IBM’s acquisition of PwC Consulting holds potentially damaging consequences for IBM’s current business partners, particularly those belonging to the consultants and integrators program.
Concern centres around whether the deal will further encroach on the market segments traditionally
serviced by IBM’s consultants and integrators channel partners.
In the past, IBM has been clear that, from an IT professional services perspective, it would limit its go-to-market efforts to large enterprises, while looking to channel partners to take IBM-crafted solutions to the small and midsize business (SMB) space.
In light of IBM’s recent steps, there are a number of reasons to believe IBM will move more aggressively into the SMB market, particularly the upper end of the mid-market (businesses with between 500 to 999 employees).
Significant revenue currently realized for IBM from SMBs (PwC saw potential) –SMB’s currently account for 15 per cent of IBM Global Services’ (IGS) total revenue.
IBM’s business partners, in general, contribute 40 per cent of IBM’s services revenue. The importance of the SMB revenue stream, coupled with the fact that PwC Consulting had plans to target the SMB market prior to the acquisition, suggests that, combined, IBM and PwC Consulting will make a more concerted effort to target this segment of the market.
PwC Consulting will certainly help round out IBM’s overall IT professional services capabilities, particularly in the area of business process expertise.
Entire additional headcount cannot target large enterprises – IGS’ Business Innovation Services (BIS) unit will absorb the majority of PwC’s Consulting practice. PwC Consulting will add an additional 31,000 employees to IGS, bringing the total headcount of BIS to 55,000.
Given the weaker economic picture, it is doubtful there will be enough business generated over the next 12 to 18 months from large enterprises alone to support the overhead costs associated with a workforce of 55,000. Before the announcement, mid-tier consulting and systems integration vendors were already voicing concern that IGS was migrating downstream into the mid-market. With the addition of PwC Consulting, IBM cannot address only SMB infrastructure and application consulting needs, but also potentially do a better job addressing IT strategic planning, business process outsourcing (BPO), and business transformation projects.
While these non-technical offerings will certainly help IGS win more business with large enterprises, it will likely have an even greater opportunity within the mid-size space where CIOs with strong business acumen are hard to come by.
The consulting and systems integration market in North America and the world is much weaker today and is likely to experience only moderate growth through 2003. Though the market overall is slowing, the greatest potential lies within the midsize business market, where the professional services market is realizing higher growth rates as compared to the large enterprise market.
IT utility services not yet appealing among SMBs –IBM claims that the SMB market will be attracted to their IT utility hosted offering.
Ultimately, this may be true, but, currently, the SMBs are not actively buying hosted solutions. This situation is not expected to improve in this market until late 2004. Recent surveys in the SMB market show little future interest in allocating funds toward hosted/outsourced offerings.
Since IBM has more than once stated the strategic reliance on SMBs to grow revenue, IBM will surely seek other services to provide until utility services take off in this space.
ISVs also impacted
The impact on vendors of software competing with IBM’s WebSphere suite will also be substantial, as PwC Consulting was a conduit for much of IBM’s rival brands. The Art Technology Group (ATG), in particular, has used PwC Consulting as an effective partner in the time since ATG built its product bundle, as has fellow e-commerce specialist Broadvision.
Infrastructure software competitor BEA also uses PwC Consulting as a major channel partner. None of these vendors should expect IGS to maintain the same level of interest in these products after the acquisition closes.
Gartner Dataquest perspective
The PwC acquisition enhances IBM’s ability to sell whole solutions to the marketplace. Consulting and systems integration vendors would be wise to hedge their bets and begin thinking about developing IT solutions on other platforms. (Sun Microsystems, HP-Compaq or Microsoft). This is particularly relevant for consulting and systems integration vendors targeting the upper mid-market.
This presents a significant opportunity for other product vendors to tap into the SMB channel in search of solution partners if IBM’s consultants and integrators partners opt to leave. It is no secret that channel partnerships are the keys to penetrating the SMB space.
IBM has been successful with this strategy in the past. If IBM does not play its cards right, it risks losing one of its greatest strengths because of encroachment on its channel’s revenue base, pushing its channel to competitors as they search for other solutions to maintain their revenue – an offer Microsoft, Sun, Oracle and HP-Compaq would not likely refuse.
That said, some mid-market enterprises will reject a giant in the IT services market because of perceptions that they will not receive the personal touch they desire. Mid-tier vendors do provide this concept of strong relationship building and will continue to win business for that very reason. Although on paper capabilities might appear to be sound, what must not be forgotten is the desire for SMBs to deal with trusted advisors which they perceive to know and care about their business.
IBM is placing a large bet on the IT utility model for the SMB market.
Ultimately, it just might pay off. However, for this model to succeed, the bulk of the consulting and systems integration revenue generated will come from redesigning the business applications based on the business process expertise of the IT services provider and the initial systems integration.
PwC possesses this expertise in huge quantities. Thus, should IBM’s IT utility bet pay off, the total consulting and systems integration (not IT management) revenue pie for IBM solutions could shrink substantially, limiting the opportunity for mid-tier partners. These recent actions could be IBM’s first step toward weaning away partners in its consultants and integrators program.
— With files from Ted Kempf, Mika Krammer, Raymond Laracuenta, Whit Andrews and Michael Haines