CM: How will this marriage of a partnership and a commercial company avoid some of the difficulties we've seen similar marriages experience, such as that between EDS and A.T. Kearney or Cap Gemini and E&Y, or even CSC and Index?
Rometty: Not only do we think the outcome will be different from some of the other deals you have mentioned, but we think it's already been different. We've got something very strong going for us, and that's the client proposition. That's a very powerful reason for two things to come together, and this can overcome a lot of obstacles that might be faced.
However, what first needs to be said is that we both prepared for this day to happen, and this goes a layer deeper than changes within PwC. Look back in time at certain key decisions made by Lou Gerstner: First, he kept IBM together. And second came the decision to form IBM Global Services in the mid-1990s, and the placement of existing services groups under a single umbrella. This meant not just outsourcing, but consulting and technology services, and we had already built the bridges in between these businesses. And this is an important point, because the fact is that these other businesses you mentioned made acquisitions but did not have a cradle for them to fit into. They didn't have the linkages built between them. We did.
CM: When EDS bought A.T. Kearney, the company's management said that they expected to execute a pull-through model where for every dollar of ATK strategy work, there would be another $10 in integration services. Will "pull-through" be a component of your model?
Rometty: I think that's a dated model. That's a consult-and-build, and it's outdated by about five years. And this is where there needed to be a handoff from a strategy team to an SI team. Here the teams are integrated to work better, and the discussion today is about how you build a solution for a client.
CM: The cradle you've described, is this an IBM cradle?
Rometty: Your first fear would be that PwC would have to be absorbed into the IBM mold, but we were quite clear from the very beginning that we would adopt the best things of the two. From the start, we announced that the operating model would be PwC's, so this is a huge signal to people about our willingness to change.
CM: You've stated that IBM is adopting PwC's industry segment approach to consulting work.
Rometty: Yes, and over the last several years IBM has aligned itself by industry line. So we have a common view of how to face the client. Now, IBM started building industry skill in the early 1990s, but we have put an industry dimension over all of IBM over the last three years. Here we have this industry dimension that dictates how we face the customer as well as how PwC faces the customer. So if we were to step back and look at what we've done to prepare for this acquisition, we decided to be an integrator, we created a services business and built the links that taught people how to work to create an end-to-end solution. We decided to go to market in an industry dimension and my view is that this made for a pretty solid foundation. Now enter PwC.
CM: What, other than being industry-facing, does it mean when you say you've adopted PwC's operational model?
Rometty: This means that we operate in two dimensions. The primary dimension is an industry go-to-market and the secondary is the solution area. So every consultant has an industry affiliation and a solution affiliation. CM: But IBM had already added the industry affiliation prior the merger. So what's new here?
Rometty: Yes, we had industry, but consultants didn't live at the intersection — people either had an industry affiliation or a solution. Meanwhile, at PwC people had both. So we pulled these together and first we had to adopt their solution areas, because IBM had a different set. And so you can see the flexibility right off the bat with IBM's adoption of PwC's solution areas and, of course, we announced the leadership in the different geographies. It all came from PwC and we did that consciously. It was a way to retain people and give them a sense that there will be someone at the helm who had had a significant role in the firm before. And we believe we don't have some of the natural conflicts because our skills are very complementary and our relationship with clients is different. Part of this was because they were our auditors and we could not do work together. We could not have subcontracted to them and they couldn't subcontract to us because of audit independence issues. So in the marketplace you did not find us on top of each other and we were in different areas.
CM: There has been some talk that you may have gotten too good a deal, and that the payout partners ultimately receive from the deal is not enough to keep them on board. How do you respond?
Rometty: What should be made clear is that in addition to the purchase price we have put together some retention vehicles that are outside of the purchase price.
CM: So we shouldn't expect to see a certain percentage of partners walk?
Rometty: We got 99 percent of all the partners. And they have signed noncompetes. And the retention vehicle covers four to five years. There is also a retention vehicle for the staff.
CM: We are aware that mentoring was an important component of PwC's culture. Should we expect to see IBM enhance its efforts in this area of career development?
Rometty: When we talk about how we do post-integration, we first talk about the importance of speed. And a lack of speed, I think, is clearly what has hurt some of the other consulting firm acquisitions. Another piece, we call adopt-and-go. This means asking the question, Who had the best practice that distinguished the firm? The focus on mentoring and career development was a piece that PwC did very well, and so we're adopting their global career framework. Meanwhile, IBM does executive leadership development very well, so we are adopting IBM's leadership development.
CM: What parts of PwC's career development framework will be new to IBM?
Rometty: Well, we have a career framework as well, but PwC's was more robust. It identifies different levels of competencies. It's able to characterize a consultant's industry skills, technical skills, financial skills, business acumen, and mentoring skills. And it was certainly more developed on the industry side compared to IBM's. So the point is that we've made it clear that this deal is not about PwC adopting all of IBM's practices or IBM adopting all of PwC's.
CM: How quickly will PwC consultants be able to access leadership development?
Rometty: Well, we have already announced 80 global leaders who will lead the combined entity, and by January 1 all of our people will be integrated fully into one organization. To that point we have already held a leadership symposium to bring together all of the partners, and so it has already started.
CM: Some argue that systems integration work is about helping clients do what they do better, while strategy work is really about helping clients do something different — and therefore a technology integrator is ill-suited to supply strategy services …
Rometty: The only strategies that are any good are the ones that can be implemented and executed, so you now have to have some of the technology integration knowledge to make this happen.
CM: It's been said that this deal has helped the accounting profession advance auditor independence, at the expense of the consulting profession's independence. Is independence an issue, now that PwC Consulting is attached to a giant technology manufacturer?
Rometty: I would charge that there are very few firms in the marketplace today that are independent. How many have announced relationships with different partners? How many accept marketing fees and remarketing fees? How many have executives who sit on boards of other companies or have executive from other companies sit on their boards? What really matters in the eyes of a client is your ability to be objective and the solutions you provide. They want you to be objective in what you provide, and they want you to stand behind your work. So I really believe it's about objectivity, and I question who is independent.
CM: But doesn't independence become a bigger issue the higher you climb the strategy consulting ladder — doesn't independence foster greater earnings power?
Rometty: My experience with clients has been that at a strategy level they often enlist consulting services on an individual level and if the people move, the client moves with them. When we first looked at PwC, we saw people within the strategy portion of the business that have very-long-term relationships with clients. Now, will there be times when there is a client that only wants to do strategy work — yes, there will be times. But I believe there are also going to be times when a client says, I want to work with a firm that knows how to connect to the next piece. In the marketplace, there is room for both of us, but I don't believe that strategy is the sole domain of the strategy houses.
CM: Wouldn't IBM be better positioned to advance into strategy services if business consulting were spun off?
Rometty: Our goal is not to excel in the strategy space. Our goal is to be able to provide clients with answers to problems, and that includes strategy, that includes helping build it for them, and that includes helping them operate it, and that's the goal at the end of the day. So what I believe being part of IBM really means is that we've grown up in a culture of integration, which is what can now bring greater value to clients. And I think it's important to consider things like how software can make profits change in a business, and why a client may want IBM to provide both software and services. … We think quite differently.
Sidebar: How the Partners Fared:
EDS Buys ATK
Year: 1995
Price Paid: $628 million
At Time of Sale:
A.T. Kearney Annual Revenue: $346 million
# A.T. Kearney Consultants: 1,007
# A.T. Kearney Partners: 118
Price/Revenue Ratio: 1.815
Value of Deal to ATK Partner: $2.5 million
Cap Gemini Buys Ernst & Young
Year: 2000
Price Paid: $11.1 billion
At Time of Sale:
E&Y Consulting Annual Revenue: $4.05 billion
# E&Y Consultants: 17,348
# E&Y Partners: 1,000
Price/Revenue Ratio: 2.7407
Value of Deal to E&Y Partner: $4.1 million
IBM Buys PwC Consulting
Year: 2002
Price Paid: $3.5 billion
At Time of Sale:
PwC Annual Revenue: $5.5471 billion
# PwC Consultants: 30,000
# PwC Partners: 2,600
Price/Revenue Ratio: 0.6309
Value of Deal to PwC Partner: $700,000
Sidebar: When the Honeymoon is Over …
"It is unclear whether EDS is committed to remaining in the high value-added consulting market in a leadership role. … One needs to understand that you are working for a large corporate entity that places more value on quarterly returns than it places on individuals or collections of employees."
— ATK consultant, August 2002
"You have to more carefully manage your own career as managers become better incented to meet short-term financial goals than to grow people within the organization. Management goals continue to conflict with those of consultants."
—CGE&Y consultant, November 2000
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