Layoffs hit more sites

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Last week's announcement that MarchFirst would cut 1,000 employees-10% of its workforce-sent a chill through the Internet professional services industry, already rocked by layoffs. Web developers who once had their pick of clients are now scrambling for them.

"A year or two ago, all these interactive agencies were in the enviable position that they could turn away work," said Marissa Gluck, senior analyst at Jupiter Research, a division of Jupiter Media Metrix. "These guys have to hustle now to bring on new clients, and now, just not dot-com clients. They're also under increased pressure that these clients are sustainable-not on a project basis."

The pressure is especially intense for public companies like Chicago-based MarchFirst, the biggest shop on Advertising Age's Interactive 100. Thomas Metz, MarchFirst's president and chief operating officer, said the cuts will save the company about $100 million a year. MarchFirst had "gotten a little ahead of itself" in the hiring cycle and now is reducing costs to bring the company in line with marketplace trends, Mr. Metz said.

MarchFirst has been hit by cutbacks in Internet consulting and advertising as some of its dot-com clients have folded and others are scaling back digital marketing efforts. Last month, it reported a third-quarter loss of $436.7 million, compared with net income of $9 million a year earlier. The company said it was hurt by slowing demand for consulting services and the weakness of the euro against the dollar. MarchFirst was formed by the March merger of Whittman-Hart and USWeb/CKS; the company's stock has sunk 95% since Whittman-Hart announced last December it would buy USWeb.


MarchFirst isn't alone. Beyond Interactive, Ann Arbor, Mich.; iXL, Atlanta; Luminant Worldwide Corp., Dallas; and Razorfish, New York, have all had layoffs. Many of the biggest Web consultancies have stock prices under $5.

"I think in general, we're seeing demand outstripping supply," said Richard Wise, North American practice leader for Mercer Management Consulting's e-commerce strategy group, adding that recently he's seen an overall "softness" in terms of proposals and rates.

He thinks i-shops will have to take measures to cut costs, such as outsourcing services like computer programming in offshore countries.

Mr. Wise also said he sees firms consolidating into bigger roll-ups or beginning to specialize in niche markets. "Roll-ups can be tricky to pull off," he said, noting the troubles MarchFirst and Luminant have had. In those cases, he said, companies were trying to "mishmash" too many different services-ranging from Web design to backend integration. Luminant, backed by Young & Rubicam, was created one year ago by the instant roll-up and simultaneous initial public offering of seven companies; the stock's fallen 97% from its peak and traded late last week at $1.50, an all-time low.

Dave Skwarczek, president-CEO of Streams Online Media Development Corp., a privately held Chicago Web developer, said he hasn't found clients to be more demanding lately, although the competition for accounts has intensified. "It's clearly more competitive out there," he said.

He, too, believes this shakeout will force some Web shops to narrow their focus. "The term 'everything' has grown to be so incredibly all-inclusive," he said, that companies can't possibly do a good job handling all tasks from customer relationship management to user interface design and e-commerce. "I think firms will be focusing on what they do best."


Jupiter's Ms. Gluck said she hasn't heard of clients being able to suddenly command cheaper rates, but she thinks that the Fortune 100 companies particularly have been able to get bargains for awhile.

I-shops have "bent over backward to please" these clients, because they enabled them to attract other big clients. Now, she said, many of these traditional companies are pulling back from interactive initiatives because they're not as scared about trying to keep up with their dot-com rivals.

As to which i-shops are more subject to this downturn in business, Ms. Gluck believes every shop is at risk.

"It'll be interesting how this affects the pool of employees," she said. "We have 25-year-olds making six-figure salaries. That's not sustainable."

Ms. Gluck added: "All these guys have suffered from high turnover" in clients. "No one is immune. It's a bloodbath."

Copyright November 2000, Crain Communications Inc.

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