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Companies invest cash in consultancies for clout

Hardware and software companies have been striking marketing alliances with consulting giants for years, but now they're getting a little closer with a flurry of high-profile cash investments.

Suddenly, it's all about services.

Novell today forked over $100 million to consulting firm Whittman-Hart. Cisco wrote a $1 billion check last month to Big Five consulting firm KPMG. And Microsoft this week handed over $67.5 million to e-services company USWeb/CKS.

Not that these hardware and software companies haven't been striking marketing alliances with consulting giants for years. But today the stakes are higher. Companies are ensuring, with cash, investments in firms that can not only sell, but integrate and customize their software and hardware for clients.

"It's pretty simple," said Jeff Matthews, general partner in Ram Partners, a Greenwich, Connecticut, investment firm. "They're basically buying access to customers. It's sort of like plumbing supply companies buying up plumbers. If you own the plumbers or have an investment in the plumbers, they're going to use your tools or your partners."

The investments are industry-wide, and include business software maker PeopleSoft's April equity stake in Corio, a start-up services company that hosts PeopleSoft financial and human resources applications.

Meanwhile, Novell's $100 million investment in Whittman-Hart sent the company's stock soaring to close today at $38.78 a share, above the company's 52-week high of $37.62.

Whittman-Hart plans to train 600 of its consultants to use and install Novell's applications. The boards of both companies have approved the deal, which is expected to close by November.

Meanwhile, the Microsoft/USWeb deal calls for a similar training arrangement. Starting in 18 months, USWeb/CKS will pay Microsoft royalties on services work done for their joint customers. In turn, Microsoft will pay $14.9 million for warrants to purchase one million USWeb/CKS shares for a fixed price of $27.59 at any time over the next five years.

Filling an anticipated void
Julie Giera, analyst at Giga Information Group said hardware and software companies will use consultancies to staff their projects and make more money.

Over the next four years, the number of available technology jobs that will be filled by qualified college graduates will average about 12 percent, leaving a deep gap in staffing, analysts said. Partnering with a services firm enables these companies to get projects staffed quickly with the right people at a time when companies want e-commerce sites built in months.

And companies from telecommunications providers to hosting firms to software makers are seeking a piece of the huge e-commerce services market, which is slated to increase to $1.73 trillion by 2003 from $174 billion in 1999, according to International Data Corporation.

"The big money is in systems integration and hosting," Giera said.

Cash infusions
Hosting is a big part of these partnerships, and services firms are scrambling build data centers, where customer's applications or databases are managed remotely, with users accessing them over leased line or browser. USWeb/CKS, which has 4,000 clients and $229 million in 1998 revenues, already has built two centers and is working on a third in London.

Marty Gruhn, a vice president at Summit Strategies in Boston, said investments that Microsoft and Cisco make in consulting firms ensure they get a shot at being the platforms of choice in these data centers and at customer sites.

"If you invest it gives you a little more control and an inside edge," she said.

She added that acquiring a services company will never be the best route for these software and hardware companies, considering the culture clashes between the two worlds and the complex relationships Microsoft, for example, has with a number of services firms already.

"I find their investments to be quite intriguing really," Gruhn said. "What it says is: We've gone from the?relationship of I love you, you love me, to putting money on the table to get a preferred position."