Scient Lands Back on Earth

The retention issue

The underlying reality that took Scient and so many other e-consultancies down multiple notches is the ripple effect from the earlier correction last spring which took the wind out of the sails of so many dot-coms. It also explains why investors and financial analysts are so anxious to know how dependent companies like Scient are on dot-coms for revenue. Scient claims that only 10 percent of its revenue comes from dot-com pure plays, a claim that is subject to a certain amount of interpretation [see sidebar]. But, whether dot-coms make up 10 to 15 percent of Scient's annual revenue may be of less strategic significance than the firm's ability to hold on to top talent in the months ahead. 
Historically, the consultancy has enjoyed relatively low turnover rates in its consulting staff. "Our turnover last quarter was 15 percent," boasts Howe, "— low for the industry."

True enough, but a drop in stock price can quickly change things. For his part, Howe is quick to point out that a low stock price gives Scient even more leverage on the recruiting side, since it means new hires get options at a very attractive price.

But clearly it becomes a situation where one may be looking at the glass as half-full.

"Like momentum, high valuation is your friend when you're headed upward and a curse when you're headed down," explains Bain & Co. managing director John Donahoe. "The public ownership structure of many of these (e-consultancies) is going to make it very challenging for them to sustain successful businesses … and continue to retain the talent their growth demands," says Donahoe, who believes players like Scient have now all but lost their gravitational pull.

Stephen McClellan, financial analyst with Merrill Lynch in San Francisco, says he believes Scient's talent situation is particularly challenging because of the lofty heights where its stock once resided.
"Employees who have been around for awhile are suddenly looking at a pile of options under water," he explains.
Moreover, earlier efforts by Scient to remedy the situation now, seem futile. "Scient issued a lot of new stock options to senior people when the stock hit 40, off of a high of 130," he confides. "Suddenly, those options don't look so hot either, and they also dilute the stock for all shareholders. This makes it harder to hang on to people."

Greetings from the Golden Gate

For their part, the folks at Scient like to emphasize the fickle nature of stock price. "We can't control what the stock market does," says Chris Lochhead, chief marketing officer at Scient. "If we worried about our stock price, we would all be jumping off the Golden Gate Bridge several times a day."
McClellan says Scient and its e-consulting competitors are all, to some extent, victims of an "Empire Strikes Back" mentality.
"When companies like Scient first emerged," he says, "they really did steal some of the thunder from the established consulting giants, firms in the Big Five category. This was the era of, 'Damn the torpedoes, e-business at any cost!'
"Now, there is a shift away from front-end development and toward implementation and integration. This plays more to the strengths of firms like EDS, CSC, and Andersen."

It would be a mistake, however, he continues, to read too much into this transition. "It is really too early to tell whether this means that Scient and its peers will end up taking a back seat to the established firms."
One thing that Howe and all the analysts agree upon is the inevitable slowing of growth. "We have said all along that our growth over the last two years is not sustainable," says Howe. "Our long-term goal is simply to outperform the market."
Almost everyone predicts that there will be a shake-out resulting in consolidation, but most analysts also think there is plenty of room for the surviving e-consultancies to thrive. McClellan, in particular, still likes Scient. "If I had to pick two long-term viable players here, I would take Scient and Sapient," he says.

Sturtz likes Proxicom and Tanning Technologies, and is a bit more cautious about Scient. "Those two firms [Proxicom and Tanning] are not as dependent on dot-com revenue," he says. "Scient could still do very well — they are in a great business, but they have to make the difficult transition to serving the global 2000."
According to Howe, the dot-com shake-out hasn't really stopped the global 2000 from investing in e-business. "The large companies are really not driven by what the dot-coms do or don't do," he explains. As for Scient's future, Howe's bullish opinion has never wavered.
"I still think we're the leading e-business innovator. Our position in the high-value services segment continues to improve and increase, and we continue to push this forward and focus on speed," says Howe.

Consulting's many layers

But speed is no longer the calling card it once was. "We have left the early adopter phase in e-businesses," says McClellan. "The dynamics have shifted to big corporations doing e-business projects over longer periods of time. It is a more rational market, but a slower-growing one."
For his part, Howe believes Scient has already found its place in this rationale market. "We plan to be a global firm, but we don't need to be as big as Andersen Consulting," he says. "The difference is in value. We deploy smaller teams in the high-value territory of e-business."

Today, Scient claims to consist of approximately one thousand billable consultants. Going forward, analysts expect to be watching these numbers closely, since they provide clues about a consultancy's earnings potential. Business strategists, in particular, are the ones who typically pull in the most money. They are the stars of management strategy firms such as Booz-Allen & Hamilton, where Howe himself learned the trade.
Howe says that he is evaluating the makeup of Scient's consulting staff. "We might tip the balance a little more in favor of the strategy people," he says, "but technology is key, so you need the architects, and the design people are critical too, so I don't anticipate any big changes here."
These numbers, however, are even harder to interpret than financial statistics. "The reason for this," explains Sturtz, "is that they are not auditable. In other words, how do you define a strategist? Is it really a senior consultant who has years of business savvy, or are we just talking about a recent grad with the title of 'e-business strategist'?"
In its search for answers, Wall Street is seeking to better define consulting's many layers of talent, an act that can only offer upside to "strategy conscious" Scient, as well as to the consulting profession as a whole.

Sidebar: Inside Scient's Talent Portfolio*

• Vertical Experts: 10 to 15 percent

• Business Analysts and Strategists: 15 to 20 percent 

• Visual Design and Front-end Technology: 20 to 25 percent 

• Technologists, Engineers, and Architects: 35 to 45 percent

• About 5 percent are involved in helping clients manage their e-businesses once they're up and running

*Workforce composed of 1,000 billable consultants

Source: Scient Corp.