Pick a Web solutions winner

These firms, representing the newest wave in IT services, are quickly winning loyal fans in the e-business application development market.

These new Web solutions companies have attacked the market with an unlimited number of business strategies--and it is yet unclear which strategy will prove the one that puts a firm ahead of the pack. Strong demand for e-business solutions, however, will likely make any number of these strategies successful for some time.

The biggest debate is whether firms need to house creative and technical talent under the same roof. Sure, most application development requires some creativity. Yet requiring systems developers to think out of the box can be challenging for some who are familiar only with the structure of programming and other logical strings. Advertising agencies have a head start in this creativity market, since Web sites in their infancy were but static advertisements.

As Web sites become more interactive, incorporating e-commerce storefronts and other features, many ad agencies have fashioned separate companies to tackle this growing market. A few have since gone public, including Razorfish and Modem Media Poppe Tyson.

Some Web developers argue that cramming technical programmers with their back-end expertise, creative consultants, and management consultants all under one roof is too much to ask one IT company to do. So what's the better solution?

Many Web solutions companies are going for a best-of-breed approach, focusing only on the technical aspects of Web solutions, while telling clients to hire a creative firm to help with the Web design. This could become more difficult as e-business grows and company demands become more complex. By then, many firms may come to expect IT service companies to offer complete services in-house.

The best solution may involve maintaining separate brand names for each Group, while under the management of a single firm. USWeb pursued such a strategy, reversing its decision to integrate the technical USWeb and the creative CKS under the new moniker "Reinvent" this past January.

This strategy is similar to that of the major systems integrators that have acquired management consultants, such as EDS's acquisition of AT Kearney and CSC's Index. In 1998, Sapient acquired Studio Archetype and integrated the firm successfully. AppNet also appears to have successfully absorbed a string of some 11 acquisitions to create the company in its current form. How did AppNet do it? By offering strong incentives to its managers to cross-sell capabilities and work together.

So what is the best strategy in the Web solutions market? As we've seen in the above examples--and as long as the market for Web development and consulting remains strong--different strategies clearly can be successful. Even mature IT service companies have danced to their own tune, like the regional branch strategy used by Keane--which claims some $1 billion in revenue--or the industry specialty model favored by equally successful American Management Systems.

I would tend to favor an organic model for success in this market. Firms should start with small acquisitions, and add specialties as needed. This would make culture building and nurturing easier, and make acquisition integration less distracting to the business.

Focusing on a particular niche, whether creative, technical, or consulting, and excelling at it, will get a Web services firm in the door and keep it in front of customers. As Web solutions companies get larger, they will be able to expand their expertise to encompass the whole gamut of Web services specialties. We have seen larger integrators such as US Web/CKS and Sapient realize this. I expect to see similar acquisitions from Cambridge Technology Partners, a company which has lagged in the acquisition game.

The industry seems to be moving more and more toward specialization, and this will probably become even more important as Web solution companies become larger and e-business projects grow more complex. Eventually, Web solution companies may start challenging more established firms like Anderson and IBM.

Now, how about the valuations of these up-and-coming Web solutions firms? Stay tuned.

Bill Loomis is managing director of the Technology Research Group at Legg Mason Wood Walker, Inc., Baltimore. He can be reached at wrloomis@leggmason.com. Legg Mason makes a market in USWeb/CKS (USWB). This information herein is based on sources believed reliable but is not guaranteed as to completeness or accuracy and is not intended to be an offer to buy or sell any security. Opinions expressed are subject to change. Additional information available on request.