Still Standing

Baldwin Louie — Mon, 20 Aug 2001 15:00:00 -0700

It's been a rough year for Jerry Greenberg and Stuart Moore. In July, split-adjusted shares in Sapient, the tech consultancy they co-founded in 1991, were trading for six bucks and change, down from around $60 a year before. The young co-CEOs - who last year made Fortune's list of the 40 richest Americans under the age of 40 - can now add "ex-billionaire" to their résumés.

Those paper losses reflect an abrupt reversal of fortune for a company that had enjoyed nine straight seasons of bountiful growth. Sapient's sales, which hit $503 million last year, an 82 percent increase over 1999, have been in free fall since December and could end the year down 27 percent or more. To cut costs the company has shed 1,060 employees - about a third of its workforce - since March.

Sapient is hardly alone. During the first six months of 2001, combined revenues for Net-centric consultancies Answerthink, iXL, Razorfish and Scient were down 53 percent from the same period last year. Yet IDC recently offered the rosy prediction that e-business consulting sales will grow from $22 billion in 2000 to $68 billion in 2005.

The question is, who will be around to profit from that growth? At one end of the e-services spectrum are Web site builders such as Razorfish and Scient, which look increasingly shaky. At the other end are Big Five consultancies like Accenture, Cap Gemini Ernst & Young and KPMG Consulting, and old-school tech giants like Computer Sciences Corp., Electronic Data Systems and IBM Global Services - all of which offer e-business consulting as just one component of their technology and strategy services portfolios.

Sapient sits somewhere in the middle. On the one hand, it's been tarred with the same dot-com brush as the Scients and Viants. But unlike those rivals, Sapient has years of pre-Net experience in the less-than-sexy business of systems integration. The old stalwarts, however, have even broader backgrounds to draw upon, as well as formidable brand names and long-standing customer relationships. As Sapient takes on these giants for a piece of the e-services market, the question is whether its blend of new-economy agility and old-school technology smarts will be enough to help it compete.

Established in Cambridge, Mass., in 1991, Sapient has changed consulting specialties the way a prom queen swaps boyfriends.

In the beginning, Sapient focused on systems integration, unifying customers' disparate hardware and software resources into efficient, enterprise-wide systems. A couple of years later, as client-server technology replaced the old mainframe-terminal architecture, the company tweaked its training and hiring efforts to position itself as a client-server expert.

Then, in 1996, Sapient turned its attention to the Net, eventually embarking on a major rebranding effort. Its consultants became "architects for the New Economy." The splashy introduction to the company's 1998 annual report referred to the Net no less than seven times. "The Internet changes everything," it proclaimed in headline type. "Run, don't walk, down the digital road, or be left in the dust." The company's acquisitions - including Web design firm Studio Archetype in 1998 and Web developer Adjacency in 1999 - bolstered its new, Net-centric reputation.

BYE-BYE LITTLE GUY
While big diversified consultants like Accenture and IBM Global Services have survived the downturn with minimal pain, most of the smaller, Net-focused pure-plays have hit the skids.
SALES (Millions)
Company	2000	Change from 1999	Jan-June 2001	Change from 2000
Answerthink	$311	20%	$137	-13%
iXL Enterprises	$358	64%	$73	-67%
Razorfish	$268	57%	$71*	-50%
Sapient	$503	82%	$196	-13%
Scient	$339	204%**	$38	-75%
Viant	$127	108%	N/A***	N/A***
JOB CUTS
Company			Jan-July 2001	% Reduction of Staff
Answerthink			146	11%
iXL Enterprises			300	18%
Razorfish			400	49%
Sapient			1,060	32%
Scient			1,310	72%
Viant			211	39%
MARKET CAPITALIZATION (Millions)
Company			Aug 1, 2001	One-Year Change
Answerthink			$379	-49%
iXL Enterprises			$43	-96%
Razorfish			$45	-97%
Sapient			$765	-87%
Scient			$45	-99%
Viant			$74	-95%
CURRENT STATUS
Company
Answerthink			Analysts: It'll survive.
iXL Enterprises			Can its merger with Scient save it?
Razorfish			Down to $30 million in cash, it may soon be sushi.
Sapient			Diversification and $271 million in the bank give it some breathing room.
Scient			See iXL: 1+1=0?
Viant			Analysts see nothing but red through 2002.
Estimate. Q2-Q4 only; Q1 '99 not available. **Not available at press time. Sources: Bloomberg, SEC filings and companies listed

The strategy worked well: Everybody wanted a Web site, and Sapient, along with its imitators, quickly had more business than it could handle. It helped Wells Fargo pioneer browser-based banking and assisted Pacific Bell's launch of Internet access services. "With a market growing this large this fast, we're not particularly worried about the competition," Greenberg told Upside magazine in late 1999.

But things have changed. Consultancies such as MarchFirst, Razorfish, Scient and Viant - which each grew frenetically in the late 1990s thanks to their focus on Web design and e-commerce - are now struggling to avoid the same fate as their primarily dot-com clientele. Shares of Scient (which just merged with competitor iXL) recently were trading for 55 cents; Viant's were down to $1.64 and Razorfish's to 46 cents. These stocks cost 20 to 98 times as much a year earlier. MarchFirst fared even worse, filing for bankruptcy in April.

Meanwhile, potential clients are shifting their technology spending away from the sort of Web-integration projects Sapient had specialized in and back toward improving core business operations such as inventory management and supply-chain logistics. In response, Sapient has changed course again, touting its back-office roots and removing Net references from its marketing materials. "The internal message in the winter of 2000 was that the Web is dead," recalls one recently laid-off Sapient employee who still speaks highly of the company. "We're not a Web consulting firm, and no one should describe us that way."

Its pure-play rivals, lacking pre-Net credentials, weren't in a position to pull off that kind of metamorphosis. "They are the Internet," says Greenberg of companies like MarchFirst and Scient. "That's what they're all about, and that's kind of a solution looking for a problem." Sapient's client base has always been more diversified than that of its pure-play rivals: Even at the height of the Internet bubble, when Net-related projects brought in 40 percent of Sapient's overall revenues, dot-com clients accounted for less than 20 percent; its client list includes old-economy mainstays such as Lloyd's of London, Toyota, United Airlines and the U.S. Marine Corps.

While the pure-plays have receded, competition from the Big Five types, from tech powerhouses like IBM and, lately, from hardware giants such as Compaq, Hewlett-Packard and Sun (which are hoping to diversify their revenues by moving into e-services), is only going to grow. "A year ago, the consultants with more of a non-Net presence and revenue streams were seen as the dinosaurs," says Morningstar analyst David Kathman. "Now the opposite is true."

These bigger players have several advantages over a midsize company like Sapient. For one, they have better-known brands; in tough times, the old saying that nobody ever got fired for buying IBM is suddenly relevant again. They also can offer clients one-stop shops, with diversified portfolios of services, for all their consulting needs.

So how does a relatively small player like Sapient - which now has around 2,200 employees - plan to survive in a land of dinosaurs like IBM Global Services, which has 150,000, or Accenture, whose workforce totals 75,000?

The answer depends in part on the company's recently announced global distributed delivery strategy. For more than a year, Sapient has been ramping up operations in New Delhi. So far, it has hired about 250 employees there - mostly programmers - and it plans to relocate up to 100 senior engineers and project managers from the U.S. to India. Because labor and infrastructure are far cheaper in India, and because the company's presence there will allow it to work on a 24-hour cycle, Sapient hopes the move will make it faster and cheaper than the competition.

Sapient isn't the first to recognize these advantages. Other firms, notably Cognizant, have long been active in India, and Indian companies such as Wipro have been snagging business from American firms, particularly on commodity programming projects. (Wipro, in fact, is rumored to be eyeing Sapient as an acquisition; Greenberg wouldn't comment on those rumors except to say that as chief of a public company, he'll never say never.)

In handicapping Sapient's prospects, the founders are also quick to tout the "C" word. "You can be differentiated based on culture alone," says Moore. "Think about how you pick a lawyer or accountant. It's chemistry. Do you trust them? Do they care about you? Will they put your interests first?"

Every new employee, including those in India, spend their first week at Sapient being indoctrinated with the company's "core values" - which include things like openness, relationships, personal growth and client-focused delivery. The latter is codified in such mantras as "Client, Sapient, Team, Me." (The client is everything, I am nothing.)

The result, Moore claims, is an exceptionally results-oriented workforce: "I just had a client in Toronto say, 'Your team cares more about this than I do!'"

Sapient's emphasis on these values is evident in one of its "war rooms," a space awash in whiteboards where teams powwow with clients in a bonding and project-planning process called "fusion." Team members fine each other for breaking self-imposed ground rules such as: "Don't be late," "Don't say, 'To be honest ...'" and "Leave the dead horse alone." They also give each other awards and rate their personalities on a "communication subtypes" chart, where a person might be classified as, say, a "thinking socializer" or a "relating relator."

While this approach may be a bit touchy-feely for Wall Street, analysts are largely enthusiastic about Sapient's unique pricing model. While most consultants bill based on time and materials, Sapient charges a fixed amount to deliver a project by a fixed deadline. If it takes longer, Sapient eats the additional costs. "Fixed-price, fixed-time shifts the risk away from the client," says Barry Chubrik, an analyst for Credit Suisse First Boston. "It's a major competitive advantage."

Moore says the model has an added benefit. "More than 93 percent of our projects get done on time," he says. "Fixed-price, fixed-time is so important because it forces us to be good at what we do."

The company has one other ace up its sleeve: At the end of the second quarter it had more than $271 million in the bank, enough of a cash cushion to keep it chugging along even if the e-services business doesn't bounce back as predicted next year. "We will survive," says Greenberg. "The question is, are we going to be a leader and set the pace in this market?"

Looking five years into the future, Moore envisions Sapient as a multibillion-dollar company. But more important than mere revenues, in Moore's view, is preserving the idiosyncrasies that distinguish Sapient from its competition. "The idea of being just one of many," he says, "we find appalling."

Then again, being "one of many" is bad only when many are failing - like now.

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