Consulting firms shift gears with start-up stakes
Big Five management consulting firms are tearing down their conservative images by making unprecedented investments in start-up companies that are also their clients.
Just last week, Andersen Consulting added ChemConnect, the Net's largest global chemical and plastic exchange, to a growing list of start-up investments that includes electronic merchandising software maker Blue Martini and online grocer Shoplink.com.
Meanwhile, PricewaterhouseCoopers last week bought 12 percent of Web site designer Methodfive. In September, Ernst & Young made a minority investment in the Patent & License Exchange, which plans to introduce an online marketplace for sales of patents, licenses, and other intellectual property later this year, and IntraLinks, an online service designed to help quickly close financial deals.
The investments come at a time when these big companies are shifting the bulk of their consulting work from complex back-office software installations to shorter-term, more lucrative e-commerce projects as businesses move to the Web. The new investments cut across industries, as management consulting firms try to establish themselves as broad-based e-commerce players.
Some firms, beyond just the Big Five, are also allowing individual consultants to invest in companies they work for, while others, such as Andersen, pool the equity received in exchange for consulting work and split it up among partners. The problem, some industry observers say, is that these investments were taboo five years ago--before the Internet changed everything--and they raise questions about whether a consultant should also wear the hat of investor.
"Now, it's almost like the consultants are playing the [venture capitalists]," said Tom Rodenhauser, head of Consulting Information Services, which follows the Big Five firms of Deloitte & Touche, PricewaterhouseCoopers, KPMG, Andersen, and Ernst & Young. "They think taking equity isn't a dicey proposition." The problem with it, he contended, is that consultants can lose objectivity when working for a client they're invested in---and focus on a short-term stock market return for the company instead of what's best for the long-term.
Ethical concerns
"It's an odd situation and I think in some cases that the opportunity to
hit that home run is so great that people bypass ethical concerns and just
go for it," he said.
Consulting companies say their aim with these investments isn't to make a quick buck, but to help shepherd these start-ups through their early days by lending their vast experience and industry knowledge. In turn, the consultancies get experience working on cutting-edge projects that help them rebuild their images through Web-savvy firms.
"We don't make these investments to get a return," said Andersen spokesman Andrew Giangola. "We make them because we want to be involved in a hot and exciting online business."
Maybe so, but Andersen's investments in hot, cash-strapped start-ups could also pay off when their clients'--some which have inked stock-for-consulting-services deals with Andersen--shares rocket. Giangola said Andersen works out deals that are best for their clients, sometimes involving cash, sometimes based on so-called "sweat equity."
He added, "It depends on the negotiation process."
Andy Zimmerman, global leader of PricewaterhouseCooper's e-business practice, said the company doesn't make investments in start-ups for the money, and picks its targets wisely. The company picked Methodfive because of the quality of its Web site work, he said, which includes the Economist, Office.com, and Cdnow.com.
Zimmerman said he hopes to do another half-dozen similar investments within the next month to start building a network of connections to supply chain, procurement, design, and services companies. E-commerce work will comprise 50 percent of the $6 billion company's consulting projects by next year, he said, compared with about 30 percent this year.
KPMG, too, said it is making investments in start-ups, though the company wouldn't identify which ones. KPMG partner Paul Ciandrini said the company is taking stakes in companies that do Web design, Web development, e-business strategy, and branding for e-business. In addition, he said they're contemplating investing in new areas such as network engineering to support business partner Cisco's initiatives. Cisco in August made a $1 billion investment in KPMG.
Ciandrini said these companies benefit from KPMG's management experience. In turn, KPMG gains experience in new high-growth business areas that help the company expand.
"We make investments that will help to grow our businesses aggressively," he said.
But Rodenhauser questioned whether that growth comes with a cost.
"It's really a weird game being played out there right now," he said.