Business Week analyses IBM’s acquisition of PriceWaterhouseCoopers Consulting about 16 months after the deal, suggesting that even though there are challenges at present, it will pay off in the long-term:

Big Blue’s big push into strategic consulting is proving to be one of the thorniest challenges in the young tenure of Chief Executive Samuel J. Palmisano. While Palmisano and his top lieutenants have managed much of the PWCC acquisition smoothly, they’ve been confronted with a consulting industry that’s more troubled than most anyone anticipated it would be two years after the U.S. recession officially ended. A glut of capacity and the rise of offshore competitors have led to brutal competition. The result is that many IBM consultants are sitting on the bench, dragging down revenues and profit margins. “They’re probably a little bit behind where they were hoping to be,” says analyst John B. Jones Jr. of Soundview Technology Group.

Even as tech demand recovers, Palmisano will need to move IBM up the food chain faster than rivals nibble away at the bottom. Competitors from India and elsewhere are aggressively moving into services like call centers and maintenance that IBM has long offered. At the same time, players such as Hewlett-Packard Co. and Accenture Ltd. are stepping up their capabilities in traditional IBM strongholds like outsourcing. Rivals openly question whether the PWCC deal will offer IBM any competitive advantage. “Time will tell with that acquisition. So far, they’ve had virtually no growth,” says Carleton S. Fiorina, CEO of Hewlett-Packard, which considered acquiring PWCC before IBM did. “Relationships are nice, but in the end, do they bring business in the door?”

So will the PWCC deal pay off? The evidence suggests that it will, over the long term, though 2004 will be challenging. Already, the collaboration between PWCC’s consultants and IBM’s techies is resulting in a range of high-end services that rivals will be hard-pressed to match. More than ever, the company’s consultants are helping top execs plot strategy and plan business initiatives — and then offering the services and gear to make it happen. “Having started from nowhere, we’ve made a lot of progress,” says Virginia M. Rometty, head of the BCS group.

Whether Rometty’s group thrives will depend in large part on how it performs in the market for what’s called “business process outsourcing.” In these deals, companies hand over management of an entire corporate function, like finance, to an outsider. IBM’s strategy is to develop expertise in four processes — human resources, customer care, procurement, and finance and accounting. It has attracted an anchor customer in each segment, and now it’s marketing its skills to other corporations.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.