Business Strategies: Spin City

FRAMINGHAM (04/03/2000) - At a glance - Company: Black & Veatch Solutions Group (BVSG); Spin-off date: January 1999; Employees: More than 550; Revenues: $50 million; Industries served: Manufacturing, government, finance and insurance, health care, services and distribution.

Watching Black & Veatch, the 85-year-old engineering firm based in Kansas City, Missouri, spin off its IT department into a consulting organization is like watching a local farm team take on the Yankees. You hope they'll score, but experts are betting the big guys are going to cream them.

That's the consensus of some industry watchers who doubt Black & Veatch Solutions Group (BVSG), which spun off from Black & Veatch in early 1999 and plans to go public sometime later this year, can survive the demands of the IT consulting world. They applaud the courage and conviction of the Little-Engineers-Who-Consult, but similar doomed attempts in recent years combined with a rapidly changing market leave industry watchers lukewarm. "I've seen this a thousand times before," says Marc Cecere, vice president of IT management with Giga Information Group in Boston. "The IT spin-off idea had its heyday about four or five years ago. Very few were successful, even the ones from larger firms."

But despite the odds, Black & Veatch thinks it can do it. "The goal," says BVSG's CEO Gerald White, who was a partner in Black & Veatch's IT department before the spin-off, "is to build a billion-dollar consulting business just like Black & Veatch built its engineering consulting business."

But why would an enduring, worldwide engineering company decide to step into the often murky, highly competitive IT consulting world? According to Black & Veatch CEO Len Rodman, who championed BVSG's efforts, the spin-off will offer its customers a few things other consulting groups don't: a winning methodology, for one; and the ability to deliver results on time and on schedule. But whether the process that makes for successful engineering will transfer into the information technology arena remains to be seen.

HOW IT STARTED Back in the early 1980s, John Voeller, former CTO of Black & Veatch and now CKO of Black & Veatch and the consulting CTO for BVSG, helped bring what he calls data-centric thinking into the engineering world. In 1983 the company launched Powrtrak, a custom-built, relational database that changed the way Black & Veatch did business (see "Reengineering the Engineering Business,"CIO, Feb. 1, 1998). After Powrtrak, all project details, which were formerly kept on paper, moved into a central database where they could be updated and accessed via the internet and satellite by users all over the world.

It was a development that would determine the company's future. The database revolutionized the company, making a paper-intensive office virtually paperless. Because of Powrtrak, projects often came in on time and on budget--sometimes even under budget. Business boomed. By 1995, Black & Veatch controlled 30 percent of the domestic engineering and construction market and 24 percent of the international market.

This victory not only grew the business, it fueled ideas. Over the years, Voeller and White presented Powrtrak to nonengineering companies, which asked over and over if Black & Veatch would build IT projects for them. White and Voeller wondered: Why can't we do for those companies what we did for ourselves? As veterans of the engineering and IT worlds, White and Voeller saw similarities between the two--similarities that made the step from one business to the other seem relatively (and perhaps deceptively) small.

By the late 1990s, Black & Veatch's IT department had been consulting on outside projects for at least 10 years. Voeller personally worked on over 100 technical audits for other customers (including some competitors). Late in 1998, the IT department stuck its corporate toe further into consulting waters after signing a $14 million contract with Southern Nuclear Power and an $8 million contract with General Motors. Voeller believes handling these large contracts forced Black & Veatch's IT department to either succeed or to fail--long before the department officially became its own entity.

WE CAN DO THIS Big changes came in January 1999, when Black & Veatch officially formed BVSG, appointing five partners from Black & Veatch's IT department and other divisions to head it, including White and Voeller. (Chief Operating Officer Brad Vaughan, Chief Project Officer Ron Hollrah and Chief Development Officer Dean Kothmann also joined the crew.) Black & Veatch handed its new child a challenge: to actively search for outside work while continuing to support the Black & Veatch team. BVSG beefed up staff, recruiting project managers and IT professionals from outside the engineering world, bringing the total number of employees from 400 to more than 550.

The result? BVSG plans an IPO for sometime this year. By separating the companies now, says CEO Rodman, shareholders in Black & Veatch's employee stock ownership plan can reap the benefits of the technology craze without risking public ownership of the core business.

But high hopes don't guarantee smooth sailing. Even before the official spin-off date, BVSG had to work hard to prove itself outside the engineering arena. The two key problems of the IT department were its self-image and the perceptions of the outside world.

At the end of 1997, the Black & Veatch IT department spent much of its time marketing its knowledge--with disappointing results. Convincing clients that the group could hold its own as technology gurus was tough. Finally, when a client revealed that he had turned to Black & Veatch because of its methodology, "the light bulb went on," says White. "We (originally) saw ourselves as technical experts, but we're really project management experts. We realized we were good at getting jobs done at a fixed cost and on time. That got people's attention." The realization, both liberating and humbling, rocked the core of the IT department, which revamped its marketing operation, focusing on process and outcome.

During all this soul-searching, the fledgling consulting group was trying to convince clients that it had the goods over behemoths like Andersen Consulting.

It wasn't easy. "We anticipated significant challenges in getting people to understand what we were capable of," says White. And those challenges arrived:

Potential clients wondered not only how an engineering firm could handle their IT needs, they wondered if Black & Veatch could understand the business reasons behind them. But the group was ready to meet those challenges. "It helped being a subsidiary of a consulting organization. What started off being a barrier, turned into an asset," says White. Once BVSG found it was able to convince clients that their process made all the difference, White says things changed.

By late 1998, clients were plentiful, and the group felt more confident in its future--a future separate from Black & Veatch.

STOP ME IF YOU'VE HEARD THIS ONE BEFORE In the murky field of consulting, a field known for littering fresh-faced college graduates at worksites for months, even years, BVSG says it is different. Four principles drive its contracts: fixed schedule, fixed price, guaranteed results and liquidated damages if BVSG doesn't come in on time--assurances, they say, the Big Five competitors wouldn't even think about offering. They want to make sure clients know exactly what their wish list will cost and how long it will take.

These guarantees, says Voeller, make all the difference in beating out the competition. "We've gone up against the Big Five in places like General Motors.

What we've witnessed is almost a level of disbelief in our methodology for software development."

Giga's Cecere doesn't buy the guaranteed results line. "It's a nice phrase but meaningless by itself. How do you define what doesn't work out? A guarantee is only as good as the quality of the firm itself." A successful consulting organization must factor in what he calls "a lot of slosh," that is, extra funding to provide proper training, documentation and help-desk support. "A bad consulting firm could do the job badly but still claim to live up to their contract, " he cautions. And acres of gray area exist between the consultants' view of a successful IT job and the clients' view. Cecere doubts the BVSG assurances will really attract customers who are hip to consulting jargon and jaded by consulting firms.

The cynicism may develop because customers have seen other organizations break away from a parent company, with varying degrees of success. Hartford Technology Services became a separate business entity from The Hartford Financial Services Group three years ago. The path for the Hartford, Connecticut-based IT group has been rocky. According to company insiders, not only does HTS find balancing the needs of the parent company with those of new customers a challenge, but it has discovered something else: The culture of the company's core business changed when the IT department took on outside challenges. Some employees, suddenly under pressure to prove themselves daily, balked at the new climate. Enter new, challenging emotions like fear, risk and discomfort--which can bewilder, immobilize and eventually drive away a certain portion of the staff. And while the outlook for Hartford Technology Services isn't entirely bleak, becoming truly profitable may take another two years, says one source--time a fledgling consulting firm may or may not have.

Death to other firms testing the consulting waters came from being unprepared corporatewide. Another complex spin-off came out of Lockheed Martin Defense Systems, which launched a 5,000-person IT consulting group in 1995. Like Black & Veatch, Lockheed believed its IT department's methodology could translate to the commercial sector. But the few clients it attracted found the methods complicated, the process time consuming. In addition, the marketing department--unaccustomed to selling IT services--broke down. The lesson? What might fly in a vertical market doesn't always translate to other industries.

Julie Gierra, a vice president at Giga Information Group, says the aspiration to spin off IT functions is almost epidemic. "We literally talk to two or three customers each week who want to do it--and there are so few who can succeed."

The company may have winning software or methodology--but that's not always a magic potion. "What looks cool for, say, the defense industry will look to the banking industry like it's from another planet," says Gierra.

In addition, separating from a parent company raises an allegiance issue. Does the fledgling IT organization's loyalty lie with new customers or with the parent company? If the processes that work for the parent customer don't work for the new customer, can--or will--they change? Who gets the organization's attention first? Gierra says flexibility is the key to success, something BVSG will need going forward. "Those who insist on their methodology are those who are asking for trouble," she cautions.

AGAINST SOME ODDS BVSG has an outsourcing agreement with Black & Veatch that makes the spin-off the sole provider of the engineering firm's IT services, and BVSG is aware of potential problems juggling the new clients with the old. "It takes a lot of work to balance the needs," says White. "If you get an exciting project from an outside customer, you'll have employees who want to move over."

But he hopes that the fact that Black & Veatch continues to need new projects on the cutting edge of the IT world will keep IT workers interested in looking inside as well as out.

Even as BVSG is keeping an eye turned inward, it must remain flexible to and understanding of the needs of new customers. "We think of ourselves as solution providers," says Voeller. "We try to solve a situation, not purvey canned results." Voeller believes IT consultants usually come to the table with their own familiar bag of tricks. "If you say document management, they have one program they like, and they'll move you toward it." BVSG tries to get its hands and mind around the whole picture and then search for the solution--which may or may not include BVSG. "We say no to SAP implementations," says Voeller.

"That's a high revenue opportunity, but we don't do it. Other companies do it very well." BVSG regularly turns down work it doesn't feel it can do well.

"There are plenty of organizations we won't help," says Voeller. "We'll point them in another direction. Our allegiance is to having a high-quality project.

We get that from being engineers. It allows you to have huge candor."

LONG-TERM SUCCESS? But candor may not float the IT spin-off forever. Giga's Cecere wonders if the parallels between engineering and IT consulting are enough to justify the leap. "The pace of change is much faster in IT," says Cecere. "A successful engineering project means the building doesn't fall down.

Also, every construction project ends in litigation. That's how it is." In the IT consulting world, he says, the failure rate is higher, upkeep is more and litigation is a smaller issue. Although the process might seem similar, he says, the urgency and measure of success is not. For many companies looking to have their IT needs filled, the urges the child of an engineering firm might have to track documents can eat up precious resources.

Still, it's an IT-needy world out there. Success over the short term isn't unreasonable. "It takes a lot of ineptness to screw up consulting," says Cecere. "You can be successful for a bit, but to sustain for an extended period of time will be the trick. It will require quality and something that is a differentiator."

Cecere says BVSG needs to learn how to manage consulting for IT--from moving information along the pipeline to marketing to billing, something the group has done well in the engineering business. They also need to set up the infrastructure before needy customers hammer them. "If they're good at establishing and controlling resources, they can do well with it, but only if their people are extremely experienced and have a standard tool set." Does Cecere think BVSG has a shot at success? Perhaps, but "unless you have all the factors in place, it's tough to compete with the Andersens."

Julie Gierra also questions long-term success after this high-need era passes.

"There is a skill shortage and tremendous growth right now," says Gierra, who points out that industry growth increased from 17 percent in 1998 to 24 percent in 1999. "Companies don't have inside skills, and it's attractive to find outside help. There is a big hole." According to Gierra, the need for consulting services can be attributed to two major IT pushes: Y2K and the explosion of the internet. Most connected companies had to allocate for Y2K, and now that the millennium tech-threat is mostly history, companies are allocating resources to create a web presence. But once that's done the need for outside IT services may diminish.

Naysayers aside, a few companies have succeeded in IT consulting. For example, Royal Dutch/Shell Group, based in the Netherlands and United Kingdom, spun off its IT organization into Shell Services International Group of Companies (SSI) in 1998--with a balance sheet that now shows a combined revenue base of $1 billion and assets of $340 million. Today, SSI runs offices in nine countries, serves customers in 125 countries and employs more than 5,000 workers. What kept SSI afloat when others sank? "SSI took the time to understand the marketplace," says Gierra. "They designed and put important functions in place first--support functions like training, help desk, pricing, a knowledgeable sales force and service level agreements."

READY, SET, CONSULT! Whether industry watchers look on with skepticism or optimism, BVSG feels it has the goods to compete over the long haul. Voeller says the BVSG difference lies somewhere between artistry and skill. "Real artistry comes when you have a group of strangers together in a room," says Voeller. "The client may be unclear on what it is they want. You have a set time frame and a daunting task." Without the proper consulting skills, the group will go nowhere. It takes a consulting expert to help the client figure out what they need, identify platforms and software, and take them from A to Z."That," says Voeller, "is art."

What's your take on IT spin-offs? E-mail Features Editor Meg Mitchell at Rebecca Lynch is a freelance writer based in Wayland, Massachusetts.

A HEALTHY BOTTOM LINE BVSG plays doctor to an ailing IT organization What do building bridges and building health-care websites have in common?

Plenty, if you ask Child Health Corp. of America (CHCA), which asked Black & Veatch Solutions Group (BVSG) to rescue it from its IT woes. The Shawnee Mission, Kansas, company, which provides an alliance of children's health-care hospitals with products and services, had watched its IT needs grow along with its company, and the IT organization needed some help from the outside world.

After taking bids, CHCA settled on BVSG, which spun off from its parent company, Black and Veatch in 1999, to provide a system support plan, website design and project management. CHCA was impressed by BVSG's previous work with Blue Cross/Blue Shield and General Motors, according to Jim Cook, vice president of information technology services for CHCA. Mostly, CHCA valued what it calls BVSG's nonpartisan consulting approach. "We looked at other players and felt like they had an agenda. They were pushing their own products," says Cook.

Jeff Primovic, vice president of pharmacy with CHCA, works directly with BVSG on the website, which, as part of the CHCA alliance, will provide vaccine information to parents and allow health-care providers to order vaccines online.

More than anything else, Primovic appreciates BVSG's outsider perspective.

"They have taken a lot of time to learn the business and how it works," says Primovic. "They challenge me and my team's thought processes. Not just technically but from an outsider's viewpoint that's been really positive." BVSG also turns work around quickly--sometimes a little too quickly. "They can turn things around faster than I can respond!" says Primovic. -R. Lynch.

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