Over the last few weeks, we’ve looked at lessons to be learned from failed dot coms and warning signs to watch for when doing business with or working for a dot-com company. Looking deeper into the ecosystems surrounding the dot coms, I’ve seen another trend emerging: the effect on the consulting firms that drive technology development for dot coms. In fact, there are market signals that the end of the entire systems consulting era may be at hand. The recent announcements are somewhat alarming:
- MarchFirst laid off 1,000 of their 10,000-person workforce. Rumors persist that another 20 percent of the remaining employees may soon be gone.
- Scient laid off 460 of 1,100 employees and closed offices in Austin, TX, and Silicon Valley.
- Lante expects to cut 120 administrative and consulting jobs, or 19 percent of the total employees, reducing its total number of workers to 500. This reduction includes the closure of its Singapore and Delhi offices.
- Xpedior Inc. called for the elimination of 380 jobs, or about 32 percent of its workforce.
- Local “boutique” Microsoft Solution Providers are either being acquired because they can’t continue generating enough revenue to sustain their operations or are going out of business for lack of work.
How the dot-com revolution will ultimately tank traditional consulting businesses
As the dot coms got fat, dumb, and happy with wheelbarrows full of public money, they tried to grow at an accelerated rate to justify their market capitalization. This meant hiring employees at any cost and buying business if necessary, since the only metrics that the market valued were the number of customers (which at some point was supposed to translate into revenue) and the number of employees (which, in theory, meant the ability to generate unique intellectual property that would drive the long-term value of the company).
Employees seeking fame and fortune (in the form of stock options and higher salaries) left not only large corporations but also the traditional IT consulting firms. The dot coms were happy to pay with the market’s cash and the company options at rates well above the market average. As the shakeout becomes more pronounced—i.e., the market becomes more rational—former dot-com employees trying to find jobs have learned a difficult lesson in supply and demand.
The corporations that lost employees to the dot coms have either outsourced their operations and eliminated positions, or they’ve rebuilt their internal capabilities and tried to eliminate their reliance on outside consulting firms. As employees try to get back on with their old companies, the positions no longer exist or, if they do, the employees must be willing to take a drastic cut in pay to get their compensation back in line with the market. Consulting firms have been hit by the triple whammy of losing their employees to the dot coms, losing their consulting contracts with old-economy businesses (for lack of employees to do the work), and the collapse of the dot-com market as a supplier of technology consulting.
Other factors in the demise of traditional consulting
The gap between product functionality and the business user’s ability to consume it continues to grow. Businesses need to justify the investment to move from an office product with 500 features to the next version of the product with 600 features. Operating systems now offer more features and functions than most companies will use during the life of the product.
As a result, businesses are becoming much more focused on making processes simpler, rather than adding or upgrading software and hardware products. Now that companies can afford to hire top-dollar consultants laid off from dot coms for low to mid-dollar salaries, many of these companies will choose to do the necessary process engineering themselves with the infrastructure they already have in place. Since most traditional consulting companies aren’t equipped to do anything except install more products on more workstations, they don’t have a viable product to sell to these companies.
Traditional consulting and training companies have also become victims of their own successes. Over the last five years, companies have made millions of dollars training certified product specialists. With the dot-com shakeout in full swing, there are hundreds of unemployed, certified product specialists in the market. Microsoft Solution Providers are a prime example of companies that have become victims of their own success in training MCSEs and MCSDs. The skill sets are so easy to find today, companies are choosing to hire their own employees rather than employ consultants with those skills.
Finally, the slowdown of the domestic economy will delay or cancel projects that had previously been approved. The overall demand for traditional consulting services will be significantly reduced. It’s likely that the severity of this slowdown will be significantly larger than anyone has predicted. Individuals or companies whose livelihood is based on by-the-hour consulting engagements will find their standard of living significantly reduced over the next 12 months.
Is there an upside?
Despite these dark predictions, there is a light at the end of the tunnel. Companies and individuals who concentrate on taking existing products and services and focusing them on creating more efficient processes have a chance to be quite successful.
The market is crying out for a way to get off the Internet hype bandwagon and the product upgrade treadmill. Focusing your company on implementation of business processes that solve problems rather than implementing new technology or products “just because they’re new” will go a long way toward ensuring your survival.
Have you had to change consultancies because the one you were using went out of business? Are you more reluctant to use consultants? E-mail us or start a discussion below.