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Web consulting firms taking focus off dot-coms

With an increasing number of dot-coms going belly-up, analysts say Web consulting firms may move away from start-ups and more toward large brick-and-mortar clients.

No consultant wants to be associated with a failure.

For some time, Web consulting firms have busily promoted their dot-com client rosters, using their Internet expertise as a way to differentiate themselves in a highly competitive market. But with an increasing number of dot-coms going belly-up, that may no longer be considered such a badge of honor.

Scient recently saw its shares tumble following the bankruptcy filings of clients Verde Media and Inacom, both of which owed Scient money when they went out of business.

Organic, a 7-year-old Web consulting, media and design firm based in San Francisco, helped build, a U.K. Internet clothing retailer that recently sold its technology to Internet services company Bright Station. The company also provided services to cash-strapped CDNow.

Tom Rodenhauser, who heads e-business analyst firm Consulting Information Services, said while the downturn in the dot-com market may trigger a blow to a consulting firm's stock, the real damage is apparent when a firm's credibility is called into question.

"If the consulting firms are involved with too many dot-com failures, it certainly affects their business," Rodenhauser said. "Consulting is a business that lives on client referrals...If your past performances are spotty at best, that's not good for future business."

However, consulting firms--which help dot-coms with everything from Web site development to building an Internet strategy--are not necessarily responsible when one of their clients fails, Legg Mason analyst Bill Loomis said.

"Companies like Scient do advise dot-coms on their business strategy, but they weren't the core developer of the business," Loomis said. "They didn't write the original business plan; they weren't the ones that got funding from (venture capitalists). They may have helped take (the start-up) to the next level...but for whatever reason that particular dot-com didn't have a product or service that attracted consumers, no amount of e-strategy is going to help them."

In recent years, a slew of smaller Web consulting firms have sprung up to challenge more established and larger rivals such as IBM Global Services, Electronic Data Systems and Andersen Consulting.

Web consulting firms have been revered for their ability to attract dot-com clients as well as traditional brick-and-mortar companies that needed help building their Web sites and developing Internet strategies. The growing crop of Web consultants, such as Scient, iXL, Razorfish, Viant, Zefer and a host of others, caught investors' eyes when the smaller firms began to capture more lucrative Web engagements than their behemoth counterparts.

Is bigger safer?
Some analysts say the negative trend could act as a catalyst for Web consulting firms to shift their client focus to more stable, Global 2000 companies.

"Clearly there's been a certain froth taken off the market with the demise of the dot-com companies," said Mark Wolfenberger, an analyst at Credit Suisse First Boston. "But what we've seen is that most Web consulting firms have migrated to Global 2000 clients over the past year, so in that sense, it's not such a big deal."

Even with the dot-com failures, Special report: End of the BeginningWeb consulting firms will benefit from the traditional brick-and-mortar clients that spend more money on expanding their Web businesses, Wolfenberger said.

"Last year, you had 100 projects to choose from," he said. "This year, you may have only 80, but the projects are higher in quality and bigger in magnitude." The market is shifting toward these larger businesses and away from the dot-com frenzy, he said.

That is the case with Organic, according to chief executive Jonathan Nelson, who declined to comment on and CDNow. He said the company has been making the shift to serving a larger number of Global 2000 clients during the past 18 months.

"We see a (different) mix of clients," Nelson said. "We're still really interested in good dot-coms, but as a minority in the overall mix of (our) business."

Today, Organic's clients are about 75 percent brick-and-mortar and 25 percent dot-com, compared with a dead even mix a few years ago.

"Right now, a lot of stuff is happening that we saw months ago," Nelson said. Last August, Organic landed a multimillion-dollar engagement with automaker DaimlerChrysler to build Web sites that will connect the manufacturer to its customers and dealers.

Scient chief financial officer Bill Kurtz said the company will most likely see its Global 2000 client roster increase by 5 percent to 10 percent during the next year, but asserted the shift in focus is a reaction to current market trends and is not meant to downplay its dot-com client base. The company still sees its ability to capture the start-up clients as a great differentiator in the competitive services field, he said.

"We look to follow the industry trend and continue to derive our revenues from where the market trends show the opportunities," said Kurtz, who noted that out of Scient's total 110 clients, only 2 have had financial difficulties. "It's not a de-emphasis on start-up (clients), it's a market trend that's being fueled by the Global 2000."

Kurtz said the see story: Stagnant market hastens demise of some Net firms company expects to receive the $1.5 million payment due from Verde Media sometime today. He also said Scient stopped offering consulting services to Inacom last November when the business became "doubtful."

Despite some negative effects from dot-com duds, analysts say they are still optimistic about the consulting arm of the e-business world.

"There's always been too much work for these (Web consultants)," said Stephen Birer, an analyst at Robertson Stephens. "The real trend and opportunity lies with the brick-and-mortar. We'll see a revenge of the brick-and-mortars. That will be the relationship for consulting firms in the long run."