Consulting
References Practices Case
October 9, 1994
Robert M. Howe, the man who took $100 million and turned it into I.B.M. Consulting.
In 1991, I.B.M. hired Robert M. Howe from Booz, Allen & Hamilton and gave him a free hand and $100 million to invest. His assignment: take the money and make the International Business Machines Corporation a force in the fast-growing market for information technology consulting. So Mr. Howe 49-year-old Harvard M.B.A., set about pending money, recruiting people from firms like McKinsey and Price Waterhouse, and retraining l.B.M. engineers, sales people and technicians as consultants.
No one could argue with the strategy. The business is certainly a growth opportunity. The worldwide market for information technology consulting - a broad category that an include everything from management advice to setting up networks of personal computers - will reach nearly $20 billion by .996, estimates Dataquest, a research firm in Framingham, Mass. The market has oared as more and more companies need help in deciding how to use today's confusing array of computer tools.
For l.B.M., consulting is crucial to its future and its hopes for lasting recovery. 'competition and the spread of low-cost microprocessor technology to computers of all kinds has eroded its hardware sales, traditionally dependent on big mainframe machines. The company's new growth, inevitably, must come from services and softwaree. That shift, to be sure, is already under ^way. From 1991 to 1993, l.B.M.'s sales of ;services and software have increased from $16 billion to $21 billion, or more than one:third of the company's revenues. This year, analysts say, services and software revenues are nearing 40 percent of its business.
The consulting business should be at the forefront of l.B.M.'s push into services. Mr. Gerstner, once a young star at McKinsey & Company, observes that all the major suppliers of computer hardware or software to the corporate market are in the business of "delivering a set of solutions to serve our customers' needs" instead of supplying off-the-shelf products and programs.
"The consulting group is a very important part of that for us," Mr. Gerstner said. "It is a key Dart of our internal strategy."
IN the consulting field, Mr. Gerstner adds, I.B.M. has the advantage of being able to tap the company's formidable research labs for technology know-how and its marketing force for in-depth knowledge of specific industries and corporate customers. "We've been working with the information technology departments of these companies for decades," he said.
I.B.M. Consulting, as the business is named, was formally launched in the fall of 1992. By some measures, it has made an impressive debut. The company claims to have 3,500 consultants, with more than 3,000 of those retrained from elsewhere within l.B.M.'s ranks. Its consulting force practices in 30 countries and has hundreds of clients, ranging from corporate giants like American Express, Maytag and Cigna, to smaller companies like Mtel and Washington Mutual Savings. I.B.M.'s worldwide revenues from consulting of all kinds reached $362 million last year, estimates Consultants News, a newsletter in Fitzwilliam, N.H. Mr. Howe, general manager of l.B.M. Consulting, says the business will turn a small profit this year for the first time.
Yet for all its advantages, the l.B.M. consulting unit faces a stiff challenge in trying to establish a distinctive identity for itself - and a real business franchise - in a crowded field. And that challenge, analysts say, has become even more difficult because of recent changes within the company.
Mr. Gerstner's predecessor as chairman, John F. Akers, who stepped down under pressure in early 1993, had been making l.B.M.'s operations increasingly autonomous - a collection of stand-alone businesses. Mr. Gerstner, by contrast, is a firm believer that the company's size and scale can be made a strength, by offering corporate customers one-stop shopping for information technology. He has pushed for a closer integration of the company's units.
The step that had the most impact on the consulting business came last July, when l.B.M.'s marketing force was reorganized into 12 industry specialties like finance, health, insurance, telecommunications and media. To diffuse the industry expertise of its consultants throughout the company, many of Mr. Howe's people now report directly to the industry czars in the marketing organization. If l.B.M. Consulting can work smoothly and build a reputation in the marketplace, "they will really have achieved something because their structure is working against that now," said David Lord, editor of Consultant News.
For his part, Mr. Howe replied, "We always intended to end up in industry groups. Places like McKinsey and Booz, Allen are organized by industry as well."
TRUE, but other consulting operations don't have the headache of trying to work from within l.B.M.'s still labyrinthine bureaucracy. After the reorganization, Mr. Howe remains in charge of training and certifying 1.B.M. consultants, analysts say. That is a vital role in Mr. Gerstner's vision of the new l.B.M., while the marketing force is supposed to be transformed from order-taking salesmen into experts selling tailored solutions to corporate customers.
"If l.B.M. is really going to be more than a supplier of hardware and software products, Howe has to successfully spread the consulting ethos throughout the company," said Sam Albert, a former l.B.M. executive, who is a consultant in Searsdale, N.Y. "But that is very different from having bottom line control."
Working from further within the l.B.M. corporate fold is likely to make it harder to establish a brand identity for the consulting business. Though growing, I.B.M. trails the likes of Andersen Consulting, EDS, McKinsey, Ernst & Young, CSC Index and many others in the consulting field. Last year, it ranked 19th in total revenues, according to Consultants News.
"I.B.M. is a Tier 2 player," said Bonnie Digrius, who tracks the technology consulting business for the Gartner Group in Stamford, Conn. 'The name l.B.M. doesn't open as many doors as it used to and it doesn't open many in the consulting market.'
The l.B.M. name, in fact, can be a liability. Its initials are synonymous with computer making. So some potential customers would never think of l.B.M. when they are in the market for a consultant, and others might consciously avoid I.B.M., suspicious that the company would pitch its own products.
To win clients, Mr. Howe's staff has to overcome both those hurdles.
Two years ago, John McCarthy, senior vice president at Smith Barney & Company, decided to hire a consulting firm to help streamline the way the Wall Street firm handles the investment accounts it manages for thousands of clients. The goal of the project was to change the way the firm routed securities transactions so there would be less paper shuffling, making the system less labor-intensive and less costly.
At the outset, Mr. McCarthy recalled, he didn't even know that l.B.M. was in the consulting business. When he found out about l.B.M., Mr. McCarthy decided to invite them in. Still, he said, "I would have bet that the consultants at one of the Big Six accounting firms would have been the {favorite. I really had no idea what l.B.M. offered."
I.B.M. showed up with an entire team of consultants, and that impressed Mr. McCarthy. "They were a bit new to the game and it seemed like they cared a little bit more about us," he said. "They treated us as if we were a special client."
Smith Barney hired l.B.M. for the project. Though Mr. McCarthy admits that there were some member s of the l.B.M. team he would not invite back, he was pleased enough with most of the effort to hire l.B.M. again. "Without the l.B.M. people driving this, we wouldn't have gotten the project done," Mr. McCarthy said. "We'd failed in the past."
The securities-routing project, he said, should pay for itself in three years. Thereafter, Smith Barney should save several million dollars a year because of the changes.
Mr. MeCarthy was also struck by the independence of the advice he got from the l.B.M. consultants. To track securities more efficiently, they did recommend running some software programs on a non-l.B.M. system - a large computer using industry standard software, called Unix, made by a rival supplier, which Mr. McCarthy declined to name.
Benjamin A. Tomb, senior vice president of Cigna Corporation's group insurance division, said he was irritated when l.B.M.'s consulting unit was brought in by Cigna corporate headquarters in Philadelphia. "I went in with a negative attitude towards l.B.M.," Mr. Tomb recalled. "I was very cynical that we were going to get the world according to l.B.M. to solve our problems."
In 1992, the l.B.M. consultants were brought in to try to improve the efficiency of Cigna's $1.5 billion group insurance business which supplies life insurance to the employees of many companies. Typically, the workers buy the insurance through voluntary deductions from their paychecks.
Mr. Tomb's qualms about l.B.M. were dispelled fairly quickly. When the l.B.M. consultants suggested new image-processing equipment to speed the handling of insurance forms, they recommended a system made by another vendor, Ameritech Corporation.
Mr. Tomb was also impressed by the people l.B.M. sent in -"seasoned" professionals mostly in their mid-40's, he said. "When you bring in the Big Six, you get wet behind-the-ears M.B.A.'s, herds of them," he said.
Based on l.B.M. recommendations, the Cigna unit's 150-person customer service center in Bethlehem, Pa., was organized. Before, the workers had been grouped by the functions they performed like billing and new accounts.
Instead, I.B.M. advised reorganizing the employees in cross-functional teams of less than a dozen people each. That way, everybody sees the whole process of handling customer accounts rather than having divided tasks and responsibilities.
THE teamwork approach, which encourages employees to share time-saving tips, has proved a winner. Since the I.B.M. engagement was completed, Cigna's group insurance business has been growing at an annual rate of 20 percent. Productivity has improved by 35 percent over 18 months and administrative costs have tumbled by 40 percent. "In 18 months, we've taken a third of the cost out of the business," Mr. Tomb said. Of the l.B.M. consultants, he observed, "I came away with a lot of respect for them."
In the consulting field, I.B.M. is still trying to earn respect. As a start-from-scratch business staffed by outside recruits and retrained l.B.M. employees, critics say the unit lacks a distinctive methodology. "They have a mongrelization of what was big ten years ago in various consulting firms," Thorton May of Cambridge Technology Partners, a consulting firm in Cambridge, Mass. "As opposed to creating something unique, they are grounded in old think."
Mr. Howe replies that clients are concerned with results rather than consulting methodologies. His business, he says, is growing by 50 percent this year- an accomplishment he attributes largely to being part of l.B.M. Others may see drawbacks to being inside the Big Blue fold, but he sees mainly benefits.
"We never would have grown this fast or become this big without the l.B.M. name," Mr. Howe said.
The largest consulting firms, based on estimated revenues;in fiscal 1993 from all types of consulting, in millions.
1 Andersen Consulting $2,876 2 McKinsey &: Company 1,274 3 Coopers & Lybrand 1,050 4 Ernst & Young 1,030 5 Price Waterhouse 995 6 Deloitte & Touche 906 7 William M. Mercer Cos. 859 8 KPMG PeatMarwick 845 9 Booz, Allen & Hamilton 800 10 Arthur Andersen 790 11 I.B.M. Consulting Group 362