Consulting
References Practices Case
OCTOBER 7, 1994
Slightly more than a year old, EDS's management-consulting unit is treading where such firms as McKinsey & Co., A.T. Kearney Inc. and Boston Consulting Group Inc. already dominate. And EDS has set its sights high: It wants to lead the pack.
EDS, the computer-services unit of General Motors Corp., expects its consulting practice to post around $200 million of revenue this year and turn its first profit in 1995. But can EDS, which posted $8.6 billion in revenue last year from running corporate data centers and computer networks, achieve long-term success spinning abstract management advice?
Analysts worry about its credibility. "When the Fortune 500 want strategy consulting, they won't listen to an information technology firm," says Susan Scrupski, editor of InfoServer, an industry newsletter based in Barnegat, N.J.
EDS thinks differently. To prove it's no longer just an Information-technology concern, EDS points to a crew of heavyweight consultants recently lured from a number of major firms. New consultants continue to come on board every month, the result of a continuing recruiting effort. And EDS is busily gobbling up independent firms: The company in recent months bought five consulting shops, such as JSA International Inc. of Boston and Canadian firm Linx Participative Consultants Inc. And it says it has another six acquisitions in the pipeline.
On top of all that, EDS says, much of the strength of its consulting practice lies in its ability to draw on the company's flagship information-technology operations, which offer such services as installing computer networks and running corporate data centers.
Unlike most other consulting firms, EDS needn't stop at giving advice, says H. Michael Gleason, who heads the company's consulting practice. Rather, EDS's technical arm is able to implement its consultants' recommendations all the way down to installing computers and running them, turning EDS into a one-stop shop says Mr. Gleason, a former managing partner at accounting firm Coopers & Lybrand.
To some extent, EDS is fighting back. For years, traditional consulting firms have been invading its turf by building up expertise on information technology.
In launching its own offensive, EDS has plenty to gain. The $31 billion management-consulting industry, expected to grow by about 10% this year, offers profit margins many times higher than those of EDS's other businesses. And then there's the potential bonus of selling technical expertise to management-consultancy clients.
There's a precedent for such a "trickle down" arrangement. About half the contracts of CSC Index Inc., the consulting arm of Computer Sciences Corp., generate business for the parent company's technical units, says James Champy, an executive at Computer Sciences, based in El Segundo, Calif.
In fact, Mr. Champy estimates that every dollar of CSC Index's consulting revenue leads to $5 of additional revenue for technical services. EDS foresees an even richer ratio: It figures that every dollar in consulting fees could produce as much as $10 of follow-on revenue. As for how much follow-on revenue the consulting unit has actually generated so far, Mr. Gleason won't say.
But at least one EDS consultancy client, Bank of Boston Corp., says it's considering hiring an EDS technical unit to upgrade a software program that determines efficient staffing levels in retail branches.
To be sure, many management consultants' recommendations involve some kind of information technology, be it computers, communications networks or handheld wireless devices. Given the crucial role technology plays in running a business, management advice "must affect the information-technology structure of a company," says Ms. Scrupski. "No business today is done without computers."
But some note that while EDS may not tell every client that it needs more information technology, it's still saddled with a conflict that dogs many firms that sell both advice and the service to implement it. For EDS to advise using information technology and then "stand there with their hand open" for the follow-on business opens the risk of appearing to be biased, says David Lord, editor of Consultants News, an industry newsletter based in Fitzwilliam, N.H.
Some of the most pointed criticism on this matter comes, not surprisingly, from traditional consulting firms. A setup like EDS's could be viewed as a group of consultants "just feeding the gaping maw of software programmers" in other parts of the company, says Gary Curtis, head of the information technology practice at Boston Consulting Group.
Mr. Gleason concedes that EDS's consultants are "very involved" in helping the company grow. But he insists they evaluate clients' problems "with a level of objectivity."
"We're not here to be the sales and marketing end" for EDS's other businesses, he says.
Such an image matter isn't the only pothole EDS is bound to run over. Some question EDS's ability to fold its new hires into a corporate culture of engineers who generally earn less money than most consultants. Indeed, consultants hired straight out of business school sometimes earn over six figures - twice what experienced engineers often earn.
Differences in outlook between management consultants and technicians have brought down some past attempts to combine the two.
One of the most well-known examples of an attempted combination gone sour is McKinsey's 1989 acquisition of Information Consulting Group, a computer-services firm. Of the 245 Information Consulting Group employees hired then, 151 have left.
Nor can EDS be sure of mining its new consultants' client lists, something it's counting on to ensure a steady flow of business. Clients are often more strongly bonded to firms than to individual consultants, analysts say.
Despite such uncertainties, Mr. Gleason continues to tout the consulting practice in the exaggerated language of management consultants, talking of "leveraging EDS's core competencies" into the unit. Although he wouldn't reveal the practice's targeted annual growth rate, he pledges that the unit will be "the biggest consulting firm by 1999."