Web Boutiques Collapsing

 
 
By Paula Musich  |  Posted 2001-01-01 Email Print this article Print
 
 
 
 
 
 
 

Profits and growth for Internet integrators down.

A triple whammy of bad news for the Web-integration services business will likely spell doom for many boutique Web-integration companies.

The latest victims of the downturn—Organic Inc. and Cysive Inc.—reported revenue shortfalls and layoffs late last month on the heels of a string of cutbacks by a long and growing list of competitors. And it is becoming evident that few are likely to remain standing.

The dot-com falloff, a pullback on Web-integration projects by Global 2000 companies and a slowing economy promise to seal the fates of many of the boutique companies, according to industry observers. "The problem is they didnt anticipate the slowdown after the dot-coms sank. If the economy goes into the tank, thats the third piece they didnt anticipate," said Tom Rodenhauser, principal at Consulting Information Services LLC, in Keene, N.H. "The Internets not going away—there will still be an enormous wave of change—its just that big wave that hit has pulled back."

As many as 5,000 positions have been eliminated in the last three months—just among the top 10 players—and that number doesnt include those employees who chose voluntary severance programs, said Frances Karamouzis, an analyst at Gartner Group Inc., in New York.

Organic laid off 270 employees, and Cysive cut 40 to 50 positions. And as the layoffs mount, recruiters working at large systems integration houses and professional services providers are having a field day.

"I think you can stand across the street and wave an interesting paycheck and find anyone you want," said Brad Rucker, executive director of Electronic Data Systems Corp.s new Web services unit, Bluesphere, in Plano, Texas. Rucker said that in a two-week period, he received at least 30 phone calls from current and former employees of the boutique players.

In such an environment, the large professional services companies such as EDS and Computer Sciences Corp. see no reason to acquire the ailing, publicly held companies.

"You have to understand the scale," said Sheldon Laube, chairman and CEO of PC subscription services company CenterBeam Inc., in Santa Clara, Calif. "PricewaterhouseCoopers has 163,000 people. They recruit 32,000 people every year. Theyre recruiting the size of Scient [Corp.] every four weeks."

In addition, Gartners Karamouzis said she believes that the value of services companies—their people and clients—is hard to hang onto in an acquisition. And many of the boutiques had only discreet projects, not long-term relationships. "In fact, some of the contracts arent good ones to have because theyre not profitable," she said.

One dissenter said that he believes there are some boutiques with value beyond people and customer contracts that makes them attractive acquisition candidates. "The acquisition of intellectual capital is another reason to acquire, but weve found many [boutiques] arent mature enough to have created that intellectual capital," said Pete Martinez, an e-business strategy executive for IBM, in Boca Raton, Fla. Martinez said he believes there are exceptions but would not name them.

When the projects put on hold by Global 2000 companies go forward, the partners they choose will likely be the large professional services organizations, CenterBeams Laube said.

"The money spent on IT consulting now will be spent on the traditional players because people need complex back-end systems integrated with their Web front ends," he said. "The people who understand legacy systems are the Arthur Andersens, EDSes and PricewaterhouseCooperses."

So what will happen to the boutiques? "I think youll see some people get delisted," said Consultings Rodenhauser. "With others, they may just become a mere shell of an organization. Others will shrink and focus on a specific area. Perhaps many will go away."

Because many of the boutiques are publicly held companies, the other option is to take them private, said Cysive customer Steve Stanko, director of emerging technologies at Cymerc Exchange Inc., in San Francisco. Although Cymerc liked Cysives work, when that work ended, the company no longer needed Cysives services.

"I would consider working with them again, but the realities of our business right now make that unlikely for the next six to 12 months," Stanko said.

Although none of the boutiques has closed its doors yet, some could throw in the towel as early as spring. "They cant go two quarters in a row bleeding like they are," Rodenhauser said. "Anybody whos gone through two rounds of cuts, by the third round they are out of the game." Two companies, iXL Enterprises Inc., of Atlanta, and Xperior Inc., of Chicago, have already had two rounds of layoffs.

Those likely to weather the storm include Sapient Corp., of Cambridge, Mass., Proxicom Inc., in Reston, Va., and DiamondCluster International Inc., of Chicago, observers said, pointing to the long-term histories, stability and moves that have allowed them to stay ahead of changes.

Survival for these companies depends on several things. "You need a strong management team, a consultant force that has experience with Fortune 1000 clients will be critical, and a diverse customer base like Sapient has is essential," said Barry Chubrik, an analyst at Credit Suisse First Boston, in New York.

 
 
 
 
 
 
 
 
 
 
 

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