A Room for Two

An even bigger driver is the emergence of Internet-based business. E-business is forcing every business to change the way it operates to one extent or another, from the neighborhood pizza shop that takes orders over the Web to the world's largest automakers, who are using the Internet to refashion their supply chains. This means new business strategies, plans, and processes, as well as new technology by the ton — a field day for consultants of all types, from the button-down, strategic McKinsey crowd to body-pierced Web design gurus. Business executives are scrambling to find a consulting firm that can get them something — anything — fast.
But the real driver of the growth of professional services goes far beyond skills shortages and technology change and e-business. It comes from the desire of companies to get out of the IT business and focus on their own businesses. They make mops, sell air conditioners, distribute medical devices, or do any of the myriad things that make up the economy. They don't particularly want to be in the IT business of acquiring, building, implementing, and maintaining computer systems. They just want the use of information technology.

Enter professional services. Consulting services, IT services, outsourcing, and ASPs (another name for outsourcing) address the desire of businesses to be relieved of the responsibility for implementing and running technology systems. By taking over the planning, design, implementation, operation, maintenance, even strategy, the services companies enable organizations to take advantage of IT without being in the IT business. In short, they allow their clients to focus on their own business instead of on technology.
So, as Gartner predicts, a trillion bucks a year will be thrown at IT services. If you are a software provider, you don't have to be a genius to figure out that you should try to get a piece of this pie — especially if you are looking at radical restructuring of your conventional revenue models.

History's lesson

Software companies have understood the value of consulting for some time. Computer Associates, one of the world's largest software companies, found itself frustrated in its search for a consulting firm partner, having been shot down by CSC in a nasty 1998 hostile takeover battle.
More recently, Microsoft jumped into bed with Andersen Consulting for a joint venture they named Avanade. The companies are representing Avanade as an expansion of their existing relationship. The target market for Avanade is large enterprise-class organizations, the Fortune 500 crowd. Not to miss out on any of the action, however, the venture will also work with Internet start-ups and new market entrants, the company adds.
Specifically, Avanade will focus on e-business offerings to be built on the Microsoft enterprise platform and Windows 2000 operating system. Avanade will provide Internet and technical services for reusable e-commerce applications, Windows DNA development and application integration, highly available enterprise and Web infrastructures, and data center consulting services.

The companies slapped a $1 billion value on the venture, with Microsoft contributing $385 million in cash to support Avanade, as well as providing solutions development support and other intellectual capital. Andersen Consulting will provide intellectual capital, training, resources, solutions development, and other services, according to the joint announcement. Over the next two years, Avanade expects to hire a highly skilled team of more than 3,000 technologists with expertise in Microsoft's products.
If services are what customers need and want, then who best to provide those services than the people who know the customers' businesses well enough to build the core applications they already run — the software providers. And, as these products are enhanced and extended for the Internet and e-business, the software companies suddenly can boast of e-business experience.

A different kind of consulting

At one level, this is nothing new. Software companies have long provided consulting services aimed at assisting with software implementation. Companies license the software and, for what typically amounts to an extra 10–40%, they get some software engineers to come in to help install and configure the software and maybe do a little integration. When major integration or customization is required, the extra services can easily equal or exceed the cost of the software license. But this isn't the kind of services software companies are talking about now.
"You're seeing a different kind of consulting now," observes Keith Block, senior vice president, Oracle Corp., Redwood Shores, CA. In the past, the client knew what the technology problem was, picked the technology provider, and purchased some implementation services as well. Today, clients face the e-business world and haven't a clue about where to begin. "They know they have to go to e-business, but they can't get their hands around it," he continues. "They need somebody who can help them at the highest levels both to frame an e-business strategy and to follow through on implementation."

Suddenly, clients are looking at their software vendors differently. "Clients now see us as an e-advisor," says Block, and the company has rolled out a wide range of new consulting services to address this new role. Many of these offerings involve working with top corporate executives rather than with the database and packaged solution implementers lower down in the organization.
Since all this is new to the software companies, they have had to scramble to get into shape. "We had people who did tactical consulting in the past and demonstrated the ability to step up to strategy," Block points out. He has launched raiding parties looking to scoop up talent from strategic consulting firms like McKinsey and Booz-Allen.
PeopleSoft is the latest big packaged applications vendor to jump on the professional services bandwagon in a big way. Again, the effort is a direct response to the Internet and e-business, "which requires different skills and a different consulting model," says Jay Fulcher, executive vice president, PeopleSoft Consulting, Pleasanton, CA. To this end, PeopleSoft introduced its Accelerated Lifecycle Consulting (ALC) model, which is intended to help customers rapidly implement e-business solutions based on its new PeopleSoft 8 suite of products.
Consulting already is a big part of PeopleSoft's balance sheet, to the tune of about $500 million. One-third of its employees work in the consulting division, and this is likely to increase. "We think there is a lot of additional opportunity in consulting, and more revenue, particularly for consulting around CRM, PSA, and B2B procurement and marketplaces," says Fulcher.
To capture the opportunity, PeopleSoft is pulling together a team that can deliver business (domain) knowledge, product and technology expertise, and business process expertise. Because of the current instability in the dot-com segment, Fulcher has been able to attract some dot-com veterans seeking a more stable environment where they can still be entrepreneurial. In addition, the company has invested $10 million on developing its ALC methodology and a new set of service offerings.

The latest consulting efforts by software providers like PeopleSoft "address the need for more in-depth consulting, not just technical implementation assistance," notes Ana Volpi, senior analyst at IDC, Framingham, MA. But despite all the talk of more strategic consulting, these technology engagements still revolve around the vendor's technology. They are strategic only in the sense that they are applying technology to the client's urgent e-business strategy. "It is really about faster deployment," she admits. For the long-term strategic vision, and projects where technology is only one component, businesses still are going to rely on the big consulting firms like Andersen.
Even small software companies are jumping on the services bandwagon, upgrading their basic implementation services. Unica Corp., Lexington, MA, a provider of CRM analytics, doubled the size of its consulting staff in the last three months, opened satellite offices, and hired an experienced vice president to head the consulting operation. "We always had technologists who would help our clients build models, but this goes further," says Richard Hale, Unica's vice president/consulting.
Now Hale wants the consulting arm to help Unica's customers become better marketers through their use of the Unica application. "It is to our advantage that our customers be successful. But often, to be successful they need to change other things," he explains. Unica consulting will still build analytical models for them, but it will also help customers reengineer their marketing processes, if need be, to fully capitalize on its sophisticated CRM analytics. Unica, however, does not even try to serve all the IT services needs of its clients. Instead, it partners with a wide range of technology and business consultants and software companies while focusing on its particular niche, marketing analytics.

A new consulting model

Any move into consulting raises the possibility of competitive conflicts with consulting firm partners. While Fulcher compares the new PeopleSoft consulting effort to those of consulting firms such as Viant and Scient, PeopleSoft isn't likely to go head-to-head with outside consulting firms soon — although it may in the future. The ALC methodology is intended for use with PeopleSoft 8. "I would like to see us getting into other technology," he says. But the only non-PeopleSoft technology the company currently implements is Commerce One.
Oracle, too, focuses its consulting on its own products. "We're not going to bid on an SAP engagement," notes Block. However, the company's emphasis on consulting does complicate its relationships with consulting firms that may be competing for the same engagements. To minimize conflicts, "we try to focus on complementary skill sets," he adds.
For most software vendors, the primary function of consulting remains support for the sale of their own products. While consulting can provide significant incremental revenue, most software firms are just as likely to discount consulting to close the sale or to ensure successful use of their product. For software firms mired in mature, slow growth/no growth markets, such as ERP and database vendors, however, e-business consulting offers a way to leverage their existing customer base as they latch onto the largest, fastest growing segment in the market, IT services.

Sidebar: PowerPoints:

• Companies cannot find and afford enough of the highly skilled people needed to deploy the latest software applications. Compounding the shortage of skills is the speed at which technology is changing.

• As technology and strategy become more intertwined, companies are expressing the desire to get out of the IT business and focus on their own businesses.

• If services are what customers need and want, then who better to provide them than the people who know the customers' businesses well enough to build the core applications and systems architecture they already run — the software and hardware technology providers.