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Andersen plans venture capital unit

The consulting firm is creating a new venture capital unit focused on Internet companies in an effort to establish itself as a major Net player.

Andersen Consulting today announced a new venture capital unit focused on Internet companies in an effort to establish itself as a major Internet player.

The new unit, called Andersen Consulting Ventures, plans to invest up to $1 billion over the next five years to create new electronic or Internet-focused businesses, the company said.

The $8.3 billion management consulting firm said it will invest more than $500 million in the new unit, which will also receive funding from a variety of financial investors and venture capital firms.

Today's announcement marks the latest move by a large services and consulting firm to shift its focus from traditional back-end implementation and consulting projects to Internet-driven projects.

Andersen competitors Ernst & Young, KPMG, PricewaterhouseCoopers and EDS have all been moving aggressively forward with Internet strategies. The firms face new competitive pressures from some of the smaller, more nimble Internet services companies, such as Razorfish, Scient, Viant and others, as they try to become visible Internet players through large ad campaigns and separate units intended to focus solely on e-commerce projects.

In recent weeks, Andersen has made a number of investments in Internet start-ups, including last week's equity stake in Internet marketing software company Prime Response, electronic merchandising software maker Blue Martini, and chemical and plastic Net exchange ChemConnect. Some industry observers have raised questions about whether a consulting firm should also play the role of investor.

Tom Rodenhauser, an industry analyst who heads, said that although Andersen plans to ensure there's no potential for insider trading and sharing of undisclosed information on those start-ups the firm invests in, he finds it hard to believe that a consulting firm-turned-investor will steer clear of conflicts of interests.

"[When you make an equity play and you're a consultant], sometimes there's an underlying notion that you want to push the stock price high and cash out to make that profit," said Rodenhauser. "There's a sense that this could happen."

He added, "You can't be both a consultant and an investor. You can't wear the same hat because you [as a consultant] have the potential for insider trading much more so than you would have on normal circumstances [when you are a venture capital firm]."

On the other hand, Rondenhauser said this is a necessary move by Andersen, something the firm needed to do in order to attract and retain employees as well as a way for them to make "lots of money."

"In the big scheme of things, they had to do this," added Rodenhauser. "But, the bottom line is they can't claim objectivity anymore. This [new unit] changes the role of the consultant forever."

Roxanne Taylor, a spokeswoman for the firm, said the new unit is an extension of Andersen's existing practice of investing in companies it believes will succeed.

She said conflicts of interest don't pose much of a problem. "The bottom line is this is a standalone unit within Andersen Consulting," said Taylor. "We respect our confidentiality with clients' information and manage those conflicts. The nature of Andersen investments are going to be an extension of what we do today."

To date, the firm has made $40 million worth of investments. She added, "This [new unit] is going to allow us to bring additional focus and scale by setting this up as an independent unit for the firm."

Still, more consulting firms have delved into making steady investments in start-ups as well as trying to break their consulting arm away from their accounting side. Last week, Ernst & Young confirmed it is in talks to sell its consulting business with European consulting firm Cap Gemini.

Andersen said its new venture unit will be based in Palo Alto, Calif., and will be headed by managing partner Jackson Wilson, who will direct the unit's investments as well as initiatives for incubating new companies.

"Through Andersen Consulting Ventures, the firm will be able to create value as a principal in addition to being an advisor to new businesses," Wilson said in a statement. "We will make investments in start-up companies that are well positioned to leverage technology in order to enable new business models and change entire industries."

In his new role, Andersen said Wilson will establish relationships with venture capital firms and investment banks in key markets in Europe, Asia and North America.