Consultants misread market slowdown

Internet consulting firms, which should have been among the first to detect a downswing in spending on electronic commerce projects, have been caught flat-footed by a sudden down swing of IT spending.

Internet consulting firms, which should have been among the first to detect a downswing in spending on electronic commerce projects, have been caught flat-footed by a sudden shift in the market.

One by one, consulting firms have been forced to issue profit warnings, saying they did not foresee the sudden downturn in spending by failing dot-coms, and delays in projects by major corporations. At the same time, they say there is no reason to panic. The overall market for systems integrators and Internet commerce in general remains bright.

"I think what we've seen is a dramatic shift in spending, not a downturn in the overall market," said Andy Blackburn, vice president at The Boston Consulting Group (BCG). "The work that needs to be done now is the heavy lifting - areas like back-end integration - and that takes more time to develop."

Fears that dot-com firms were starting to run out of money and may default on payments have battered shares of Internet consultants, such as marchFirst, Razorfish, Sapient, Scient and Viant all summer. It culminated in an announcement last week that iXL Enterprises, considered a blue chip among the new breed, will also miss its revenue expectations.

The Atlanta company also announced the resignation of William Nussey, its high-profile president. The 34-year-old Nussey was considered to be a star.

Bertram Ellis, iXL's chief executive, will assume Nussey's responsibilities in a management reshuffling. Ellis said the company should not have been caught off-guard by the downturn, but the sudden shift was difficult to predict. "The dot-com spending was a pipeline we could dial up or dial down as we needed to smooth out our volume and smooth out utilization," he said. "Quite frankly, the dot-com business was something this quarter that did not exist to dial up or dial down even if we wanted to."

Ellis said Global 1,000 companies are continuing to invest heavily in Internet projects, but they are taking more time to plan out those projects. They are also bringing more of the initial design and planning work in-house. "The dot-com fear factor is not driving the expenditures of our large clients as it had in the previous quarters," he added.

Not surprisingly, investors hammered iXL's shares following the earnings warning. Shares were trading at around $7 early last week, down from a January high of $58.75.

While he acknowledged investors had reason to be disappointed in the company's results, Bertram predicted the turnaround would be quick. The industry, he says, is still expected to grow 40 percent to 50 percent per year.

Bertram's comments were supported by a study released last week by BCG, which forecast a continued rapid rise in business-to-business e-commerce. The research firm estimates business-to-business commerce revenue in the U.S. will grow from $1.2 trillion this year to $4.8 trillion by 2004.

At least one analyst believes Internet integrators are in for more turmoil, though.

Tom Rodenhauser, who heads Consulting Information Services, said Web integrators will now have to battle the likes of Andersen Consulting, EDS and Ernst & Young for a piece of the Global 1,000 market.

"There's a certain irony in the fact that the big guys have spent so much time and effort on trying to get little, and now the little guys are going to have to try to make themselves look big," Rodenhauser said.