When Wall Street analysts evaluate whether a publicly traded consulting company is a good investment, they look for something information technology shops would rather not see: fees that are high and going higher.
Most IT consultants charge between $100 and $150 per hour for systems implementation work. Yet a new breed of Internet-savvy service firms command much higher rates for the design and deployment of Web storefronts and applications.
"Most of the new business coming on board for [Web] service firms is priced at $225 to $250 per hour," says Moshe Katri, an analyst at SG Cowen Securities Corp. in New York. Like most Wall Street analysts, Katri considers not only billing rates but also the amount of revenue generated per consultant when evaluating such firms. He says hourly rates in the $200 range and annual revenue-per-consultant of at least $250,000 are good signs. "There's a mad rush to stake out the new Web territory, so most service vendors in this space can hand-pick their clients, and their rates reflect that," says Katri.
Stan Lepeak, an analyst at Meta Group Inc. in Stamford, Conn., says annual revenue rates of $300,000 per consultant - once found only at high-level management consulting firms - are now becoming common. "The scale is shifting to the right as rates across the board go up and as supply and demand gets further skewed," he says.
Examples of this trend include high-end Web site design and e-commerce firms Cysive Inc. [Nasdaq:CYSV] in Reston, Va., and Scient Corp. [Nasdaq: SCNT] in San Francisco. Each firm's stock price has climbed steadily on the basis of strong margins and high rates.
For its third quarter of last year, which ended Sept. 30, Cysive reported profits of $862,000 and revenue of $7.3 million - a 182% revenue increase from a year earlier. But it also impressed investors with an average hourly rate of $201 and $390,000 in revenue per consultant.
For its second fiscal quarter, which ended Sept. 30, Scient posted revenue of $31 million, an increase of 895% compared with the same period last year.
Scient lost $5.8 million for the quarter, but its stock fared well with analysts as a result of high professional services margins of 54% and revenue-per-consultant of $303,000 for the year. The company doesn't disclose average billing rates.
"Rates are going to go up a lot and, largely, [IT shops] are going to get screwed," says Lepeak. "In general, prices will go up and quality will stay level or go down because there just aren't enough people to go round."
High billing rates aren't the only basis for high stock valuations. Cognizant Technology Solutions Corp. [Nasdaq: CTSH] is widely recommended by analysts because it has a 50% profit margin even though its billing rates are low, says Chairman and CEO Kumar Mahadeva. More than 70% of the Teaneck, N.J., firm's employees are based in India, which helps keep costs low, he says.