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
, 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,
, 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:
), 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
, 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
, a venture of rubber-industry units of
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
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
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
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
. 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.
Being Clearer About Palm and 3Com
A sentence in Tuesday's column on 3Com's distribution to shareholders of its interest in Palm unfortunately confused plenty of readers. It is a confusing situation.
But let me try once more to make it clear: On July 11, the date of record for the Palm distribution, 3Com will create an "ex-dividend" class of shares with the symbol COMS V. Buyers of these shares will not automatically get Palm shares and that is why Sanford Bernstein analyst Paul Sagawa predicts they will be worth about 15.
Meantime, shares of 3Com, trading under the symbol COMS, will continue to reflect 3Com's interest in Palm. After the distribution on July 27, the COMS V shares will disappear, and only COMS will remain. And the value in 3Com now represented by the Palm stake in COMS shares will be transferred to shareholders in the form of Palm shares. That's why 3Com's share price will come down. A complete
primer on this complicated matter appears on 3Com's Web site.
Come see Adam face off with
resident technician, Gary B. Smith, in the first Real Money Conference, live in New York, June 28. The challenge: technical analysis vs. fundamental research.
"Because I research *facts* about companies, I almost never agree with Gary B., who practices a form of voo-doo called technical analysis. But when we get into the ring together, innocent bystanders generally enjoy themselves." --Adam Lashinsky
"Technical Analysis rules, especially when my adversary is the pitiful Adam Lashinsky. Don't believe me? Then come watch me square off with him." -- Gary B. Smith.
Surviving and Profiting in Treacherous Markets
June 28, 2000, Marriott World Trade Center, New York City
For information and registration, go to
Real Money Conferences .