Scient/iXL combination still faces tough going

The planned merger that two struggling Web consulting firms announced this week will help them offer more resources to their clients. But the deal won't necessarily ensure the financial recovery of Scient Corp. and iXL Enterprises Inc., as some users said the services offered by the combined company may still be out of reach in the current sluggish economy.

New York-based Scient Corp. and Atlanta-based iXL said Tuesday that they plan to merge under the Scient name in an all-stock transaction, which is expected to close by December. Both companies were among the crop of Internet consultancies that quickly attracted corporate users during the Internet boom but then saw their revenues plummet as the economy slowed.

For example, Scient reported this week that revenue in its first fiscal quarter, ended June 30, plunged from the year-earlier figure of US$91.4 million to just $11.3 million. Business also dropped off sharply for iXL, which disclosed second-quarter revenue of $32.7 million, down from $118.4 million during the same period a year ago.

Other Web consultancies, such as Cambridge, Mass.-based Sapient Corp. and New York-based Razorfish Inc., have been similarly plagued by declining revenue, losses and layoffs this year. Bert Ellis, iXL's chairman, said during a conference call this week that the consulting business suffers from "significant overcapacity" and that consolidation is needed to produce "a more efficient cost structure" at companies.

By combining their respective expertise in Web design and Web consulting, iXL and Scient could offer more comprehensive services to users, said Keith Landis, a senior vice president at Carlisle, Pa.-based Campus Door Inc. Scient provided business strategy and IT consulting plus support services to Campus Door, a student loan company, until the end of last year.

But Campus Door found that once it was up and running, it no longer needed Scient, particularly because the consulting firm's services were "not the cheapest," Landis said.

Santa Monica, Calif.-based online mail services company Stamps.com Inc. stopped using iXL's services at the end of last year because relying on a consultancy isn't cost-effective compared with bringing functions in-house, said Dave Dreyer, its director of marketing. He added that Stamps.com also no longer needed the "same level of expertise" to develop an interactive marketing strategy because its number of new customers has remained steady.

The experiences of Stamps.com and Campus Door indicate that overall demand for Web consulting is falling because of the slowdown in the economy and because many companies have already established their Internet strategies, said William Martorelli, an analyst at Hurwitz Group Inc. in Framingham, Mass.

As a result, many Web consulting firms have been struggling financially, Martorelli said. Though merging could improve the financial situation of the Scient/iXL combination by allowing them to eliminate overlapping jobs, Martorelli said, the company needs to "broaden its capabilities beyond Web implementation" projects in order to remain in business.

Tom Rodenhauser, an analyst at Consulting Information Services in Keene, N.H., said Scient and iXL users should make sure that the project teams assigned to them stay intact as the deal goes forward. "The distraction of merging causes firms to lose sight of clients for a while," he warned, adding that Scient and iXL will be "turning inward when everyone expects you to look outward."

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