Services firms run circles around tech giants

In many technology industries, larger companies flush with cash are the dominant players--think Microsoft, Dell Computer. Yet in the nascent but growing Net services market, IBM, Electronic Data Systems and other behemoths are lumbering after small, savvy firms that started on the ground floor but have risen quickly to the top.

Sapient, Scient, Viant and Razorfish are among the Internet consulting companies reporting strong earnings despite stiff competition. Sapient this week posted earnings three times last year's levels. Viant watched its revenues numbers jump more than 200 percent from a similar quarter last year.

Scient is scheduled to report earnings today and is widely expected to report its first profit. AppNet and Razorfish also have reported strong revenues growth.

"Their growth is unprecedented," said Stephen Birer, a financial analyst at Robertson Stephens. "They are posting huge, huge growth simply fueled by the huge demand to be on the Internet. All of these companies are seeing unlimited demand for what they do."

According to Forrester Research, the domestic market for Internet services is expected to grow to $64.8 billion by 2003 from $19.6 billion this year.

As a result, many old-school consulting companies are looking to tackle the market for Web development, strategy and design. Established players such as IBM Global Services, EDS and Computer Sciences have been steadily moving from traditional computer outsourcing and toward e-commerce business.

Yet many of these companies just "aren't fast enough," said David Mahoney, a financial analyst at Wit Soundview. "It's a constant game of trying to stay ahead of the technology curve...Web consultants have a long runway in front of them."

Last week IBM reported its quarterly numbers, unveiling a surprise: Its services unit had flat year-over-year revenues growth, compared to expectations of 6.5 percent growth for the quarter.

IBM Global did say that demand was strong for its e-business consulting services, which grew a hefty 70 percent to $1.1 billion.

EDS, which is expected to report first-quarter earnings later this week, said its eSolutions unit signed more than 300 Internet business contracts in the quarter, representing nearly $500 million in new revenues.

Despite the growth, analysts say such companies are no matches for the nimble Internet consulting firms that continue to land more deals than their behemoth counterparts.

Lehman Brothers analyst Karl Keirstead said Net firms are simply playing in the "better part of the services industry."

Limited to online work, smaller firms don't have the same challenges as larger companies that manage other elements of the industry, such as hardware or network management. Because of this, the larger companies say less of their Internet work adds to overall revenues growth.

"IBM's e-business work is 15 percent of their revenues mix, and EDS is about 5 percent of their revenues mix," Keirstead said. "Despite the growth that they've seen in these areas, it's still not large enough to drive that kind of growth we've seen" in some of the smaller firms.

Wit's Mahoney said the big players will "be able to grow, but it's going to be a struggle." Older companies have the advantage of being able to retain top talent more easily. Yet "the smaller guys all have a much better opportunity in front of them because they specialize. They have the experience and total focus," he added.

Robertson Stephen's Birer said that despite the possible threat from big companies as they boost their Web services, customers are still leaning toward smaller firms.

"The threat is out there, but the new breed of builders are winning out," he said. "Clients see them as the leaders."