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How will consulting firms fare after the bug?

Consulting companies are making a bundle on Year 2000-related services now. But what happens after the turn of the millennium?

Consulting companies are making a bundle on Year 2000-related services now. But what happens after the turn of the millennium?

Some financial analysts worry that companies including Keane, Computer Horizons, and IMR (Information Management Resources) face a rocky transition from being Year 2000 fix-it wizards to application development, maintenance, and reengineering specialists.

"The transition won't be as seamless as many of the bulls on this story believe," said Karl Keirstead, analyst at Lehman Brothers.

"These companies have the greatest risk around them," including selling companies on services that differ markedly from their expertise, he said. "They've got to open up a new market and the sale is very different."

"Logic will tell you that it won't be smooth," said Paul Shain, analyst at Robert W. Baird in Milwaukee. But Shain said that Keane, in particular, will be buoyed by its successful strategy of developing long-term relationships with clients, which began before the company started offering Year 2000 services. That will help the company retain its business, though it will switch gears.

Strong in the first half of 1998, Year 2000 stocks took a dive in mid-July as they increasingly became viewed as an investment risk. Year 2000 conversion entails preparing computer systems to handle the century date change.

Of the Year 2000 conversion specialists, IMR, Keane, and Computer Horizons derive between 20 percent to half of all revenue from code conversion and testing services.

Other consulting behemoths such as EDS and Andersen Consulting offer such a broad range of services that they most likely won't suffer from the evaporation of Y2K conversion business.

However, Computer Horizons, for example, takes 20 to 25 percent of its revenue from its millennium bug services, with IT staffing comprising much of its other business. Year 2000 services comprise 40 percent to 50 percent of Keane and IMR's businesses, with the rest of their revenue coming predominantly from applications maintenance, staffing services, and custom software development.

Stock in some Year 2000 service companies has dropped in value since spring as investors fretted about the long-term profitability and the possibility of a rocky transition period. But some analysts remain bullish.

"I believe there will be a turn-around," said Bill Loomis, analyst at Legg Mason Wood Walker in Baltimore, Maryland. "Clearly investor sentiments are against Year 2000, now but all three of these companies have shown they are transitioning in the third quarter."

The companies will benefit from a corporate trend toward consolidating vendors and from the fact that Keane and others are already a vendor of choice and working on a major project.

"I think what you will see is another wave of business" that will restore investor faith, said Jim Sober, analyst at Emerald Research in Baltimore. "People underestimated their Year 2000 problems and there will be a wave in 1999."

Analysts expect revenue from Year 2000 services to peak in the first quarter of 1999, when companies are scrambling to fix their mission-critical applications, and taper off through the early part of 2000 as firms turn to repairing systems on the back burner that don't directly affect their customers.

To make the leap from fixing code to maintaining, building, or enhancing a company's existing applications won't be an easy sell, Keirstead said.

For one, he said, most companies are doing their own application maintenance. Competing to provide Web services--building intranets and Web sites--would also be a hard sell, he said.

"It's a fairly large leap for Year 2000 firms to move up the food chain to Web services," he said. "This is what Cambridge Technology Partners and smaller boutiques have the best shot at right now."