DiamondCluster International Inc.

When we last looked in on DiamondCluster, the business-strategy and technology-solutions company was sorting out last year's acquisition of Cluster Consulting and counting its multiple blessings.

When we last looked in on DiamondCluster, the business-strategy and technology-solutions company was sorting out last years acquisition of Cluster Consulting and counting its multiple blessings. DiamondCluster was definitely on a roll, even as many of the competing e-consultancies had begun to implode.

At the time, company chairman and CEO Mel Bergstein was particularly enthusiastic about the deal with Barcelona-based Cluster, a major player in the European wireless market. "Wireless is going to be almost as important as the Internet, and certainly an extension of the Internet," he asserted.

The Cluster acquisition has added new customers, such as Ericsson, to Diamonds Fortune 500-heavy client list. More importantly, perhaps, it has positioned the firm to play a leading role when the next generation of wireless technology starts to gain traction in the United States. It also has expanded Diamonds reach in Europe, where it previously had little business.

The numbers were strong, as well. For Q3 (fiscal 2001), DiamondCluster reported revenue of $73.6 million, an increase of 70 percent over the same period last year. Earnings doubled to $13.5 million. For a time, DiamondCluster looked like it was going to emerge unscathed from the economic downturn that was causing so many of its competitors to announce layoffs and drastically revise earnings estimates downward.

But the economys continued lagging has caused Diamond to hit a slow patch. In fiscal Q4, the company met lowered expectations of 19 cents per share from the original target of between 30 cents and 32 cents per share. Recently, the firm posted a $27.3 million loss for its fiscal Q4, which was mainly due to amortization of good will and non-cash compensation costs associated with its Cluster Consulting acquisition in November. For the quarter, the company reported revenue of $73.7 million compared with $43.4 million in the year-ago period. "While it appears we are seeing a slight upturn in the U.S. capital markets that may suggest an economic recovery in six months or so, we are not yet seeing that reflected in our clients spending in North America," Bergstein says.

This economic period will test any companys mettle, he says. "These are defining times. We believe we have an opportunity during these difficult economic times to further differentiate ourselves and build an even stronger culture," he says.

While company executives are cautious about the companys near-term growth prospects, Bergstein remains optimistic on a number of counts. Thanks in large part to the Cluster deal, business in Latin America and Europe remains solid, especially in Southern and Central Europe, where demand for wireless is still robust. In Q4, European and Latin American clients represented 48 percent of revenue, and 21 percent of revenue for fiscal 2001. If nothing else, this underscores how important the Cluster segment of Diamond already has become.

Bergstein is also pleased that DiamondClusters relationship with its core clients remains solid, though he concedes that the company is delaying a number of existing initiatives until the economy stabilizes. To date, the firm hasnt lost a single core client that was with DiamondCluster at the start of the fiscal year. He also admits that new work is tough to find across the board.

For the short term, DiamondClusters priorities, Bergstein says, are serving its clients; recruiting, retaining and developing its people; and staying on the leading edge of ideas. "This is a marathon, not a sprint," he notes. "We have a strong business model, and while the current economic model is a challenge, we need to keep our vision on the future. Supplying the right balance of short-term managerial oversight combined with long-term leadership vision is my No. 1 priority right now."

A big part of that vision was articulated by DiamondCluster fellow Fred Wiersema, who has a new book coming out in June, The New Market Leaders, published by the Free Press. "It presents some powerful methods and tools for Global 2000 companies to assess their market position and to chart a course toward a leadership position," says Bergstein. "One of my major challenges right now is to make sure our clients and prospects are familiar with these emerging concepts. I think they are very relevant and very important."

And how does Bergstein intend to keep Diamond on course toward a leadership position? "My ultimate challenge is to make sure our teams remain multidisciplinary and well-balanced in their skill sets, and that they stay innovative, collaborative and passionate about generating results for our clients," he says. "To be honest, these principles are so ingrained in our people that this really isnt an issue—but I do think about it. And I want to be sure we stay committed to these principles."