Internet consultancies, which fuelled the dot.com boom with the promise of a perpetual upturn, are cutting staff and market watchers expect few to survive.
New York's Razorfish, a Silicon Alley evangelist for the new economy, has been laid low by a traditional downturn in the US. The five-year-old company has axed 20 per cent of its 1,800 staff worldwide amid investor fears about its rapidly declining cash holdings.
Morgan Stanley estimated that Razorfish had $51.5 million (€57 million) in February and is facing a cash burn of $20$25 million in the first quarter.
Last Friday, Razorfish rival Organic announced a $20 million restructuring, eliminating 300 positions to cut costs. This followed a week of suffering for MarchFirst, which was formed 13 months ago from the merger of old-economy Whitmann-Hart with start-up USWeb/CKS.
Trading in MarchFirst's stock, which had slumped to 16 cents from a 52-week high of $42.63, was suspended by Nasdaq after the company refused to comment on reports that it was laying off half of its 7,000 workforce.
A few days earlier, Boston-based rival Viant announced the closure of three offices and 210 job cuts. Xpedior all but threw in the towel, laying off half its employees and closing four unprofitable offices. It is now seeking a buyer for all or part of its operations.
"These small niche players are losing market share fast," says Mr Stephen McClellan, global services analyst at Merrill Lynch.
"One wonders what their endgame is. Most are selling below their cash-per-share value because there is nowhere for them to go except down," he says.
Macroeconomics were not the only factor behind the Net consultancies' fall from grace. Many took contracts that were too small to interest their larger rivals.
One software and services analyst recalled the head of one Net consultancy boasting about a $1 million deal he had won. "Later, one of his colleagues said to me: `You do realise he is exaggerating'."
The Big Five consultancies, which were caught napping when the Net consultancies burst on to the scene, now find it hard to contain their glee.
"We have received several approaches by these companies, offering to be bought," says Ms Cathleen Benko, global e-business practice leader at Deloitte Consulting. "We would be happy to consider it, but they have yet to give us a compelling reason to do so." Rumours of the death of small e-business consultancies have been greatly exaggerated, says Mr Laurence Holt, chairman of Quidnunc, a privately owned software and consultancy business with $30 million in revenues and offices in London, New York and San Francisco. Last year, Quidnunc reduced its 250 staff by 20 per cent and made its first loss in 13 years of business.
However, the company is financially sound. In November it raised $15 million in venture capital funding, is currently winning business and expects to return to profitability in the second quarter. Unlike the US-based Net consultancies, Quidnunc earns more than half its revenues in London, which has yet to feel the cold wind of the North American downturn. More importantly, Quidnunc has already weathered the recession of 1991.
"The Net consultancies were children of their age," Mr Holt says. "They were born in the middle of a boom, so they didn't build their business to withstand a downturn."
Whatever the fate of the consultancies, Mr Holt believes they have fundamentally changed the industry. "There was a reason these start-ups were able to enter the consulting market," he says. "The Big Five have had to become more agile, changing their skills and culture in the process."
Deloitte's Ms Benko sees one big benefit for her industry. "They made consulting cool."
