Small consulting firms feel pinch

Now that days of dot-com “work up to your ears” are past, smaller Internet consulting firms are redefining their strategies and trimming their staffs.

Viant Corp., for example, has let go 125 employees and closed its Dallas office. MarchFirst Inc. recently thinned its troops by 1,000 and is in need of a US$100 million cash infusion, and another Chicago firm, Xpedior Inc., axed 380 jobs. San Francisco-based Scient Corp. said goodbye to 460 of the company’s employees.

The end of the dot-com boom has led to a slowdown in business for consulting firms, which are responding by changing their strategies. Some are shifting to a focus on vertical markets such as financial services and manufacturing.

Although the layoffs may be coming to an end, the downturn in revenues may continue for at least the immediate future.

“I definitely think much of this debacle is going to continue in the first quarter of next year and probably into the following quarter, maybe March or April,” said Frances Karamouzis, research director for e-business service providers at Stamford, Conn.-based Gartner Group Inc. “I wouldn’t be surprised if some of the major players will make some announcements in the next weeks.”

Continued survival, buyout, or outright death all are possible scenarios for smaller Internet services firms, Karamouzis said. The firms must focus on protecting their employees and slowing attrition rates to stay viable or to have a chance at being bought out, she said. They also must provide their clients with better metrics on the benefits of their consulting work, to better show the kind of ROI (return on investment) the client will gain, she said.

Smaller consulting firms must build their skill sets out on the back end to address business process work, such as supply-chain management, suggested Lewis Clark, senior analyst for e-business services at Gartner’s DataQuest arm. This will make them more competitive with the major consulting firms including Andersen Consulting Inc. and KPMG LLP, he said.

There also is a more basic reason – bigger often means better.

“I think it is a question of critical mass,” said Jack Staff, chief economist at Zona Research Inc. in Redwood City, Calif. “You get to a certain size, you get to a certain legitimacy. It’s also a question of capacity.”

Regardless, the Internet services sector has been splintered, with the top 20 consulting companies gaining about 29 per cent of the work, Clark said.

The amount of spending in the sector is “astronomical” and it is expected to grow to $159 billion in 2004 from $23 billion in 1999, Karamouzis predicted.

Professional services are still vital, as many companies must seek outside assistance on e-business work, Karamouzis said.

“There is room for plenty of players, but they must provide quality services,” Karamouzis concluded.