Tough times cut long-term consulting costs

Consulting companies have been hard hit by the downturn, but TechRepublic's Tim Landgrave says that could be a good thing for business costs.
Written by Tim Landgrave, Contributor
The economic downturn has been hard on the entire technology industry, but consulting companies have become especially vulnerable.

As CIOs tighten their belts, the consulting budget often is the top line item that's eliminated. In turn, consulting firms lay off staff members who then get jobs with former clients, further eroding the demand for highly qualified, and priced, consulting services.

Until the economy picks up significantly, CIOs can expect two things to happen: Smaller consulting companies will go out of business and larger ones will take advantage of the situation by growing organically or through acquisition. And a smaller number of available vendors may mean that tech leaders will pay more for services once the economy rebounds.

But by planning now, you may be able to buy services today and take advantage of lower rates later. This is especially true given the recent significant acquisition made by consulting heavyweight IBM, as well as Microsoft's change in the way it's approaching the corporate consulting market.

The Big Dog gets bigger

Not content to be the world's largest outsourcing provider (with over 150,000 employees in 160 countries and gross revenues of $35 billion), IBM made the deal that HP couldn't when it acquired the PricewaterhouseCoopers (PwC) consulting group. (HP floated an $18 billion offer for PwC two years ago before deciding to acquire Compaq instead.)

The resulting entity has a $42 billion annual run rate with 180,000 employees. At $3.5 billion in cash and stock, this is IBM's biggest deal since its acquisition of Lotus Development Corp. in 1995. It's also another significant step in IBM's journey from a company dependent on its hardware revenues to one that derives most of its revenues from software and services.

With the recent national focus on the questionable practice of using the same accounting firm for auditing and consulting services, PwC stood to lose a significant number of customers from one side of the house or the other. Joining IBM quickly, however, allows the new entity to maintain customer relationships on the consulting side, while the remaining PwC auditing entity can keep its clients. It's key for IBM, which can now not only provide low-end and middle-task based technology services, but also management consulting services on a par with those offered by PwC's major competitor, Accenture.The "new" Microsoft consulting services

Microsoft has tried for years to build an indirect consulting channel that promotes its Solution Provider Partners as the key management interface for major companies, with its Consulting Services group staying in a supporting role. But with the huge technical dice the companies are being asked to roll on adoption of the .NET development framework and the new .NET line of servers, CIOs at major corporations are demanding that Microsoft put more skin in the game.

If Microsoft wants to win corporate hearts and minds, it has no choice but to build an infrastructure within the company that will allow it to take the lead in all major accounts.

But with only 12,000 employees, Microsoft will have to beef up the group quickly. Existing employees are primarily technical consultants, analysts, and customer service representatives with little or no management consulting, account management, or enterprise sales experience. So how can Microsoft compete in the consulting space with bigger rivals like IBM and EDS?

One clear benefit to customers is Microsoft's ability to go beyond implementation consulting and offer direct access to product designers and developers. Microsoft's strategy of using its partners to grow the business hasn't been successful because those partners don't have significantly better access to internal Microsoft resources than the IBMs of the world.

As CIOs continue to demand this direct access and accountability from Microsoft itself, the company has no choice but to give in to the demand or face customer defections to other technologies like Linux, Java, and WebSphere.

The biggest potential losers are the Microsoft Partners who made investments in training sales, consulting, and technical delivery teams to deliver solutions based on Microsoft platforms. With customers demanding direct Microsoft involvement, this investment will go to waste unless the partners find ways to leverage that investment as a subcontractor to Microsoft in these large corporate accounts.

It may also drive many Microsoft partners down market to look for business in the midsize and small business space, where a direct Microsoft relationship is economically unfeasible. Local providers also have a compelling geographic story to tell, unlike the national consulting firms.

How you can benefit

Given these recent changes, IBM and Microsoft both will be under intense pressure to establish their new consulting entities quickly with new business or new long-term contracts. And existing Microsoft Partners will be hungry for new revenue sources to replace the potential lost revenue from Microsoft's new focus on taking the lead role in the enterprise space.

If CIOs have or anticipate having large development or infrastructure projects in the next 12 to 18 months, they should consider approaching potential IT consulting partners now. If your company has more than 5,000 workstations, you have a considerable amount of leverage with national consulting players like IBM, Microsoft, EDS, Accenture, and HP. These companies would rather sign longer-term contracts with lower consulting rates than continue to lay off their consultants.

If your company has fewer than 5,000 workstations, you should focus on negotiating deals with larger regional consulting players who are hungry to sign long-term deals and will give very attractive rates.

The IBM acquisition and the new Microsoft consulting focus have created a favorable negotiating environment for the opportunistic CIO. But the opportunity will only last until the consulting services space begins to show signs of growth with the rest of the economy.

Are you negotiating better rates? TalkBack below or e-mail us with your thoughts.

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