Net consultancies look to rebuild after sobering year

Most of 2000 was a grounding and sometimes humbling experience for Internet consulting companies, which are looking to ring in the new year with a more cautious plan for how to win customers.

4 min read
Internet consulting companies started the year like rock stars, with a rapt audience of clients pumped up on consulting and clamoring for cutting-edge Web expertise.

But within months, companies like Scient, Razorfish, iXL Enterprises and Viant were hit by waning stock prices, layoffs, weak financial results, and an unexpected market shift that hit when a slew of dot-com companies bit the dust.

"When you're a one-trick pony (type of) consulting firm and demand goes away, you're really up the creek," said Tom Rodenhauser, an industry analyst who heads Keene, N.H.-based Consulting Information Services.

For Internet consulting companies, most of 2000 was a grounding and sometimes humbling experience. Instead of toasting their successes, companies are looking to ring in the new year with a more cautious, yet realistic, plan for how to win customers in 2001.

In the first half of 2000, this burgeoning crop of Internet consulting companies ran circles around their old-line counterparts, nabbing a slew of e-commerce projects and churning out strong financial results.

Analysts at the time called the companies' sales growth unprecedented and applauded their ability to quickly devise Web strategies and consult dot-com clients about their business plans.

Market valuations were sky high for a number of publicly traded Internet consultancies, some of which had yet to turn a profit. Before spring, San Francisco-based Scient boasted a market capitalization of close to $4 billion and a share price upward of $100. Now the company, like the rest of its rivals, has seen its market cap dramatically shrink to around $211 million and shares trading below $3.

According to Forrester Research, a Cambridge, Mass.-based Internet research company, the domestic market for Internet consulting services is expected to grow to $64.8 billion by 2003 from $19.6 billion this year.

The higher you fly...
Blazing on the demand for their services, some companies developed an arrogance not unlike that of some Hollywood celebrities, touting soaring revenue growth, employee hiring sprees, and client waiting lists that stretched over several months.

Soon enough, Internet consulting companies were increasingly spreading their wings overseas, working to nab more lucrative consulting projects in booming market segments such as wireless and interactive television.

The industry's seemingly endless winning streak came to a jarring halt when its Internet start-up clients began shutting their doors or filing for bankruptcy.

Word was out that many ailing dot-coms had quickly burned through their venture capital and had left some advisers with unpaid bills, prompting some consultancies to move away from serving cash-strapped dot-coms and shift their focus toward landing more established Fortune 500 clients with fatter wallets.

But because these types of projects typically take longer to complete, analysts have said that earnings growth will not be as steep as it once was for the star-studded group.

Enter the downward spiral.

A crop of players in the Internet consulting market have spent a hefty chunk of the last three months cutting jobs as part of restructuring plans to save money and eliminate operational costs.

A string of companies, Newsmaker: Razorfish swims against the streamincluding MarchFirst, Razorfish and iXL, have issued profit warnings, blaming the changing market landscape.

Christine Overby, a Forrester analyst, said the bottoming out of the entire industry has been a highly memorable event for a group that was once considered invincible.

"They fell so fast," Overby said. "These (companies) were just so busy trying to do the work on the table that they didn't realize the (sales) pipeline was in fact drying up."

Demand for services remains
"When you're a small company and growing at the rate they were growing and receiving so much unsolicited business, you just don't have the business operations (set) and processes (in place) to deal with any type of change in the market," she said.

But analysts say despite the recent bleak outlook, demand remains strong for Internet consulting services.

"There will always be this need for consulting around the Internet," Rodenhauser said. "But now we have a (more) careful client who is not going to just run to one of these (Internet consulting) firms. "They'll test a variety of players," he said. They will go back to traditional companies like IBM Global Services and Electronic Data Services, which have the name recognition and the veteran services expertise.

Those that have the staying power, analysts say, will be able to land more projects that require typical systems integration work, such as helping a client participate in a new industry marketplace, making sure disparate procurement and supply chain management applications work together.

Meta Group analyst David Scott Lewis said some of the projects Internet consulting companies will land will rely more on heavy-duty back-end integration work and supply-chain management expertise targeting specific industries.

"The demand is there," Lewis said. "The question is, Can these e-boutiques make the shift, or will IBM (Global Services) eat their lunch?"

Added Rodenhauser: "These firms are no longer Internet consulting firms. They're no longer e-consultants...They're just plain old consultants."