Net services firms downplay pure-play

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Like Al Gore’s attempt to distance himself from Bill Clinton in the recent presidential campaign, a number of Internet services companies are taking steps to downplay their dependence on dot-com business.

Razorfish Inc. said pure-play dot-coms account for about 5% of its revenue. Sapient said its dot-com revenues account for less than 10% of its total. And MarchFirst Inc. announced in November that it would no longer court independent dot-coms, focusing instead on wooing the largest corporations in the world.

While a move away from dot-coms to older, more established and presumably more stable corporations seems sensible, the strategy is not without dangers. By targeting brick-and-mortar accounts, Internet services companies place themselves in direct competition with the Big 5 professional services firms and their awesome marketing power. This is a battle they cannot easily win, analysts said.

"About 75% of these [Internet professional services] firms won’t be around by the end of the year," predicted Terrence Tierney, a U.S. Bancorp Piper Jaffray Inc. analyst.

Superior solutions

Despite increased competition from the Big 5, Robert Bernard, chairman-CEO of MarchFirst (which recently received a $150 million investment from Francisco Partners) remains confident in his company’s capabilities. When Tierney asked during a late November conference call how MarchFirst could compete with the larger companies, Bernard replied, "We believe without question our solutions are superior to the Big 5."

Maybe so. But MarchFirst, the product of the merger between Whittman-Hart Inc. and USWeb/ CKS, is shrinking. Last week, a company spokeswoman confirmed additional layoffs would be announced on top of the 1,000 employees (10% of its work force) who were let go in November. Whittman-Hart built its reputation by providing technology consulting to midsize businesses. "The Whittman-Hart part is salvageable," said Stephanie Moore, Giga Information Group Inc. analyst.

But while Internet professional services firms may offer some advantages over the Big 5, marketing these differences will be a difficult task. Consider that Big 5 consulting firm KPMG L.L.P. is an ubiquitous sponsor of the Professional Golfers’ Association, or that the former Andersen Consulting is spending $175 million, including running a Super Bowl spot, to ensure that its new moniker, Accenture, becomes a household name.

By comparison, MarchFirst’s advertising campaign for all of last year was reportedly just $30 million. The company said it has not decided how the campaign will continue in 2001, if at all.

In case after case, Internet consulting firms are scaling back ad budgets due to cash flow problems.

In the late 1990s, in the rush of businesses looking for Internet consulting services, advertising was unnecessary, a match in a bonfire. While the Big 5—Andersen Consulting, Ernst & Young L.L.P., Deloitte Consulting, KPMG and PricewaterhouseCoopers L.L.P.—focused on ridding their clients of the Y2K bug, Internet consulting firms built e-commerce Web sites and e-business operations for dot-coms, midsize companies and multinational corporations. More than a few of the Internet consulting firms found the demand for their services so high that they could pick and choose premium clients.

It seemed every business needed something Net-oriented. Dot-coms had to build the engine that would propel their new business, and brick-and-mortar companies had to answer the threat of being "Amazoned." In this atmosphere Viant Corp., Scient Corp. and a host of other Internet consulting companies thrived. "You had to be very bad not to make money the past few years," said Lisa Bodell, president-COO of Harvest Consulting Group L.L.C., a small New York-based strategy and branding firm.

In the past 12 months, however, even those e-business consulting firms considered very good are struggling. The sea change began with the evaporation of venture capital money. This caused many dot-coms, the core clients of many e-business consulting firms, to disappear.

With the dot-coms drying up, the Internet consulting firms have shifted their sights to larger, more established companies. This move puts them face to face with the brand power of the Big 5.

At large companies, the decision to hire a supplier is a very public one, and in these large companies, the old saw is still sharp: "No one ever got fired for buying IBM." Just change IBM to KPMG or another Big 5 name.

"I think it’s even more true than it was a year ago," Moore said. "It’s much safer to choose IBM or Andersen Consulting. An IT manager isn’t going to get fired for that, but if he bets on Razorfish and it turns out bad, someone is going to question him: ‘Why did you hire these guys?’"

Size matters

The Big 5 wield tremendous brand power among larger corporations and have enduring relationships, some of which have been in place since at least the Eisenhower administration. Some of the Big 5 dismiss the newfangled Internet consulting firms as pretenders, particularly when it comes to business strategy consulting. "For them, a long-term relationship can mean 24 months," said Bill Battino, partner-global lead for e-business strategy at PricewaterhouseCoopers. "For us, it can mean 30 or 40 years."

Beyond their old relationships, the Big 5 have the brand recognition to create new ties. "Cold-calling these big companies is not an easy thing to do in this environment [for Internet consulting firms]," said Neil Isford, CEO of Plural Inc., a New York-based e-business firm. "Big consulting firms are in a much better position to do that."

Ten-year-old Revere Group Inc. kept its vulnerability to a minimum by electing never to trade services for equity in its relatively few dot-com accounts. "We never did that," CEO Michael Parks said. "I didn’t believe we were a [venture capital] firm."

Even so, the privately held, Deerfield, Ill.-based professional services company plans to cut costs this year by scaling back marketing and branding efforts. "Last year we spent almost 5% [of revenues] on marketing, advertising and PR," Parks said. This year, the company will spend just 2.25% on those functions, but allocate more to direct approaches, including direct mail and events.

Fight the power

Internet consulting firms must also fight for the business of larger corporations at a time when the demand for Internet services at brick-and-mortar companies, which are no longer spurred by the dot-com bogeyman, will grow at a slower rate.

There is "a lack of urgency among Global 2000 companies to immediately fund large e-business projects, as well as a slowdown in the funding availability for both VC-backed and enterprise-backed start-ups," Scient said in a December press release warning of revenue and profit shortfalls. The disappearance of the urgency also dims one perceived advantage of the Internet consulting firms: their nimbleness.

Companies without strong legacies beyond their Internet specialty will be hard-pressed to survive, said Kate Murphy, research director for e-business service providers for AMR Research Inc. "In our predictions, we said these kinds of companies will either be sold off in a fire sale or die," she said. "They’ll be acquired for their people and some of their clients, or they’re going to fade away."

Richard Karpinski and Ellis Booker contributed to this story.

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