Peter Griffin: IT industry risks Andersen rerun

A cold wind swept across Wellington's waterfront as a group of politicians, IT executives and journalists filed into the warmth of Te Papa.

It was early 2001, the IT industry was in the doldrums, but Catherine Calarco, enthusiastic chief executive of e-marketplace operator Onezone, was in fine form.

She had a vision - Onezone would be the online portal where Australasian scientific research institutions could trade with equipment vendors and suppliers. Turnover would grow rapidly.

IT Minister Paul Swain gave an encouraging speech, using the opportunity to push his e-commerce taskforce. At the rear of the room a director from Arthur Andersen listened intently. A representative from software company Ariba watched on from the side.

By October, Biolab had wound up Onezone, which had been expected to cost $10 million to set up. The problem - few found a need to use it. By some accounts the Ariba software didn't work anyway.

Onezone was meant to be a shining case study for Arthur Andersen, one where it was heavily involved in guiding its client, bringing in IT vendors to get the job done. It banked the cheques and moved on - to oblivion, it turned out.

Maybe Onezone would have failed without Andersen or with some other consultancy onboard, but the failure raised questions about the role of consultants.

Most of New Zealand's high-profile IT failures all acquired the services of expensive consulting houses - in narrow or broad-ranging capacities. Consultants who were well placed to point out holes in business plans that came crashing down soon after.

There are a staggering number of examples where consultants put clients wrong or failed to point out the obvious, at least. The victims range from liquor merchants to major healthcare providers to utilities companies.

If there's a lingering distrust of consultancies, there's good reason for it. After all, the billion-dollar restructuring of the last year has been all about removing that suspicion.

Andersen, as we know, collapsed in style, but not before it had the sense to spin off its consulting business, Accenture, in 2000. Accenture is now servicing its New Zealand customers from Sydney.

IBM shelled out more than US$3.5 billion ($6.3 billion) to pick up PricewaterhouseCoopers' consulting arm. The merger seems to have progressed better here than across the Tasman, though there's been little noise out of IBM about any new contracts the combined unit has picked up.

Ernst and Young split off its consulting arm to Cap Gemini, which in turn was bought out by its local management and became CGNZ.

KPMG Consulting became a separate entity - Bearingpoint, picking up some international business units from Andersen.

EDS has consulting subsidiary A. T. Kearney and recently boosted its consulting team locally.

The fundamental changes forced by the Enron scandal also altered the face of IT consulting.

Virtually all of the major accounting firms are now divorced from their consulting arms in the wake of the accounting scandal at the energy giant, which relied heavily on Andersen for both accounting and consultancy services.

The exception is Deloitte Touche Tohmatsu, which this month scrapped plans to spin off its consulting arm under the name Braxton. The market disapproved, but Deloitte says it can juggle new regulatory requirements and stay in one piece.

All of this has given IT managers much to think about when bringing in consultants. While there is little evidence to suggest perceptions of major consultancy firms have suffered much from the changes, the downward pressure on pricing in IT and scaling-back of some top-name consultancies have created opportunities for local players.

Many of those are systems integrators that are taking on consulting work - Gen-i, Certus, Ceritas, Infinity, Datacom. Local consultancies such as Simpl Group also seem to be doing better.

IT managers are being told to keep a tight rein on costs and consultancy is usually one of the first things to go. But integrators appear to be stealing a larger part of the pie.

Standalone IT consulting will be worth $80 million this year, according to research group IDC, about the same as last year. But that paints only part of the picture. IDC bundles consulting revenue related to outsourcing or integration deals into separate categories. Therefore the IT outsourcing market, estimated to be worth $640 million this year, includes a chunk of consulting revenue that could number tens of millions of dollars.

While outsourcing and integration have both suffered from belt-tightening in the IT industry, standalone consulting has been flat for the past year. That's despite rates being slashed.

"What they used to charge per hour is what they now charge per day in some cases. It's that steep a change," said IDC analyst Mark Cribbens. The major consultancies all claim they have had to reduce pricing but won't say by how much.

Merrill Lynch estimates fees may drop up to 13 per cent this year and that spending on IT consultancy will decline by around 5 per cent. Cribbens said there had not been a major drop in the size of the consulting market because businesses had relied on - and therefore paid - consultants to cut the fat from their operations, or wind down the projects altogether.

In some cases the same projects they asked consultants to help get off the ground.

A number of players in the outsourcing and integration space are increasing their income from consulting, which raises a couple of questions - can a company that may want to sell to you give you objective buying advice? Did all those accounting/consultancy companies really need to split their operations? Has Deloitte got the right idea?

The price squeeze has created friction between the traditional consulting heavyweights and ambitious IT integrators who are increasingly playing in the same space. The bread and butter for IT consultants now comes from the high end of the mid-market - within reach of the integrators-cum-consultants, and sufficiently attractive for the consulting houses to chase.

Cribbens said many businesses regarded integrators as being in a better position to give advice on IT needs, despite the potential conflict of interest in an integrator's advising a customer that it may also want to sell hardware and services to.

The fracture of the big five was all about removing conflicts of interest.

While integrators and IT services suppliers seem to be taking on more of a consultancy role, there is a danger the lessons of Arthur Andersen will be forgotten.

* Email Peter Griffin