Consulting Firms Struggle With E-Business Models

SAN MATEO (03/20/2000) - As enterprises increasingly turn to outside help for the technical and business know-how to extend their core operations into the digital economy, the Big Five -- traditional advisors of the corporate elite -- find themselves scrambling to retain that favored and lucrative position.

Under pressure from Internet-focused start-ups and regulators, the old guard of management consulting firms are facing a test of their competitiveness and influence in the fast-moving e-business marketplace. Big Five consulting firms are devising new business models and strategies in hopes of becoming nimble and attracting top IT talent.

Last week, Andersen Consulting and Microsoft Corp. formed a separate services company called Avanade, which will focus on Internet and enterprise projects anchored on the Windows 2000 platform A key reason for the spin-off was to create a start-up environment.

"Right now, being a pre-IPO technology services firm is not going to hurt recruiting," said Mitchell Hill, CEO of Avanade.

This joint venture is the latest in a series of spin-offs that is redrawing the top tier of the consulting landscape.

Spurred by regulatory and legislative scrutiny, most of the Big Five consulting firms have taken steps to divorce their auditing and accounting practices from their consulting operations.

In recent months, KPMG has spun off its consulting group. Andersen Worldwide has been hashing out the details of a similar split, but has been delayed by partner lawsuits. PricewaterhouseCoopers, stung by high-profile incidents of questionable partner investments in client companies, last month reorganized into separate consulting and auditing/tax groups.

And Ernst & Young late last month announced the sale of its consulting arm to French services giant Cap Gemini. Deloitte & Touche has tinkered with the relationships among its various business groups, but has not fully cleaved its consulting operations.

These structural adjustments parallel a frenzy of investments and partnerships designed to plug the traditional consulting leaders in to the digital economy.

Most of the firms have venture capital groups seeding new, smaller services and e-commerce players, as well as fast-growing networks of partnerships.

To keep pace with the rapidly changing business technology requirements of corporate IT shops, the Big Five not only need to adapt their strategies, but also need to shed their images as hidebound number-crunchers, analysts and users said.

"We don't look to our accountants for help with IT, any more than we would look to our caterers to get IT help," said the Web projects director at a Fortune 10 company, who wished to remain anonymous. "This is mostly an idea propounded by the accountants themselves who somehow figure if we are good at accounting we must be good at IT."

Many Fortune 1000 shops routinely rely on the Big Five for direction and advice on IT issues. But analysts and users said that these large companies will turn to Silicon Alley and Valley types, such as upstart services firms Scient, Viant, or Razorfish, for advice on Web-based projects, which require skills ranging from back-end systems integration to front-end design.

"For the most part, these [user] companies are using [the Big Five] for non-e-businesses. But for e-commerce projects where there is a 50-times increase in speed and responsiveness, these older-guard companies can't begin to cut it," the project director said.

Part of the problem, in the view of some IT managers, is that the Big Five do not exactly know yet which business they want to be in. Some see the more glistening and profitable opportunity of IT services laid out in front of them, but they also know they can't be in the auditing business with the same account at the same time.

"I think a lot of these firms are still exploring what role they should play.

What they are seeing is a bigger opportunity in [IT] services and consulting, especially when it comes to the e-world as opposed to their traditional business," said Frank Petersmark, vice president of information technology at Amerisure & Co., a large regional insurance company in Southfield, Mich.

To successfully move into IT services, what Big Five companies need to do is not only become swifter and more educated, but also do a better job of marketing themselves, Petersmark said.

Despite their mixed track records with such projects as ERP (enterprise resource planning) implementations and the perception that they are a step behind Web time, the Big Five consulting operations can't be dismissed, said Russ Novak, an analyst at the ARC Advisory Group, in Dedham, Mass.

"The tier-one service companies have the financial resources and vertical industry expertise to penetrate almost any market, although they've already opened the door to midtier competitors and Internet start-ups," Novak said.

Spinning out

Andersen Consulting and Microsoft have created a new professional services company called Avanade.

* Headquarters: Seattle

* CEO: Mitchell Hill (from Andersen Consulting)* Investment: $385 million from Microsoft* Valuation: $1 billionAvanade will offer the following products and services.

* Reusable e-commerce applications

* Windows Distributed interNet Architecture (DNA) development and application integration* Highly available enterprise and Web infrastructures* Data center consulting services

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