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Net consulting firms fight growing competition

Internet consulting companies' growing presence had fueled a market shift to nab more lucrative e-commerce consulting projects, prompting many old-line consultancies to revamp their practices. Now, the shoe is on the other foot.

Internet consulting companies a year ago were playing in a brave new world. Now, it's just business as usual.

A number of high-profile Internet consulting companies that went public over the last 12 months to 18 months--including Scient, iXL, Viant, US Interactive, Organic and others--made the recommended lists of many well-respected investment companies and shook up the consulting scene with their dot-com client focus and Internet expertise.

Their growing presence fueled a market shift to nab more lucrative e-commerce consulting projects, prompting many old-line consultancies like IBM Global, EDS and Andersen Consulting to revamp their practices to serve the burgeoning world of dot-com companies.

Now, the shoe is on the other foot. Following the April market correction that left several e-commerce companies wounded, a number of Net consultants have taken their focus away from dot-com clients and began scrambling to land larger engagements with the Fortune 500 companies of the world.

"We were geniuses six weeks ago and we're idiots now," said Christopher Lochhead, chief marketing officer at Scient. Though Lochhead said Scient has been steadily making the transition to serving larger clients for a year, he admitted that the shift came much faster than expected.

The shift "is causing some short-term pain in the sector," he said. "Now, you've got Darwinism occurring." Around this time last year, Scient had a dead-even mix of clients, but as of last quarter, only about 10 percent of its clients were dot-coms.

Like so many other players in the Internet consulting field, Scient's stock has traded recently far below its triple-digit highs. Once a Wall Street favorite, the company now trades in the mid-$20 per share range, a far cry from its 52-week high of $133.75.

"It's kind of like the revenge of the established companies," said Tara Knowles, Viant's chief marketing officer. "The turn happened faster than a lot of people expected."

A slew of earnings warnings over the past few weeks highlighted the trouble that some Internet consultancies are now facing as a result of the market shift. Though several companies say they have signed on Fortune 500 clients, some are suffering from longer sales cycles, meaning sales take longer to complete and new revenue is slow to materialize.

Viant was hit particularly hard when it warned that third-quarter earnings will miss analysts estimates.

Warnings from iXL, Xpedior and Organic have also wreaked havoc in the industry.

These companies' troubles started when consulting business from dot-com companies dried up. The April stock earthquake effectively eliminated the stock market as a source of funding, and the consultants that depended on the flood of business from Internet companies were hit hard. Cash constrained dot-coms could no longer afford to purchase consulting services.

Though Wall Street is giving the thumbs down to the Internet consulting industry, analysts say companies that can switch their client base from dot-coms to old economy companies have the best chance for survival.

Most companies that had a huge number of dot-com clients are going to have a tough time transferring their expertise to the larger Fortune 500 types, said Tom Rodenhauser, an industry analyst who heads ConsultingInfo.com. Pitching services to larger companies is different than selling to a new dot-com company that only needs quick Web work, he said.

The Fortune 500 customer and the more established client "will always turn to the trusted adviser, not the new kid on the block," he added.

Analysts say that consulting companies with experienced sales forces will be a step ahead. But once the sales pitch is accepted, clients will expect companies to deliver on that pitch with skilled employees.

"The ultimate winners are going to be firms that have high technical capabilities at their core," said Jim Janesky, an analyst at Banc of America Securities.

For consulting companies' clients, establishing a presence on the Internet is not about knowing HTML anymore; companies want to harness and manage information through the Internet, analysts say. Large corporations "are not interested in having flashy Web pages or flashy graphics," Janesky said." They are interested in being integrated with suppliers, customers and distributors."

David Sturtz, an analyst at Credit Suisse First Boston, agrees. "Those skill sets are not tied to a current fad," he said. "They were in need before the Internet boom, and they will still be in need after it's gone."

"If some firms today went into a large corporation and presented themselves as e-business strategists, they'd be laughed out of the room," Janesky said. "You might have been able to pull that off with companies that are emerging or scrambling to get on the Web, but that's not going to work with Fortune 500 companies."

So who will be the winners? Analysts say it is too early to hand out prizes. Earnings over the next two quarters will ultimately clear up the uncertainty that hangs over the industry, and will reveal which companies have successfully moved out of serving dot-coms.

While no one is out of the running yet, analysts say players such as Sapient, MarchFirst, Razorfish and Scient appear to have the best chance at success. Razorfish has always held a larger percentage of Fortune 500 clients and 10 percent or less of dot-com start-ups. Analysts say both Scient and Razorfish shifted their client focus early on.

Luminant, Proxicom and strategist Diamond Technology Partners have also earned honorable mentions in the race.

But even as analysts begin to see possible winners, the whole industry is suffering on the stock market. Viant, Xpedior, Luminant and Razorfish all hit new 52-week lows recently. Sapient has fallen about 41 percent this year and Scient has dropped 73 percent. Organic, iXL and MarchFirst are all trading very close to their 52-week lows.

"It's hard to predict how long this lull will last," Scient's Lochhead said. "The public markets are so fickle?Hopefully, over several weeks or months, (the market) will realize a big difference from the winners and the laggards."