Change Of Focus

In the Web services arena, the word of the day is "refocus."

As the sector continues to shrink,and once-high-flying companies like marchFirst, Razorfish and Scient drop off the radar screen,e-services executives at CRN's 2001 I-Builder Roundtable in New York said they're reshaping their businesses to better serve existing clients and attract more brick-and-mortar customers.

To that end, they're targeting enterprise clients, developing technology and vertical-market specializations, and fine-tuning staff compensation and utilization models. But as these companies work to lock in steady revenue streams, they're also finding that many customers are reluctant to pull the trigger on e-business projects and part with their technology dollars, given the volatile economic climate.

"At the same time you're trying to evolve your service offering and organizational structure, you're also struggling to generate cash from your business and, if you're public, keep your share price up. Those three things are immensely difficult to juggle at one time," said Kelly Rodriques, founder and CEO of Novo, a San Francisco-based e-solutions firm.

E-business solution providers eye repeat customers and long-term relationships amid slow growth environment.

Participating in the roundtable along with Rodriques were Edward Bell, president and CEO of CrossTier.com, Fairfax, Va.; David Fry, founder and CEO of Fry Multimedia, Andover, Mich.; Kevin Rowe, president for North America at Agency.com, New York; and Martin Wright, co-founder and CEO of Emerald Solutions, Portland, Ore.

Most of the executives at the roundtable predicted that 2001 would be a slow or no growth year, with most of their business coming from repeat customers. Wright said he expects 90 percent of Emerald Solutions' business to come from existing clients.

"Our focus right now is winning large projects for large clients and making sure we do whatever it takes to deliver on those projects so we can win repeat business from them," Wright said. "It's kind of a hunker-down mentality and a time to [develop] good, long-term relationships with clients."

"Our company experienced growth last year, and this year is certainly a challenge,but not a disaster," Fry Multimedia's Fry said. "In our business, everyone has to be focused on cash right now," he added.

That scenario pales in comparison to the boom Web services firms experienced over the past few years, when they had to scramble to lure talented staff that could handle the flood of e-business projects emerging from dot-com start-ups and traditional companies.

"What we're doing differently now is not getting out in front of ourselves [in the number of projects] like we did last year," said CrossTier.com's Bell. "The only thing we needed to worry about [then] was hiring people. Well, now, hiring is not the issue. It's making sure you have the sustainable relationships with your customers."

But the new focus is presenting several challenges, executives said. For one, e-services providers are finding that they must invest more time and resources up front for planning and strategy before landing a customer's business.

"Today, we're doing a lot more strategy work as a front end to any major production work," Agency.com's Rowe said.

"Over 50 percent of the work is really before you start banging out code," Bell said.

And all of that strategy work isn't necessarily yielding immediate business. I-Builder executives said that many customers are opting to put projects on hold.

"The sales cycles have gone from days to months," Rowe said.

Some customers are deferring projects one or two quarters, according to Wright. "When it actually comes to parting with the money, they're not doing that. They're delaying it," he said. In today's marketplace, the cost of winning new business is extremely high, Wright added.

What's more, the dot-com fallout and slow economy have pushed customers to seek more assurances when choosing a Web services partner. Now they're asking to see a proven track record with established clients plus information about the solution provider's financial profile, executives said.

"It's very hard to get [deals] closed because of the economic situation," Fry said. "Potential clients are much more concerned about results and the experience and investment background of the [Web services] company."

With customers becoming more selective, Web services providers are tuning up their business models, starting with their client base. Dot-coms are out, and established companies are in, roundtable participants said.

Agency.com, despite focusing on large companies from the get-go, already has pruned its dot-com exposure, Rowe said.

"We started the business under the premise that the real winners in the long run were going to be big companies with customers, products and brands," he said. "Part of our charter from day one was to keep the dot-com revenue below 10 percent,if it even ever got that high. I think, at its peak, it was about 6 percent. Today, it runs at 2 percent."

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I-Builder executives said they also are changing their sales pitch. Instead of approaching clients with a message of building an e-business to generate new sources of revenue, Web services firms are now emphasizing integration of information systems for cost efficiency.

"What we're doing is going to every single client and saying, 'How can we walk in and put in front of them a significant cost savings?' Over the last two quarters, [that approach] has kept our growth and our revenue rolling in from our existing clients," Rodriques said. "So we've shifted gears dramatically to cost-savings prospecting within our existing client base."

Fry said that approach can begin with an assessment of a customer's current e-business infrastructure, which in many cases is an amalgam of systems accrued through mergers and acquisitions and a piecemeal Internet strategy.

"It's a good time to take a hard look at ways for companies to better use resources to improve efficiency," he said. "That's certainly a compelling argument right now, because generally most of these businesses rushed out [to set up a Web presence] without any real forethought.

"We've got clients that have 80 or 90 billing systems. And some aren't even sure how many different systems they have," Fry said.

Wright agreed that more and more e-business projects are centered on systems integration. "People still haven't gotten the integration message," he said. "So we've focused our R&D and investments around things like WebMethods and integration projects that take ATG [Art Technology Group], Blue Martini or other e-commerce platforms and how we can integrate those into back-end systems."

With the need to move their technology focus to the middle and back end,and their sales focus from income growth to cost savings,Web services firms are evolving into a hybrid solution provider, a "consultant/integrator" that can supply both strategy and IT expertise, executives said, noting that many companies still lack e-business direction.

"One of the things the dot-com companies did that I think was positive was apply some pressure to the [brick-and-mortar] companies that didn't have the majority of their revenue driven off the Web. So they felt a need to get moving and to do something [on the Internet]," Rowe said. "Right now, I think we're caught in a world where a lot of [companies] were forced to do something [on the Web] and did it without a plan. And so a lot of these CEOs and their companies are saying, 'OK, I launched a Web site. Now what the heck am I getting out of it?' "

And customers' sharper focus on results is effecting internal changes at e-services providers. Senior-level technical personnel and consultants, for example, are becoming more involved in courting prospective clients and serving existing customers, executives said. Compensation schemes also are being tied more closely to employees' ability to help customers meet business objectives.

"We've won business through our commitment to delivering on certain business goals and connecting that to our [employee] compensation model," Novo's Rodriques said. "Part of our comp model connects [the employee's] comp into the success of the business goals."

Increasingly, the ability to deliver for clients is requiring more specialized expertise, roundtable participants said. As a result, Web services firms are beefing up their knowledge of key vertical markets,such as retailing and financial services,or products in burgeoning technology segments such as supply chain integration, data management and CRM. Some e-solution providers are trying to do both, executives said.

Perhaps CrossTier.com best reflects the Internet services sector's new emphasis on having a well-defined business plan. Bell said the company, which had $10 million in revenue last year, remains primarily an integration and back-end application services firm, limiting its niche to solutions based on Microsoft's platform.

While CrossTier.com might not offer the breadth of services and products that other e-services firms do, it brings deep experience in a leading IT platform and has a strong grasp of what it can actually deliver to customers, he said.

"We go in to a client or prospect and say, 'This is what we do,' " Bell said. "If they happen to need that, then it's a very compelling case. If they don't, it's a short conversation."

And Bell expects CrossTier.com to prosper in that niche this year, projecting 50 percent revenue growth. "We completely missed the dot-com boom," he said. "But by the end of 2000, we were pretty happy we did."

Russell Redman contributed to this story.