting together might be even tougher for IT services and consulting businesses. Last week, three services vendors that previously acquired consulting firms provided evidence that such marriages can be rocky.

IBM, which bought PricewaterhouseCoopers' consulting unit in 2002; Capgemini, which took over Ernst & Young's consulting group in 2000; and EDS, which acquired A.T. Kearney in 1995, all showed signs that the mergers weren't working out as planned. The consulting acquisitions were supposed to boost services sales because consultants could convince clients of the need to use IT to restructure their businesses. "Outsourcing and consulting are two very different cultures," notes Moors & Cabot analyst Cindy Shaw. "Consultants don't necessarily want to sell IT outsourcing services."

IBM, which has 330,000 employees worldwide, said it would slash up to 13,000 jobs. As much as 80% of the cuts will come from its Global Services unit, a spokesman says, and most will be in Western Europe. The services unit, which had hoped for an ongoing boost from the PricewaterhouseCoopers acquisition, saw lackluster year-over-year growth of 3% in its most recent quarter.

Pierre Danon

Pierre Danon

Middle management could bear the brunt of the cuts. IBM plans to flatten its European organization and push more decision making out to field staffs, CFO Mark Loughridge said in a conference call. "There's no longer a need for a pan-European management layer," he said.

IBM also plans to make greater use of its shared-services centers, many of which are in low-cost regions such as Eastern Europe and Asia. "Some work should be done close to the client, but other work can be done from any location," Loughridge said.

Capgemini's first-quarter revenue increased 16% year over year to $2.18 billion. However, new contract bookings fell 15%, compared with $1.86 billion a year earlier. Company officials say they're taking drastic steps to reduce head count and revamp North American operations, which haven't been profitable for three years. "When there's a fire in the house, you have to take bold steps," chief operating officer Pierre Danon said in an interview.

The company will cut 200 mostly senior-level jobs in North America and close 19 offices. To take up the slack, Danon said he wants to increase the amount of IT work done for U.S. clients from its offshore facilities in India from the 20% it does now to 30%.

The moves will help Capgemini slash IT costs in North America by 30% and facilities costs by 45%, Danon says. It will reduce North American operating costs by $100 million. The company has about 8,000 employees in North America.

Finally, EDS last week said it's looking for ways to spin off A.T. Kearney, possibly selling it to the unit's partners sometime this year. The unit's first-quarter revenue declined 12% to $204 million, with an operating loss of $11 million.

EDS as a whole had a $4 million profit for the quarter ending March 31, compared with what would have been a $44 million loss a year earlier using comparable accounting standards. The company saw sales slip 5% in the first quarter. Total revenue was $4.9 billion, compared with $5.2 billion a year earlier.

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