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Finding survivors in the e-business rubble

With the dot-coms dying off, and brick-and-mortar companies taking their time in developing new e-initiatives, it's a very different picture for e-business services companies today.

With business booming a year ago and more than 30 e-business services companies having gone public during the prior 12 months, many e-business executives toured the country lecturing people about why their companies were so much better than everyone else's.

Nowadays, most of these companies' stocks are trading in the low single digits. What's more, many of these same executives are leaving their jobs--just when they should be starting to earn their pay in a tougher business environment.

In hindsight, there was nothing special about most of these companies or their management teams. They were simply taking advantage of the money then being thrown at dot-coms, which were scrambling to develop e-business sites at almost any cost.

With the dot-coms dying off, and brick-and-mortar companies taking their time in developing new e-initiatives, it's a very different picture today. Business is much tougher and companies have to add more value than merely supplying Java programmers and other e-skilled labor to their clients.

I think most of the e-business services companies will have a tough time getting back on a growth path. Many already are closing down offices and laying off people. Since most of the companies have been so well capitalized through initial public offerings or follow-on stock offerings, they should have sufficient financing to weather the slowdown. Unfortunately, most will likely shrink to become regional companies, performing more IT staffing work than full-service solutions or project management.

Since this is a people business, the biggest challenge for management will be to retain the company's culture. They will be pressed to continue to make the company a challenging, exciting, fun and rewarding place to work. The e-business services companies that did quality work for brick-and-mortar companies and built strong relationships should have opportunities for follow-on work and new projects, even in slow times.

In addition, the e-business companies will have to adapt to the new realities of the marketplace. Companies that refuse to lower their $300-plus/hour bill rates for common Web development services may find themselves with no takers.

While e-business services companies probably faced a few quarters of slow growth after the dot-coms started to disappear in the second quarter of 2000, the slowing economy has stretched out that timetable, as large companies drag their heels over concern about their own business' being hurt by the economy. With most companies already having a Web presence, e-business work is shifting toward increased functionality and integration with other information systems.

This type of work plays to the strengths of the older IT services companies, including the consulting arms of the big accounting companies, as well as IBM Global Services, Electronic Data Systems and Computer Sciences. Smaller companies still can have an advantage over these giants through more responsive customer service, innovative solutions, and quicker adoption of emerging technologies.

In addition, given the high levels of spending on low-return-on-investment (ROI) projects, such as Y2K and initial Web development, there is an increasing demand for quick, high-ROI projects, such as supply chain and customer relationship management software, as well as measurable solutions for specific industries, such as billing and customer service software in wireless telecom. Network infrastructure consulting and integration also will get a lot of attention as e-business becomes a larger percentage of corporations' revenues and network capacity is stretched.

We believe the next year will be the real test for e-business services' management teams, and the winners that transition successfully through this huge, sudden demand shift will have real bragging rights--not just marketing hype.

Legg Mason Wood Walker makes a market in the securities of Scient and Viant. Electronic Data Systems is a Legg Mason Select List core holding. Additional information available upon request. The information contained herein is based on sources believed to be reliable, but we do not guarantee its completeness or accuracy. This publication is for information purposes only and is not intended to be an offer to buy or sell the securities referred to herein. Opinions expressed are subject to change without notice, and past performance is not indicative of future results. From time to time, Legg Mason Wood Walker and/or its employees, including the analyst who has commented herein, may have a position in the securities mentioned.