What price domination?
But the spending side of the ledger, which has received relatively scant attention, is factoring just as strongly into growing investor unease--particularly high sales, general and administrative (SG&A) costs. Legacy systems integrators historically have expended about 30 percent to 35 percent of their gross revenues on SG&A, which essentially covers all costs not directly related to the bodies thrown at a customer engagement. Publicly held Web integrators, by contrast, are spending an average of about 50 percent of their sales on SG&A.
What makes that expense line a particularly pressing concern to investors is that most specialty Web consultants haven't even begun spending heavily on direct sales. To date, they've relied mainly on their business development and customer care personnel to handle that function, which, of course, helped lead to problems when demand slacked off. So then, what's behind spiraling SG&A costs.
Where's the money going?
"It's no mystery," notes Ted Kempf, who tracks the e-services sector for Gartner Group. "How much is an ad in the Wall Street Journal? Advertising and public relations budgets for some of these companies can make up 30 or 40 percent [of revenues]."
Proxicom, to take one example, had a direct sales force of 15 people in this year's second quarter, or only 1.5 percent of its total labor force. Yet its SG&A line was 48-plus percent. So, despite gross margins of 54.4 percent in the June quarter, the company lost a couple of million dollars.
Likewise, Viant spent only 10.3 percent of second-quarter revenue on sales/marketing, employing just 31 salespeople, or 5 percent of its total labor force. But Viant's overall SG&A line was 46.3 percent for the three-month period.
It's no coincidence that industry stalwart Sapient, whose stock has held up much better than most of its competitors, spent just 33 percent of revenue on SG&A last year.
Scott Dunklee, an executive at the Lancer Group, a high-tech headhunter, says the 10 or 12 leading specialty Web consultants fell into the identical trap--they ratcheted up their investments in support staff, infrastructure and image-making machinery with the expectation of becoming the single dominant player in the market.
"And with everyone reaching for the same, big slice of pie, and nobody grabbing it, revenues at these integrators didn't go up anywhere near fast enough to keep pace with their rising support costs," adds Dunklee.
Investors, he concludes, have lost patience with the "we're gonna win this war" strategy, and are starting to pressure the e-services hotshots to get their SG&A costs in line with their revenues.
"It's all part of the realization among investors that these companies live in the real world," says the CEO of one privately held Web integrator. "Ultimately, we will all be valued on the basis of our earnings, just like everyone else."