Rough Waters Ahead
Robert Bernard was evidently in a buoyant mood in July when, after having captained the merger of USWeb/CKS and Whittman-Hart Inc. to create MarchFirst Inc., the CEO of the new e-business consulting company proclaimed that "the toughest part is behind us."
Four months later, the smooth sailing is over. With many of its dot-com customers struggling, Chicago-based MarchFirst found demand for its e-business consulting and integration services sinking. So Bernard late last month set a new course. Not only would the company lay off 1,000 employees to save money, it would also concentrate on its 500 most profitable customers. Bernard made it clear that the dot-com startups on which MarchFirst once depended would be thrown overboard.
"Were no longer going to pursue dot-coms from an independent dot-com standpoint," Bernard told financial analysts last month. "We dont believe in that model going forward. ... We dont believe that theres enough funding. We dont believe theres enough long-standing staying power from a business-model standpoint."
Onetime highflying, e-business-focused service providers like MarchFirst are the latest victims of the ripple effect radiating from the sudden dot-com shakeout. This fall, news of poor third-quarter results has come from other e-business consulting companies, such as iXL Enterprises Inc., US Interactive Inc. and Viant Corp. Even those still reporting profits, such as Sapient Corp., Scient Corp. and Razorfish Inc., were warning of slowing earnings. Almost to a company, as financial results waned, new-breed e-business consultancies were talking about refocusing their businesses either by leaving dot-coms behind or by seeking longer-term, strategic relationships with traditional companies.
As these e-business consulting companies enter troubled waters, their IT and e-business manager customers would do well to rethink how, when and where they use them, experts say. Customers who havent paid much attention to their e-consultants financial situations need to take a closer look, particularly before taking them on as long-term strategic partners. Besides considering consultancies long-term viability, potential clients should consider the types of customers and projects the consultancies are focusing on and whether the companies are hemorrhaging critical talent, experts say. Finally, customers also must make sure they are prepared for the possibility that their Web integrators could go out of business, be acquired or even choose to ditch them as business plans change.
"It is something youd have to consider because you need to know," said Chris McCann, president of flower and gift retailer 1-800-Flowers.com Inc. McCann has steered clear of the publicly owned e-consultants that are currently under the most intense financial pressure. "The financial woes may dictate cutbacks and turnover," he said.
Fight for survival
experts say its likely some of the new-breed consulting providers scrambling to survive wont be around a year from now. Tom Rodenhauser, an analyst and president of Consulting Information Services LLC, in Keene, N.H., said he is most confident in the survival of Diamond Technology Partners Inc., Sapient and Scient. All three have the solid management and size it will take to stay around, Rodenhauser said.
As for the others? "Its really questionable," he said. "Youll see a lot of others sliced up, and theyll go away."
1-800-Flowers.coms McCann has gone out of his way to hire only financially stable e-business consultants from day one. Even back in 1995, when the Westbury, N.Y., company was considering using a small consulting companyFry Multimedia Inc., of Ann Arbor, Mich.to help launch 1-800-Flowers first Web site, McCann first looked into its financial backing. The fact that the consulting company was part of a larger, 50-year-old parent company, Fry Communications Inc., helped reassure McCann. Since then, 1-800-Flowers.com has used Fry for multiple projects.
In June, 1-800-Flowers.com tapped another small e-business consulting company, New York-based Digital Pulp Inc., for a November relaunch of its site. Not only did Digital Pulp have loads of marketing and Web design experience, but it, like Fry, is also privately held. That means it doesnt face the same Wall Street scrutiny as its publicly held counterparts.
Lets get strategic
ironically, even as it and e-business managers wonder just how close to get to struggling e-business consulting companies, many service providers say their new strategy for survival is to build closer, more strategic relationships, particularly with larger enterprise clients. For example, MarchFirst and iXL have both announced initiatives to focus on their larger, more well-established clients. Viant in October launched a "strategic relationship management group" to foster stronger ties to key Global 2000 customers. All three want to establish long-term relationships with customers that can generate multiple project engagements and, in the end, greater profits.
To build those kinds of relationships, however, e-business consultants will have to change the way they do business, experts say. That means becoming a little more like their Big Five consulting competitors, hiring more-experienced business development experts who can give clients solid reasons for launching a project, rather than simply riding the now-slowing e-commerce wave.
"[Now] its all about goal setting and a metrics-based and return-on-investment sell," said Rich Young, an analyst at The Yankee Group Inc., in Boston. "Really gone are the days of one-week-long sales cycles. That, in some ways, compromised some of the service firms and compromised the users."
Many large customers, though, continue to view e-business consulting companies as good partners for individual Web projects but not necessarily for long-term engagements.
Polaroid Corp., for instance, hired Viant in November 1999 to help it create a new business-to-business Web site. Viant, of Boston, played an important role in formulating the sites strategy, creating its architecture and design, and selecting and integrating a content management system, said Bob Barton, director of Internet business for North America at Polaroid, in Wayland, Mass. Barton had particular praise for Viants suggestion to deploy Blue Martini Software Inc.s content management software for the companys new polaroidwork.com site. The tool allows Polaroid to manage content with a staff of two.
Still, Barton said he sees Viant as a project-specific e-services provider. He would consider the company again for a project of a similar scope, but he said he didnt foresee any needs in the immediate future.
besides investigating the financial viability and strategic direction of e-business consulting providers, potential customers should ask another important question: Is the service provider suffering a brain drain? As stock prices have fallen, once-lucrative stock options have lost much of their power to attract top talent to e-business consultants and keep it there. At the same time, many e-business consulting companies are trimming their ranks to cut costs. iXL last month cut 35 percent of its staff, or 850 jobs, on top of a cutback of 350 positions in September. On a smaller scale, Razorfish, despite reporting a profit, nixed 200 jobs in Europe in October. As cuts are made, say observers, it may be difficult for service providers to avoid losing top talent.
Some in technology centers such as Silicon Valley say theyve noticed an influx of résumés from employees of e-business consulting companies. At startup PharmQuest Corp., a software developer for the pharmaceutical industry, executives receive as many as 20 résumés a day from engineers, managers and graphic designers at the new-breed consultancies, said CEO Shankar Hemmady, in San Jose, Calif.
While few potential customers seem to be too concerned about the brain-drain issue today, experts say they should watch employee retention closely before hooking up with an e-business consulting company. The more consultants leave, the higher the odds of a major disruption in a Web project, experts say. Meanwhile, added pressure on consultants about their employers financial situation and the threat of layoffs could further throw them off focus.
Some service providers are taking steps to reassure employees and customers. MarchFirst last month announced one of the most unusual responses to retention concerns. Starting this month, employees can return stock options to the company. In exchange, they will receive one new stock option for every three returned, based on recent prices.
Other consultancies say theyre also taking steps to retain employees and that they are working. Razorfish recently said its voluntary turnover rate remained steady at 11 percent through the third quarter.
if, despite the turmoil, it managers decide to use one of the struggling e-business consultancies, they should be sure to plan for how they would continue their Web initiatives should their service provider disappear, experts say. Even companies that say they arent concerned about the market tremors are taking such steps.
Budget Rent a Car Corp. in October relaunched its budget.com Web site with the help of iXL, which Budget has used for various projects since 1998. Budget officials said they were satisfied with iXLs work on the redesign, which included a new look and an improved booking engine. Still, Budget officials realized that the company needed to ensure that it could continue the Web project even if iXL, of Atlanta, wasnt around. So officials dutifully recorded important information about the project, such as the business rules on which the site is based.
You never know, say Budget officials, when youll need a lifeboat. "Weve been careful all along to document everything ... so if we were to switch to different vendors, we have all the documentation," said Krista Musur, manager of Internet marketing at Budget, in Lisle, Ill.