Of IBM's 18 Global Services industry practices, the life sciences could benefit the most from IBM's planned acquisition of IT and business consulting services provider PwC Consulting.
Although IBM Global Services (IGS), with its 150,000 employees and US$35 billion in 2001 revenue, dominates the IT services market without PwC, Big Blue's life science offering isn't as broad as some of its rivals. In particular, IBM is weak in life science business consulting, an area where PwC Consulting is strong.
"The IGS life sciences practice has never really been able to engage customers at the strategic business level like Accenture and Deloitte Consulting," says Mark Hall, an IDC analyst who is research director of life sciences. But Hall says, "IBM with PwC can go into a life sciences company and engage them much more deeply, from technology to business. It's a nice complementary strategy."
These business consulting services are much in demand by big pharmas and smaller bioscience companies struggling to improve efficiency and adaptability.
Drug discovery companies are trying to make better use of their immense R&D budgets in order to shorten extremely long product development cycles. That requires shorter testing cycles and getting faster approvals for new compound entities (NCEs). Moreover, they're looking to streamline back-office administration operations and improve sales and marketing efforts.
"Drug discovery is very much done on a computer rather than in a lab these days, so IT has become a source of strategic innovation for pharmaceutical companies," says Geraldine Cruz, a senior analyst in Gartner Inc.'s Dataquest Inc. unit who follows the life science industry.
"Life sciences is undoubtedly the most complex vertical industry in the world right now," IDC's Hall says.
The IGS life science practice is strong in traditional IT services, such as system integration, data management, system maintenance, and infrastructure outsourcing, as well as in areas specific to life sciences, such as drug discovery and clinical trials. Business consulting is where PwC Consulting comes in.
"Life sciences companies are looking to change the way they do business using IT, primarily seeking to save money in product development," says Andy Efstathiou, a Yankee Group analyst. "This is an issue [the IGS life science practice] currently doesn't address. This acquisition will help it become much more successful in that space."
PwC Consulting also brings other strengths, such as its strong customer relationship management and supply chain management practices, two areas of increasing popularity with life science companies as a result of their efforts to improve sales and marketing and their interaction with suppliers and partners.
"We see tremendous complementarity," says Fergus Byrne, PwC Consulting's global lead partner for the life science practice. "We're giving the clients a team of people who understand the industry from top to bottom. It's real integration of business and technology consulting."
However, the PwC Consulting integration would be a first step in IGS' attempt to round out its life sciences offerings, cautions Gartner's Cruz. "There are a lot of other companies out there, like Accenture, that offer fairly deep and extensive clinical trial strategies and discovery strategies, along with the systems integration and outsourcing," she says. "IBM still needs to develop even more deep industry solutions."
Moreover, integrating the two life science groups successfully will be difficult because the companies' approaches to the life sciences are different: IGS focuses on the chief information officers with a tech-driven approach. IBM's Life Sciences business unit focuses on R&D teams while PwC appeals to CEOs with its business process expertise, according to Gartner's Cruz.
"There's bound to be a battle over who gets to decide the vision for life sciences," she says.
Then there's the very likely culture clash of the overall $3.5-billion acquisition, which will see about 30,000 PwC employees and partners switch from a partnership structure to IBM's corporate structure and environment. A new IGS global unit will be created when its Business Innovation Services unit is merged with PwC. IBM expects to close the acquisition this month.
"The change from a partnership to a corporate culture is an interesting change, but they [PwC Consulting] were going to have to [change] anyway," says Mike Hathaway, vice president and general manager of life sciences at IGS' Business Innovation Services, referring to PricewaterhouseCoopers' now canceled plans to spin off PwC Consulting via an initial public offering.
Making the merger work
IBM has been successful, as part of its outsourcing deals, in bringing employees from other companies and integrating them into its own operations. But a partnership is more complicated, says the Yankee Group's Efstathiou.
"I guarantee many PwC partners will decide to leave over the coming 12 months. The question is: Can IBM retain the key players to preserve the value of what they bought?" Efstathiou says.
Key to a successful merging of the two practices will be the middle managers on both sides, says Hall.
"The question is: How quickly can the middle managers be engaged? That's where the battle will be won or lost, because the middle managers are the bridge between senior management and the consultants," Hall says.
Ultimately, clients on both sides are unlikely to enjoy immediate benefits from the acquisition, says Gartner's Cruz. The best-case scenario would be for IGS to end up with a "robust life sciences practice that offers a true end-to-end integrated practice" but making that a reality will be a challenge, she says.
In the past two years, IBM has launched an aggressive push into the life-science market, one of the few vertical markets whose IT spending is growing robustly. Spending by life science companies on IT products and services is expected to grow from $18 billion in 2001 to $38 billion in 2006, a compound annual growth rate of 24 percent, according to IDC. A third of that money will be spent in services, IDC's Hall says.
"Life sciences is an IT-driven business," IBM's Hathaway says.
IBM's top brass has identified life sciences as a key market for the company, creating a life science business unit and pledging a three-year, $100-million investment in August 2000. At the time, a high-ranking IBM official called life sciences "one of the emerging markets at the heart of IBM's growth strategy."
John Madden, a Summit Strategies Inc. senior analyst who covers IT services, says, "IBM has certainly made life sciences a priority vertical."