Consulting unit helps Big Blue grow

A year ago Thursday, the computing giant completed its purchase of the accounting company's consulting unit. IBM combined the roughly 30,000 employees from PwC Consulting with about 30,000 IBM workers to form a new division, called Business Consulting Services.

The idea behind the acquisition and new unit was to generate revenue by joining IBM's technology prowess with PwC Consulting's business expertise. “This to me is an exciting and fulfilling anniversary,” said Ginni Rometty, managing partner of IBM Business Consulting Services. “The vision has come to fruition.”

Katrina Menzigian, an analyst with research firm IDC, said PwC Consulting has helped IBM compete in the budding field of business process outsourcing (BPO), which involves a company handing off tasks such as customer service and human resources management.

“It has been a smart move for them,” she said.

The price IBM paid for PwC Consulting increased from an initial $3.5 billion to $3.9 billion this July, due partly to a review of assets transferred in the deal.

Meanwhile, IBM on Thursday announced a new BPO agreement with financial services company Lincoln Financial Group. Under the 10-year contract, IBM will assume responsibility for human resources, payroll, and health benefits administration as well as customer care for Lincoln National. The deal follows a similar contract IBM announced earlier this year with Procter & Gamble, under which Big Blue will handle employee services for the consumer products giant.

IBM hasn't disclosed the revenue value of those deals. But PwC Consulting has boosted Big Blue's financial results. In the fourth quarter of last year, revenue from IBM's global services unit rose 17 percent year over year to $10.6 billion. IBM said the growth was “driven” by the PwC Consulting acquisition. In the second quarter of 2003, revenue from global services also hit $10.6 billion, marking a 23 percent increase year over year. IBM again gave credit for the sales jump to the former PwC Consulting business.

However, the marriage has had its rough spots, analysts say. David Garrity, an equity analyst with American Technology Research, said conflicts between the two companies occurred in the early stages. “This is something that is to be expected, and it did take place,” he said, adding that he hasn't heard of integration problems in the past three to six months.

But Menzigian described a continuing difference in culture between former PwC Consulting employees and their IBM counterparts. “Clients perceive there can be tension between the two organizations,” she said.

Menzigian also questioned the wisdom of putting all the consultants into one division, rather than spreading them throughout IBM, which could result in a quicker melding of companies. “It could impact the long-term integration,” she said.

IBM's Rometty said the integration is going smoothly. As evidence, she pointed to a high retention rate of PwC Consulting partners, who were leaders of the unit. IBM has retained more than 98 percent of the roughly 1,100 partners who moved over in the acquisition, she said.

Although IBM coughed up another $397 million for PwC Consulting in July, it still got the unit for a song, Garrity suggested. After all, Hewlett-Packard considered buying the unit for between $17 billion and $18 billion in 2000. “IBM basically got the business at about an 80 percent discount to what had been its perceived value,” he said.

Garrity said the acquisition has been helpful in developing expertise in different industries. It also has helped IBM establish relationships with business leaders beyond technology executives.

BPO deals used to focus primarily on cutting costs, Menzigian said. But more recently companies have begun using the outsourcing relationships as tools that can generate revenue, she said. As an example, a car dealership could use a third party to handle customer service, and that third party could use technology to send e-mail alerts to customers when their car is slated to be serviced.

With PwC consultants in house, IBM is poised to win contracts along these lines, Menzigian suggested. “By acquiring PwC Consulting, IBM has positioned itself to deliver a more value-oriented business process outsourcing service,” she said.

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