IT Services Firms Have a Vested Interest in Their Internet Clients’ Success, IDC Says

FRAMINGHAM, MASS., APRIL 4, 2000 – Consulting and IT services firms are buying into the dot-com phenomenon and have an increasing stake in Internet startups' success. According to IDC, an increasing number of IT services firms are swapping their services for equity in their Internet clients' businesses.

"Attracted by the prospect of revamping their image as Internet services firms, by the unique value of working with startups that have cutting-edge business models and technologies, and by the potentially enormous financial returns, consulting and IT services firms are taking equity stakes in their Internet clients," said Sophie Mayo, program manager for IDC's Worldwide Services research. "This trend confirms how powerful the Internet's influence is on the consulting and IT services industry. Not only is it affecting services firms' offerings, but it is also changing their business model."

However, this strategy may prove to offer only short-term gains. "Ultimately consultancies may end up jeopardizing their relationships with clients," Mayo warned. "Investments in companies that may potentially become rivals to existing clients will create considerable controversy in the marketplace and shake confidence in these advisors."

Nevertheless, consulting and IT services firms will increase the frequency and amount of equity stakes they accept as compensation. According to IDC, most Internet service firms that took equity in their clients in 1999 plan to double the number of similar arrangements this year. Moreover, the service firms are now offering a wider variety of services to meet their dot-com clients' needs.

For now, IDC believes they can get away with this strategy.

"The competitive landscape of the Internet marketplace is constantly changing — companies enter and exit the market in the blink of an eye. It's, therefore, difficult for companies to determine whom they are competing with," Mayo said. "As long as this turbulence continues, investors may be able to avoid conflict-of-interest issues. However, once the market stabilizes, consultancies will no longer be able to ignore these issues."

Another threat consulting and IT services firms need to be aware of is the possibility of their clients' failure. Pooneh Fooladi, an analyst with IDC's Internet Services research program, said, "Dot-com ventures have a very real potential to fail. Therefore, it's important for Internet services firms to maintain and even grow revenue generated from traditional pricing streams. If they don't, they could be putting themselves in a position of financial stress."

IDC recently published a trilogy of reports that discuss IT services firms' investments in Internet startups. The first report, Investment Trilogy Part 1: A New Kind of Venture Capitalist (IDC #B21787), examines why IT service firms are venturing in startups. The report explores investment strategies of Andersen Consulting, EDS, IBM, CSC, Compaq, and Oracle. Investment Trilogy Part 2: From Advisors to Fortune Seekers – Can Consultants Have Their Cake and Eat It Too? (IDC #B21788) analyzes the potential hazards of these investments. This report examines the strategies of Arthur Andersen, Bain & Co., Cambridge Technology Partners, The Boston Consulting Group, and NerveWire. The report also reviews the benefits of investing for both Internet service firms and clients. Investment Trilogy Part 3: Desperately Seeking Dot-Coms – How a New Breed of Client Is Affecting Pricing Methodologies (IDC #B21789) analyzes the pervasiveness of dot-com clients and the impact they are having on Internet services firms' pricing methodologies. It discusses the extent to which services firms work with dot-coms and how that will change in the future. The report also shows the share of select Internet services firms' clients that are dot-coms and the percentage of projects priced using equity stake methodologies.

To order a copy of the reports, contact Cheryl Toffel at 1-800-343-4952, ext. 4389 or at ctoffel@idc.com.

About IDC

IDC delivers dependable, relevant, and high-impact data and insight on information technology to help organizations make sound business and technology decisions. IDC forecasts worldwide IT markets and technology trends and analyzes IT products and vendors, using a combination of rigorous primary research and in-depth competitive analysis. IDC is committed to providing global research with local content through more than 500 analysts in 43 countries worldwide. IDC's customers comprise the world's leading IT suppliers, IT organizations, and the financial community. Additional information can be found at http://www.idc.com.

IDC is a division of International Data Group, the world's leading IT media, research, and exposition company.

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