Tom
Thought this was interesting. It hasn't any particular, immediate, applicability, but it is an interesting article on tech consulting and the growth of these firms (from theStreet.com):
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It's a fact that's hard to get around: Companies in the services business -- even in the high-tech arena -- grow largely by adding more people. That's why, for example, I've expressed doubt about the impending initial public offering of consulting giant KPMG Consulting, a tech-oriented firm masquerading as a technology company. It simply isn't likely to achieve any economies of scale as it grows.
Naturally, executives in the services business are vocal opponents of this point of view. Rudy Puryear, president and CEO of another publicly traded consultant, Lante (LNTE:Nasdaq - news - boards), tells me that he has the answer to how consulting firms can break out from growing simply as a function of the number of hours they bill. If you buy his spiel, perhaps shares of the relatively unknown Lante are a bargain.
If you think, as I do, that every publicly traded services firm hits a wall at some point (Think: EDS (EDS:NYSE - news - boards)), then Lante's billion-dollar valuation on projected 2000 revenue of $88 million simply can't stand. The company had revenue of $17 million in the first quarter, more than four times the figure in the year-earlier quarter. And its head count explains the feat. Employment has grown from 150 people when Puryear took the helm a year ago to 550 today.
So consider Puryear's line of argument, presented over breakfast Tuesday at an eatery in Silicon Valley. The Chicago-based CEO was in the area to appear at an industry conference. Puryear's a consulting-industry pro, having spent most of the 1990s building an information-technologies practice for Andersen Consulting, which is still private. So he's worth paying attention to.
His first way to create a better mouse-trapping service is simply to stay ahead of the curve. He says he focused Lante during the middle of last year on what has become the online industrial-exchange sector. A major client is ElastomerSolutions.com, a venture of rubber-industry units of DuPont, Dow, Bayer and others. Puryear thinks the next iteration of this phenomenon will be "M-to-M," or making connections between and among markets like ElastomerSolutions.com. And bully for Lante for grasping this fast-rising market before it arose.
But it's questionable as to how hot this phenomenon will be. Industry exchanges are for real. But as Goldman Sachs analyst Thomas Berquist pointed out here last week, many of them won't ever go public. Common sense suggests that some of the many exchanges butting heads with each other now simply will give up the fight once the furor dies down. Will Lante be left holding the bag?
Item No. 2 on Puryear's differentiation list is to "deliberately but selectively" take equity stakes in clients in lieu of or in addition to collecting certain fees. He says Lante aims to take no more than 8% of its fees in the form of stock. Considering that 40% of Lante's first-quarter revenue came from dot-com customers and the aforementioned assertion that many industry exchanges aren't likely to go public, this strategy isn't likely to bring in the extra money Puryear needs to break out of the services-industry trend.
The third strategy is to create a reusable asset, such as selling other industries on the technology platform Lante is erecting for the rubber industry. This, of course, is what companies like FreeMarkets (FMKT:Nasdaq - news - boards) are doing. That would make Lante look more like a software firm than a consultant.
In a similar vein, Purer suggests that Lante may be able to maneuver itself into a situation in which a client may want Lante to run its exchange, paying the service firm a portion of the transaction fees. This prospect sounds particularly problematic. Most companies want consultants to do their business and go away. Puryear bets that multicompany industry exchanges may be different.
For all these challenges, Lante is a smart outfit and a good example of a company that has transformed itself in the New Economy. The tech consultancy was created more than a decade ago by technology guru Mark Tebbe, one of the friendliest and best-informed guys in the tech world and a helpful hand to me over the years. After raising venture capital and getting his pal Michael Dell involved in the business, Tebbe decided to expand Lante dramatically, in part by bringing in Puryear.
Today, the company has established itself among what some call the Little Five, the Internet-oriented consulting firms that also include Scient (SCNT:Nasdaq - news - boards), Viant (VIAN:Nasdaq - news - boards), Proxicom (PXCM:Nasdaq - news - boards) and Sapient (SAPE:Nasdaq - news - boards). Those companies tend to trade for around 12 to 15 times their estimated forward sales. For its part, Lante is worth about 12.5 times the Street's 1999 forecasts.
But for a more sobering look at the future, consider the plight of EDS. After a nasty warning last week that it would miss its sales targets, EDS is worth about $19 billion, compared with Lante's valuation of $1 billion. EDS had first-quarter revenue of $4.5 billion, about 51 times what Lante will rake in all year. EDS is a slow grower -- and getting slower. But even industry stalwart Andersen Consulting grows about 20% annually.
In the old days, Lante always was profitable and analysts see it being so again in the second quarter of next year. If and when its growth rate begins to slow, watch for the difference in metrics between EDS and Lante (and the other e-consultants) to begin to shrink.
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Regards
WUWT |
