Out of the Box

Diamond Technology partners was first to the digital-strategies game. Now, after a major acquisition, a big gamble on wireless and a new name, it's going off in a bold new direction.

Over the past few weeks, DiamondCluster International chairman and CEO Mel Bergstein, and Javier Rubio, the companys president of Europe and Latin America, have been jetting around North America and Europe visiting clients and potential clients, most of them Global 2000 companies. The purpose of their whirlwind tour is to educate clients about Diamonds (formerly Diamond Technology Partners) expanded capabilities in the wake of its recent acquisition of Cluster Consulting. Its a union that Bergstein touts as having produced "the first digital-strategy and solutions-delivery firm with a strong global presence and world-class wireless and mobility expertise."

That may sound a mite hyperbolic, but then Diamond has never been modest about its aspirations ... and often for good reason. Even now, as many competing e-consultancies implode, Chicago-based Diamond is moving aggressively to serve additional industries, expand its geographic reach and position itself at the forefront of the wireless Internet revolution.

"We believe that one of the hallmarks of a great firm is to be able to move from technology to technology as they change," says Bergstein. "We think DiamondCluster can do that with wireless. Wireless is going to be almost as important as the Internet and certainly an extension of the Internet."

For now, notes Alden Cushman, VP of research at Kennedy Information, "Diamond is doing very well. With consulting companies, were seeing the wheat being separated from the chaff, and Diamond hasnt gone through the layoffs or decline in customers that many other firms are experiencing."

In fact, with the Cluster acquisition, Diamond has added the likes of Ericsson and Sprint PCS to a gold-plated client list, which includes Ford Motors, Goldman Sachs and Bank of America. Its stock, which hit a low of about $20 last December, is up more than 50 percent as of this writing.

Diamond is one of the few e-consultancies to avoid layoffs and/or a major earnings warning in recent months. The company just reported fiscal Q3 revenue of $73.6 million, an increase of 101 percent compared with the same period last year. Earnings doubled to $13.5 million, compared with $6.8 million in the year-ago period. "We are all very pleased with [this years third] quarter," Bergstein says.

Longer term, however, even Diamonds most enthusiastic backers concede that for the company to compete on a global basis with the likes of McKinsey & Co., its acquisition of Cluster must pan out big-time. "Thats an uphill battle," notes Cushman. "Something like 60 percent of all mergers and acquisitions end up as failures."

Diamond Envisions Flaws in Market At the height of the dot-com party, Diamond Technologys senior management had already begun to look ahead to sobering times when client fees would be harder to come by and competition even more rigorous.

The prospect of a slowing market made Diamond co-founder Bergstein nervous. The company had been growing at a 40 percent annualized rate since its founding in 1994, but with only 7 percent of its business outside the United States, its appeal to major multinationals was restricted.

"Wed been involved with big clients that had been willing to work with a small company on carve-out projects," Bergstein explains. "But as clients such as Enron and Bank of America began to transform their core businesses, they wanted their [service providers] to be global, with more scale."

Bergstein, a veteran of Andersen Consulting, recognized that Diamond couldnt hold its own against first-tier strategy outfits such as McKinsey, Bain & Co. or Boston Consulting Group, unless it added substantial reach and muscle. While Diamond had a strong presence in a number of industries, including financial services, it was a "no-show" in other important sectors such as telecom. At the same time, Diamond was heavily reliant on a handful of clients.

"We had 61 clients, with the top five representing somewhere around 40 percent of our fees, and one client, Goldman Sachs, representing over 10 percent," Bergstein concedes.

That dependency left Diamond highly vulnerable. "If we lose any major client [or] … if we fail to collect on a large account receivable, we could be subjected to significant financial exposure," the company noted in an SEC filing.

Diamond had a valid concern. Rivals like Cysive and Tanning Technologies announced revenue shortfalls last year because of payment problems related to one or two key customers.

Early last year, Diamond began scouting around for possible acquisitions, but without much luck. The problem was that most of the promising candidates seemingly had been snatched. "It appeared to be futile," says Bergstein of the search. "But then we began losing a few people to another consulting company nobody seemed to know much about. We followed the threads back and found out it was Cluster."

Takeover Target Based in Barcelona, Cluster had quietly achieved success as a pan-European company in the emerging wireless arena. Highly profitable since it was founded in 1993, the privately held Cluster had emerged as a key player, as telecoms and new operators last year spent about $140 billion in Europe for third-generation (3G) wireless licenses.

"We helped numerous operators get licenses, and we continue to work with nine of the winners," notes Javier Rubio, Clusters former CEO.

At about the time Diamond hit the acquisition trail, Cluster had begun to look around, as well. Like Diamond, Cluster had several key limitations, including minimal business in North America and almost total dependence on the telecom sector. Even so, Cluster was being heavily wooed by "A" list consultancies like Proxicom, Razorfish, Sapient and Scient.

"What they wanted, basically, was to get into Europe," Rubio recalls. "But we couldnt really see a way to put things together, because these firms are basically either Web designers with a small dose of strategy, or former systems integrators very much dominated by the IT part."

Initially, Diamond was unfamiliar to Rubio. "Diamond was not really on our radar screen because it was still an emerging power," he says. "But as its stock began to increase ... and investors turned their attention to Diamond, we got a call from one of the directors of Morgan Stanley in Europe. He said he could see a good fit between the two companies."

In May, Rubio and another Cluster partner flew to Chicago to meet with Diamond. "From the first moment, we realized we had things in common," Rubio says of his initial meeting with Bergstein.

Bergstein was equally bullish. Set side-by-side, Diamond and Cluster looked like reverse mirror images of each other. Each was oriented to high-end strategy and functioned as a partnership, and the companies complemented each other, as well.

"We had 93 percent of our revenue in North America and 7 percent in Europe," Bergstein explains. "They had roughly 80 percent in Europe, 15 percent in Brazil and around 5 percent in North America, so the fit was pretty amazing."

"There was little or no redundancy between the two companies," adds Adam Gutstein, Diamonds president of North America. "More important were the strategic synergies that were created. We have strong domain knowledge in virtually every industry other than telecom; Cluster has it in telecom and no other industry. And we have strong domain knowledge around the fixed-line Internet while Cluster has it around the mobile Internet."

Diamond was particularly impressed by Clusters management, from Rubio—who has an MBA from the University of Chicago—on down. "These werent wire-pullers," Bergstein says. "A lot of their people have engineering degrees, as well as tier-one MBAs from Chicago, London Business School and Sloan. They develop business plans for their clients, play key roles in management—sometimes for years—develop marketing and customer-service strategies and often implement those strategies."

With both firms eager to proceed, negotiations advanced rapidly. In November, the merger was completed, with Diamond paying $44 million in cash and $437 million in stock. For Bergstein and the approximately 100 Diamond partners who together own the majority of the companys stock, that was a big deal, indeed, being financed with their own money.

"They really bet the bank on buying Cluster," observes Caren Price, an analyst with WR Hambrecht.

Taking Stock Its too early to declare the deal a success, but the acquisition already has started to yield dividends. "Diamond broadened its geographic scope, especially in Spain, and added very good mobile and wireless expertise," says Cushman.

The combination also trimmed Diamonds dependency on big accounts. "With the combination, Goldman will be under 10 percent, and Clusters largest client, Ericsson, will also be well under 10 percent [of our business]," says Bergstein. "Our goal is to have our top five clients represent 25 percent of our revenue."

In Europe, the firm already has added business through its Global DiamondClusterMarketSpace Solutions (DMS) unit. Michael Connolly, president of the unit, says DMS develops and implements a clients technical architecture as an extension of Diamonds strategic initiatives. "What makes us unique is the heterogeneous approach with strategy and solutions," Connolly explains.

DMS is the hotbed of Diamonds "killer apps" development, and, working with Ericsson, it has developed a mobile accelerator lab for new mobile solutions.

Says Rubio, "Diamond has more capacity than we do on the solutions side, and with the DMS capability, weve increased the size of our team at Ericsson from seven to 20 people. Consequently, its become a very large client generating more than $1 million a month in revenue."

DiamondCluster hopes to leverage Clusters European wireless experience in the United States, where the FCC intends to close its $17 billion auctions for 3G wireless licenses this fall. "For U.S. telecoms, it is appealing to work with a group like Cluster thats got experience and is very good at mobile and wireless," says Cushman of Kennedy Information.

Still, Cushman cautions that the U.S. telecom market is vastly different from Europes, in terms of regulations and culture. "If DiamondCluster says, We have experience but understand there are huge differences here, theyll have a far better chance of succeeding than by simply trying to replicate what they did in Europe and putting junior people on the accounts."

Adds Bergstein, "Well be much more aggressive around telecom in the U.S. than we have been in the past, but, more important, up until 3G, operators of the spectrum were really just carriers … but now ... they have a much richer connection to the customer."

DiamondCluster is counting on providing key services to telecoms, as well as banks, utilities and other organizations that recognize the opportunities presented by the move to 3G wireless.

Naturally, Bergstein and Rubio are busy spreading the 3G wireless gospel. "A few years ago in North America, every CEO had to have a response to the question, Have you thought about the Internet? " says Rubio. "Now theyre responding to how mobility and wireless will affect them."

Bergstein says he and Rubio recently visited a major airline that already was being served by a bevy of consultancies. "There seemingly wasnt any room for us until we started talking about wireless. That got their attention."

When the DiamondCluster execs make analyst presentations, Rubio often points out that once all of the 3G licenses have been awarded in North America and Europe, there will be something like $38 billion worth of apps-development work in the offing.

"Were really positioned at the heart of the revolution," Rubio concludes. "And, remember, this is ongoing. There are already discussions under way about moving to fourth-generation wireless."

Of course, wireless could be a bust. But a lot of smart people in Chicago, Barcelona and points in between believe otherwise.