As part of the restructuring, Zentropy will gradually lay off 10 percent to 15 percent of its work force worldwide, according to a spokesman for McCann-Erickson.
According to a source close to the company, Zentropy on Thursday cut 32 employees in San Francisco, or 80 percent of the office's total staff. The McCann-Erickson spokesman said the cuts took place but would not confirm the number of people laid off.
Zentropy offers Internet-related services such as media planning and Web site development in 17 countries. The unit was formed from McCann's interactive group Thunderhouse and by several properties of Interpublic Group, McCann's holding company.
In addition, Zentropy president and founder John Connors has stepped down. Michael Tey, chief engagement officer, will take over his position and report to Mark Dowley, president of marketing communications at McCann-Erickson. Connors will take a position within the Internet Ventures Group at Interpublic, according to McCann.
The restructuring at Zentropy comes at a time when the entire Net marketing industry is buckling under pressure of poor market conditions and accelerated emphasis on profits. Market pressures have also put the brakes on some aggressive growth strategies espoused by Net marketing companies over the past few years.
Old-line marketing and advertising agencies such as McCann-Erickson and Saatchi & Saatchi have worked feverishly to build interactive groups to compete with independent Web agencies such as Agency.com and Razorfish. Now that the market has soured somewhat, the entire industry has been forced to scale back or reevaluate business strategies.
A number of Internet consultants have recently issued financial warnings. San Francisco-based Organic and Atlanta-based iXL Enterprises both warned that earnings would be less than expected. Shares of many Internet services companies have dropped to new 52-week lows on growth concerns.
When Zentropy hit the stage last December, the company was positioned as a fast-growing pre-IPO agency competing in the lucrative Internet services industry that spawned such successes as Razorfish and Scient. The company quickly grew to about 500 employees with offices in 17 countries.
"Zentropy was expecting to have a high revenue-per-employee ratio, so that they could take the numbers to underwriters and go public," said one San Francisco-based Zentropy employee who was given notice Thursday.
"But after the tech wreck of 2000, those dreams are long gone. A few months afterward, we had this big organization that didn't have enough work to show for it."
Zentropy will work closely with MRM Worldwide, a division of McCann-Erickson that focuses on customer relationship management.
"We see a real opportunity now to strengthen, expand and realign Zentropy Partners based on what clients globally are telling us about how they see the Internet fitting into their overall business-building and communications strategies," McCann CEO Jim Heekin said in a statement.
"With the Internet now absorbed into the overall economy, we want to be ahead of the learning curve in developing the future of the digital marketing business and to do so on a profitable basis," Heekin said.