Skip to main content

Break out the Dramamine!

Many of the bull market's darlings have been on a nasty rollercoaster ride for the last six months, and a recent report suggests there are still a few more major chills and thrills to come for one group in particular -- e-business consultants.

As the economy has stumbled, so too has demand for professional services. According to a recent study by

Challenger, Gray & Christmas

, an outplacement firm that tracks job cuts, firms providing professional services (advertising and consulting, particularly) to Internet companies announced

2,652 job cuts

during January -- representing 21% of the total dot-com layoffs.

Now comes new information that suggests the situation could get even worse. A recent

Morgan Stanley Dean Witter

survey reports that, if forced to trim their information-technology budgets, many companies would cut spending on consulting as the first line of defense.

In a poll of

Fortune 500

Chief Information Officers, the investment bank discovered that 68% of the 150 respondents would reduce spending on consulting before slashing other IT-related expenditures. Going down the line, 44% of the CIOs would skimp on custom development, while 38% of them would hold back on wireless initiatives.

The scant good news in the report was that 74% of the CIOs said they had not yet reduced IT spending. But Wall Street has already priced a revenue decline into the sector and companies have begun to feel the sting.

Recent economic data has revealed that the labor market is loosening up, leaving employers less pressed for personnel. "With the labor market as tight as it was last year, there was a lot of pressure to buy consulting out of house," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

Scroll to Continue

TheStreet Recommends

. "Now, there's less work to be done and more capacity to do work in-house."

"This is a challenging time to be in the professional services business," said Christopher Lochhead, formerly the chief marketing officer at



and currently an independent consultant. "A year ago, if you were asked to imagine a quarter when









would issue profit warnings, you couldn't."

While Lochhead expects it to be a bumpy road for consultants over the next three to six months, he points out that in the end, as long as companies seek new technologies, they're going to need consultants to implement them.

But it's the short-term that has industry experts worried.

"We continue to believe that further layoffs will be required for many companies as demand remains stagnant and voluntary turnover remains low," wrote Michael Sherrick, a consulting industry analyst for Morgan Stanley, in a report released on Feb. 5. That day,



announced it was cutting more than 20% of its workforce, or 400 employees, in an effort to cut costs.

E-consultants, whose lifeblood flowed into scores of dot-com newcomers, are having the most problems, according to industry analysts. "Companies, like Razorfish,



, and



, that rose with the high tide of the Internet wave, are now getting sucked back down," said Tom Rodenhauser, founder and president of

Consulting Information Services

, a firm that follows the industry.

Amid the recent economic downturn, experts have observed a reversion to traditional consultants for traditional reasons. "They've got strong relationships, deep pockets and proven records," said Greg Gore, a senior research analyst at

W.R. Hambrecht


But Gore hasn't lost total faith in the newer, more nimble consulting companies: "There's definitely a place for the new companies." And, professionals are generally optimistic that the economy will pick up by the end of 2001. They know that when the total economy lifts, IT will go with it.

At that point, the fittest consulting companies will have made it. The companies that will survive, noted Gore, will be the ones with strong disciplines, good client relationships and sound methodologies.