Consulting old guard revamps as start-ups proliferate

Shaheen's jump last fall only underscored how tough a year it's been for the old guard in this industry, where established companies that for years faced few threats to their core business have frantically moved to adapt to a business environment that the Internet has changed forever.

"I think when you look at it, Shaheen's move was huge because it demonstrated the power of a 'dot com' to attract basically the world's foremost consultant," said Tom Rodenhauser, industry analyst at ConsultingInfo.com. "In the Internet age, what you're looking at is that the old era of white-gloved consultants coming in and advising what you do is over. It's dead."

Enter the so-called Class of 1999--the group of Internet services companies that wowed Wall Street with public offerings this year. About 18 of the 40 largest IT services firms went public in 1999, according to Lehman Brothers analyst Karl Kierstead. The quest for IPO gold and other new challenges sparked a collective employee exodus among established firms, including IBM Global Services, Computer Science Corporation (CSC), EDS, strategic consulting firm McKinsey and Big Five management consulting firms including Andersen, KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young.

Defectors landed at companies such as Proxicom, Razorfish, iXL, Scient, Viant, AppNet, Agency.com, Organic and scores of other services firms hired to reinvent Fortune 500 business models and build strategies for 'dot coms.'

"We're certainly causing a lot of the big consulting firms to rethink how they are running their businesses," said Mark Leiter, head of marketing at Viant, who left McKinsey to join the company six months ago.

Though some critics have dubbed the high-flying Scient a marketing-heavy company that lacks the staff to keep up with demand, shares in the start-up have rocketed since the company's IPO, trading in the 90s per share today along with rival Viant. Scient--which today boasts a market cap of $6.4 billion and has had a frenetic 748 percent have growth rate since it went public--and its rivals have mostly doubled or tripled their IPO prices since their public offerings.

"[These companies] are really kind of washing up on to this industry like a tidal wave," said Merrill Lynch analyst Steve McClellan, a veteran services analyst who picked up coverage of Viant, Scient and iXL this year. "These are companies that in magnitude are a small ripple, but in their impact they are tidal waves."

Still, the older, multibillion-dollar firms say they aren't about to give up without a fight. Many executives from the consulting veterans note that employee defections are exaggerated and little more than a blip on their hiring scale. After all, they say, they typically hire more people in a month than the total of a start-up's workforce.

Nonetheless, these companies are in a marketing frenzy to change the perception that they are behind the times. Since Shaheen left, Andersen Consulting has launched a venture capital unit it plans to use to invest in start-ups, and announced plans to revamp how it compensates rank-and-file employees who until now have waited to make partner to benefit from profit sharing.

KPMG made moves to spin off its consulting arm, to hopefully free the company to take that unit public and provide stock options for its rank and file. EDS launched a big advertising campaign alongside its new e-commerce division and last week said it would set up a venture fund with as much as $1.5 billion for business-to-business e-commerce investments.

Digital consulting company Razorfish CEO Jeff Dachis is not impressed by what he views as "a lot of copycats and me toos" within the an old line consulting industry that is simply "repackaging old services."

"Now every services company wants to reclassify its assets and it seems absurd to me," said Dachis, who started Razorfish five years ago. "We've always been a digital services company. We're not migrating to e-business."

But David Shpilberg, a chief technology officer and vice chairman at Ernst & Young, argued that this was the year big consulting companies got serious about providing what corporate America needs to build networks that connect online to their suppliers and vendors. That's "not just a pretty Web site," he said.

"You need to create an infrastructure to [help these companies] survive," Shpilberg said. "That's where the small players like Razorfish find themselves at a loss."

Maybe so, but Susan Scrupski-Miranda, head analyst at research firm IT Services Advisory, said the start-ups should continue to gain market share, in part by building up areas where they are weak by making acquisitions. Internet site building marketing firm USWeb/CKS, for one, just merged with Whittman-Hart in an effort to bulk up its computer integration capabilities. Razorfish last month bought systems integrator I-Cube in a stock swap. Internet consulting start-up Zefer in September said it had acquired strategic consulting firm Waite & Company, its third buy within four months.

"There is so much money in the market being thrown at these firms," Scrupski-Miranda said. "They can afford to spend a lot until they get it right."

CNET News.com's Melanie Austria Farmer contributed to this report.