Scient's Near-Death Experience

The leaders of Scient Corp. built a thriving, fast-growing consulting firm that owed its very life to the Internet economy. Then the dotcoms imploded -- and many of Scient's customers folded. Here's how the firm is preparing for the next economy.

October 26, 2000 -- "All right, me buckos!" a pirate has seized the stage. It is Joe Galuszka, billed as the nation's only chief morale officer at a publicly traded company -- and clad tonight in some seriously swashbuckling finery. Eye patched, parrot affixed to his shoulder, he cries out the company cheer -- and the assembled faithful gleefully join in, shaking the gothic finials that adorn the ballroom atop San Francisco's Merchants Exchange Building.

This is a Halloween party, and Scient Corp. parties well. Its troops have special reason for merriment this evening: Amid the carnage littering the dotcom landscape, Scient's quarterly numbers, announced earlier in the week, were strong. The Internet consulting company's stock is in the tank, but its financials are, as these folks never, ever tire of repeating, "On fire!" (Also acceptable: "Awesome!")

"Does anyone know what our revenue was this quarter?" an executive demands of the crowd. A shout comes back: "$102 million!" That's more than double the sales of a year earlier. "What about earnings per share?" The revelers have read the press release: "Seven cents!" Awesome! The company is making money. Not truckloads of money, for sure, but more than most of its e-peers.

Tonight is about much more than self-congratulation, though. This is a party with a message, one that soon will prove unintentionally prescient. And here comes the message now -- just beyond Galuszka, 44, who is dancing his way through the crowd, parrot still shouldered, an umbrella splayed. It is the Scient coffin, weaving an unsteady conga path. A hooded grim reaper, unsteady himself but scythe at the ready, serves as pallbearer. Variously costumed acolytes carouse, New Orleans-style, behind.

Yes, it's a funeral parade. And the coffin is a metaphor. Inside it, well, that's part of the metaphor. You have to use your imagination. Inside, the new economy rests in peace.

That is to say, the new economy is ... dead.

December 7, 2000, the Wall Street Journal

"Scient Corp., amid an industrywide downturn in the market for Internet professional services and mounting competition from traditional consulting firms, said it will lay off 25% of its work force and warned of a loss for its fiscal third quarter."

Those Were the Days

What happens when half of your market vaporizes? When, overnight, the rules that defined how you play the game no longer seem relevant? When you can't give away products that clients begged for yesterday? When, without warning, the essence of your value proposition collapses?

You rethink everything. Quickly.

When the dotcoms tumbled to Earth last spring -- when their revenue models imploded and their stocks collapsed and their money plain ran out -- so did the upstart consultants that had both fed and fed off the online boom. The previous two years had been a wondrous blip, and that blip was now history. Something fundamental had altered the economics of the Internet.

What has changed is this: Internet startups no longer make the rules. Power has shifted, perhaps inevitably, back to the big guys. And those big guys, the old-line, brick-and-mortar giants, aren't panicking as they had before. They still want in on the Internet market -- but not if such a move means paying a fortune for some hastily assembled brochureware or some creaky online outlet store. They want something bigger than that, something thoroughly transformational -- and they don't mind haggling about how much it should cost. Scient and its consulting companions can't make money doing business as they had before.

Ah, before. Before had been good. The Internet consultants had appeared in the waning years of the millennium with New Age monikers such as Organic, Viant, and Zefer. They brought brains and technosavvy to the party. But they also brought buzz and mystery and edge, especially compared with old-line shops such as EDS or PricewaterhouseCoopers. They seemed suited to the Internet, which back then was about nothing if not buzz and mystery and edge. These young strategists, systems engineers, and designers knew how to build hot Web sites -- and knew how to build them fast. And that, clients convinced themselves, was what they needed.

"The Net thing was exploding, and those new consultants traded on fear," says Tom Rodenhauser, whose Inside Consulting newsletter tracks the industry. They capitalized on a company's sense of inadequacy in the face of a major technology dislocation. "Their selling point, basically, was 'YouSuck.com,' and they had presentations that would scare the bejesus out of clients. They said, 'It doesn't matter what industry you're in or where you're located -- we can take you online.' And clients said, 'Wow, they get it.' "

Scient soared among the highest. Founded in late 1997, it had thrived on an intriguing tension. At the top, its executives were buttoned-down consulting veterans who had come from the likes of Andersen Consulting, Booz Allen & Hamilton, EDS, and other top shops -- the sort of folks who could saunter comfortably into the boardrooms of AT&T or Chase Manhattan. Robert Howe, Scient's chairman and CEO, had built IBM Global Services into a consulting power and then had led Big Blue's financial-services business.

Below them, though, Scient was filled, like other Internet consultancies, with hotshot kids lured from top engineering and MBA programs. While many of them really could keep up with Silicon Valley cool, others merely carried themselves with a swagger that was meant to impress. As for Scient's marketing machine, it promised clients "the courage to be legendary," with results rooted both in bleeding-edge technology and in speed. The kids worked nonstop -- because on the Internet that was the only way to survive.

Scient bound its two spheres together with no small amount of hype -- but also with a strong, shared sense of mission. In the firm's early days, Howe and his lieutenants sold new employees on the vision of a firm that itself would become "legendary." They proposed six core values: innovation, growth, excellence, community, spirit, and urgency. And they invested in systems and programs that translated those core values into a certain organizational zing.

The package sold well. Scient muscled its way to $156 million in revenue in the fiscal year ended March 31, 2000, seven times the amount of business that it did in its first full year. By then it had expanded to 1,180 employees, and its consultants were bringing in an average revenue of $367,000 each -- a figure that put the firm at the top end of the trade. It claimed to have turned away 100 clients in a single quarter. Its stock price hit $133, which briefly put the company's value at about 30 times anticipated annual revenue; historically, consulting firms have been priced at between one and two times their annual revenue.

And then, of course, the party stopped.

It didn't stop precisely on April 14, the day that the NASDAQ famously melted down. But by May, across the consulting industry, engagements from startups began drying up: Dotcoms weren't getting new funding. Gigs with larger companies slowed too: As the startups folded, big companies had less to fear. "CEOs asked, 'Why am I spending so much money and just seeing red ink?' " says Matthew Berkeley, a cofounder of Zefer. The need for urgency had lost, well, its urgency.

By August, the layoffs and earnings shocks hit -- first at iXL, then at Viant, Razorfish, and Marchfirst Inc. Scient took some pride in having avoided the early bloodshed -- but still, its stock price plummeted to less than $10 a share. Dotcom startups, which accounted for half of its 1999 engagements, nearly disappeared from its revenue mix. What's more, a few of the dotcoms that it had helped build -- notably Living.com, a furniture e-tailer; Miadora.com, an online jeweler; and Verde Media, an environmental-news portal -- folded. Others such as MVP.com and PlanetRx.com were wobbling.

And on December 6, Scient itself finally buckled. Its revenue, it admitted, would drop by 28% to about $80 million in the quarter; bigger clients, it seemed, had been slow to pick up the dotcom slack. The company would shut down its Silicon Valley and Austin, Texas offices. More painful, it would lay off 460 employees. "This," said Christopher Lochhead, Scient's resident futurist and, normally, its most exuberant public face, "is the worst day in our history."

Scient's executives say that they had seen all of this coming, more or less. Granted, they didn't expect the slaughter to start as soon -- or as abruptly -- as it did. But toward the end of 1999, they had begun noticing subtle changes in their business. As at other consulting companies, Scient's mix of clients was shifting. Clients' demands were shifting too. The clients didn't always know it themselves, but they were headed toward a very different realization of Internet technology.

A year earlier, the Internet had been a land-grab play. Success was about getting a Web site up quickly and then about winning lots of eyeballs. Revenue -- well, that would come later. "We didn't deliberately build businesses that weren't profitable," says Howe, 56. "But profits weren't where clients were focused. It's very different today. Now it's about how you integrate a virtual and a physical business. Today, technology is the transforming agent rather than the business itself."

Nancy Dickenson was among the first at Scient to sense the market swing. A one-time professional jazz singer who had landed in Apple Computer's user-interface design department, Dickenson now heads the group within Scient that specializes in "customer experience." She thinks about how people actually use the Web, how they negotiate and interact with clients' sites. She sees what happens on the front lines.

"We had built all those dotcoms," Dickenson says. "And now we had these big enterprise companies coming to us, saying, 'Teach us how we can make our companies run like the dotcoms.' They weren't talking about just slapping together a Web site to sell stuff. They saw that the dotcoms were using the Internet as a way to run their companies. And they thought, 'What if we could stay as big and powerful as we are but change how we actually behave? Can we use the Internet not just as a way of going to market -- but as a whole new way of doing business?' " Exhibit A, the new prize client, was Hotwire, which signed on with Scient in December 1999. Hotwire was formed by Texas Pacific Group, an old-line investment group with stakes in companies whose revenues totaled $50 billion. Bankrolled to the tune of $75 million, Hotwire signed up six major airlines to create a business that would challenge priceline.com Inc. in selling deep-discounted air tickets to leisure travelers. The idea was to offer consumers fixed prices in place of priceline.com's murky bidding process and to give airlines a level playing field in unloading excess inventory.

This was a giant undertaking. "We weren't just building a sucky Web site," says Karl Peterson, 30, Hotwire's CEO. The project, in fact, would take 20 Scient consultants nearly nine months to complete. They had to build a site that could negotiate and complete transactions linked to the existing reservation-and-ticketing systems of each airline partner. And the consultants had to make the consumer experience nearly flawless, because Hotwire inevitably would attract both heavy traffic and media scrutiny from the start.

That was the kicker. Hotwire wanted to get to market quickly, because every week that it lingered, after all, was one more week for priceline.com to win new customers. But speed wasn't the only priority, or even the most important one. "We were entering a market that was much more skeptical, where consumers were tired of business models that didn't create value," Peterson says. "We had an opportunity. The old rule on the Internet was, He who gets there first, wins. We think that's total horseshit. The new rule is, The first person there who has it right gets customer loyalty."

Of Water, Tidal Pools, and Land

In Scient's Chicago office, Gerry Komlofske and John Rheinfrank had been deputized by Howe to make high-level sense of the new strategic realities. They were the company's big-think guys. Komlofske, 43, intense and gregarious, was an economist and engineer by training who had run Booz Allen's business in North Asia, and then had run its computers-and-electronics practice. Rheinfrank, 56, quieter and professorial, is in fact a professor in the technology and e-commerce program at Northwestern University's Kellogg Graduate School of Management.

That was in July, well before Scient took its tumble. Komlofske and Rheinfrank looked out at the marketplace, and initially they struggled to find a useful conceptual framework. "We were trying to explain the idea of a new world from an environment that we didn't understand, because it was moving so fast," says Komlofske. "I was dying to explain it all, and, looking back, it was like being a physicist in the 1950s -- before they had figured out quantum theory."

Lacking a theory, the two settled first on a metaphor: In evolutionary terms, they argued, the old economy was "water," capable of sustaining life, but only in limited forms -- with many of those forms being slow and inflexible. The new economy was a "tidal pool," a small but seething laboratory of change, Rheinfrank says, producing "a variety of corporate life-forms that just exploded in our faces." In that environment, operating under new rules, newcomers held an advantage over established enterprises.

But the tidal pool -- the new economy -- was ephemeral, a transitory state leading to something ... bigger. It seemed important at the time, because business experienced rapid, loud, dislocating change. But really, Komlofske and Rheinfrank argued, the new economy was merely an evolutionary stepping-stone. Like a tidal pool, it exhibited some characteristics of what came before -- but also some of the more profound phenomena that would follow.

One of which would, of course, be "land." Komlofske and Rheinfrank didn't yet know what to call that new state, but they were starting to get a handle on what it would look like. Unlimited telecommunications bandwidth and connectivity, advanced technological applications, and relative global stability, among other trends, would combine to produce incredibly efficient capital markets. Capital would flow freely to opportunities globally, and arbitrage opportunities would nearly disappear. Companies' margins of error would narrow precipitously: Mistakes, and poor management, would be revealed by markets almost instantly.

Global free trade, Komlofske and Rheinfrank proposed, would speed the blurring of corporate boundaries. Distinctions between subsidiaries and partners would diminish -- and less rigidly defined enterprises would extend their reach to the customers of their allies. Business, Rheinfrank says, would have to consider new organizational forms in order to "make this new, porous thing as mobile as you could make the old, traditional companies."

The work environment would change dramatically, moving even further toward less-controlled employees and free agents working flexibly in dispersed networks. Education would become both cheaper and more available, enabling both a truly global workforce as well as a homogenization of cultures.

Finally, a new sort of economic unit would emerge, based not on countries but on companies. National borders still would exist, but the new, extended enterprise would link regions around the world to focus on industry specializations -- a sort of transglobal value chain. Regional strengths would be tied closely to organizational strengths.

Komlofske and Rheinfrank knew they were on a roll, so they took their analysis a step further. If they were right about this new economic environment, they asked, what sorts of business organizations would succeed? Who would prove the winners?

The winners, the two decided, would be businesses that continually and accurately predicted fleeting market opportunities, and then mobilized their capabilities to take advantage of those opportunities. This wasn't about siting new factories or building specific brands; given hyperefficient capital markets, such decisions could no longer be the basis for competitive advantage. Rather, for a company to have an edge, it would have be able to target a range of possibilities for how technologies would evolve and for how consumers and markets would behave. Since an optimal strategy would prove elusive in such a hyperdynamic environment, executives would have to prepare for multiple possibilities -- aiming, say, for an arc of 30 degrees within a circle of 360 degrees. Successful organizations not only would be prescient enough to identify which 30-degree arc to target but also would be flexible enough to maneuver quickly to counter the shifts within that arc.

Winners would win because they had the closest relationships with their customers. Since pricing would become transparent and structural advantages would be arbitraged away, competitive advantage would stem more and more from identifying and satisfying customer needs. That meant that over the next decade, "the whole idea of the competitive landscape would change considerably," says Komlofske. As customer relationships became paramount, any company that enjoyed access to your customers would become a potential competitor. Banks and supermarkets could, conceivably, compete for intimacy with the same consumers.

Since operational inefficiencies would be identified and punished immediately, enterprises that didn't "optimally digitize" their operations and processes would suffer. Moreover, real-time management would become essential: Systems that allowed continuous sensing and decision making, as well as capacity mobilization, would replace quarterly reporting and periodic strategy assessments. And companies would have to find ways to manage dispersed networks of people and skills, allowing those networks to interact seamlessly across the globe.

All of this would favor large organizations. "This is bone-crunchingly hard work," says Komlofske. Such work requires both capital and scale. Adds Rheinfrank: "This isn't two guys and their dogs sitting in their Palo Alto garage and thinking of a great idea anymore." As the economy moved onto "land," big companies would reemerge as the guys who made the rules -- and as the guys who won.

As Komlofske and Rheinfrank refined their still half-baked vision, Lochhead set out to sell it. At 32, Lochhead is a shrewd veteran of four technology startups. Loud, brash, and funny, head shaved clean, prone to Prada and Gucci, Lochhead is a human exclamation point, a jarring foil to the staid style of Scient's other top executives. "Sometimes I'm amazed that I haven't been fired yet," he says half-jokingly. He embodies Scient's edge, its cool.

Much of the language that permeates Scient is, for better or worse, Lochhead's doing. "When we were just starting, something amazing would happen, and I would run around and scream, 'We're on fire! Yeah, we're on fire! This is fucking great!' And that expression just totally stuck." So it was that Lochhead identified the phrase that would describe whatever the hell it was that Komlofske and Rheinfrank were ginning up in Chicago. It wasn't fancy. It wasn't especially creative. It simply answered the question "What's next after the new economy?"

The next economy.

Welcome to the Next Economy

Spend enough time around Scient these days, and you will tire of the expression "the next economy." It appears in every employee communication, in every speech, on every T-shirt, seemingly in every other sentence out of people's mouths. Lochhead has presented his next-economy spiel at dozens of technology gatherings and at dozens of meetings of customers and employees. Typically, a grim reaper accompanies him on these gigs. "The new economy is dead!" Lochhead is likely to intone. "Long live the next economy!"

Even had there been no intellectual capital behind the sloganeering, it would have been a brilliant gambit. After all, the e-consulting space was being thrashed. Scient itself was in trouble. It had to defend the viability of its business. It needed an edge, a flashy headline that folks would remember. The truth is, in consulting, half the game is convincing potential clients that you know something that other people don't. And by last autumn, everyone else in the consulting universe had pretty much figured out the new reality. Even while Komlofske and Rheinfrank's interpretation was especially compelling, Scient's rivals were resetting their strategies -- and they were all charting similar courses. The company knew that its competition was going to get tougher.

Like Scient, most other Internet consultancies had lightened up on engagements with dotcom startups, and instead were furiously pursuing projects with big-enterprise clients. Sapient Corp., the largest consulting company in the field, derived just 9% of its revenue from startups in its third quarter 2000, down from 16% three months earlier. Meanwhile, its average engagement in 2000 was worth $7 million, up from $4 million a year earlier.

The consultants recognized, too, that their success depended on more than simply bolting a flashy Web site to an existing business. The technology itself was too quickly becoming a commodity to serve as a competitive weapon. Rather, consultants had to move upstream. The services that yielded high value -- and higher profits -- increasingly focused on helping clients set business strategy and, importantly, on integrating new technologies with existing systems and processes. "Clients are much more deliberate," says Paul Barth, chief technology officer at iXL. "They want to make sure that what they do on the Web works well with what they do in their call centers. They're much more informed now. They've thought about these issues, and they have a point of view."

And there was one more thing: In the past year, the big guys had joined the fray. Andersen Consulting, Deloitte Consulting, and other companies like them -- not to mention Booz Allen, EDS, and IBM -- were targeting precisely the same big projects at the same big clients that Scient and its e-brethren were.

Suddenly, consulting companies were building huge e-business practices and were hiring aggressively to staff engagements. McKinsey officials say that their company took on about 1,000 projects related to e-commerce in 2000, representing close to 40% of the company's overall activity. "It's very difficult now to think about a client's business strategy without looking at what its online strategy is," says Ron Farmer, a partner who coleads McKinsey's e-commerce practice. By year-end, the company expected to open 22 "accelerators" meant to foster new online businesses.

The result of all this: Pricing was coming under pressure. By the fall, rumors spread that some of the Big Five, and a few of the newer e-consultants that had been in distress, were discounting rates to win bids. Michael Sherrick, an analyst at Morgan Stanley Dean Witter & Co., says that he expects prices among Scient's peers to be, at best, flat over the next year.

So here's the upshot: Scient must reinvent itself. It has developed a persuasive vision of what the future will bring. It has created a marketing schtick to translate that vision into something that clients can easily process. Now it must equip itself to compete in the world that it proposes. It must transform itself in the way that it promises to transform others. It must deliver the goods.

Soon Scient is expected to announce a new suite of consulting products intended to help its clients navigate the next economy. It still will offer tech-heavy services around digital-business design, drawing on its considerable dotcom-building experience. Behind those designs, though, Scient will build the infrastructure it takes to support rapid, flexible decision making. So-called "central guidance systems" will combine clients' existing systems and new online capabilities to incorporate e-business into everything a company does.

Scient will dedicate more resources to "big-S" strategy consulting of the sort normally associated with McKinsey or with Bain & Co. "We have a better picture of the next 'land' than anyone else has," Komlofske argues -- and so Scient's consultants are better prepared to help clients get there. Scient wants to help companies assess the speed and direction of technological change, and to figure out how customers will behave -- how they'll live, work, and play. It wants to guide clients in creating business visions and architectures to compete in the next economy.

Finally, since organizational dynamics will be altered dramatically, Scient expects to consult on "enterprise mobilization" -- the soft stuff around talent and organizational development. If success is all about the ability to continue to create and to self-transform, businesses will have to rethink the ways that employees work and interact. Clients will have to win commitment in new ways, and they will have to design strategies for coping organizationally with constant change.

In itself, that's not such a startling strategy for Scient. Bigger projects yield more revenue for consultants -- and one way to win big projects is to offer clients everything from high-level strategy to nuts-and-bolts systems integration. As much as that, having a hand in setting strategy allows a consultant some say in deciding which implementation services a client will need down the road. The prospect of such soup-to-nuts service is sort of the Holy Grail of consulting -- and historically, it's been difficult to pull off.

Mostly, though, Scient wants to position itself at the point of maximum business impact. If the new economy was about using technology to transform departments or functions within a company, Scient argues, the next economy requires transforming the entire enterprise. Ultimately, as technology creates value at ever-higher levels, the stakes will grow even higher.

To play at that level, Scient first must change its talent mix. Today, about half of its consultants are pure technologists, focused on digital design and implementation. Within the next few months, Scient expects to hire 40 traditional strategists to bolster its high-level architecture services. It also must attract consultants schooled in human resources and in organizational design to fuel its new offering in enterprise mobilization. And it has to reeducate existing employees: "We need people who are pathological learners," Lochhead says. "People who have no fear."

Scient also must refine its knowledge-management systems. "The Internet is going to commoditize technology faster than anything we've ever seen before," says Scott Frisbie, Scient's chief technology officer. That means that any technological innovation that Scient's engineers come up with will retain value as a custom offering for a mere few months. After that, it becomes infrastructure for new innovations. An effective knowledge-management system has to be able to package innovations for rapid reuse across the company.

Finally, Scient must continually produce innovations that keep it at the technology vanguard. It does that through 20 "neighborhoods" that operate outside the formal organizational matrix, each one focused on a specific technology domain such as Internet security, database management, or application architecture. Employees from all parts of the company participate voluntarily in those neighborhoods, typically in addition to their day jobs working on client projects. The groups are more or less self-managed and create ideas and solutions either proactively or in response to specific client requirements.

For example, Scient has no formal consulting offering in wireless technologies -- a discipline in which other firms have invested heavily. But Scient does have several hundred people around the world collaborating in its wireless-technology neighborhood. Small, nimble teams within that neighborhood have rapidly built applications for, among other things, airline information, purchasing management, and mobile consumer banking. For many of the young participants, it's a jazzing experience. "This is the startup that we have going on the side," says Kyle Forster, the 23-year-old strategist who helps steer the neighborhood. "We're young, we have energy, and we want to have an impact."

The Death (and Life) of the Internet Consultant

On the morning of December 7, Scient's top executives gathered at their San Francisco headquarters to confront the future. The company was still in shock, and many of their employees felt blindsided. Until a few weeks before, after all, business had seemed true to the accustomed trajectory. There had been few hints, within the firm or on Wall Street, of any fundamental weakness. Scient had felt confident that it was adapting effectively to the new reality.

Instead, says Lochhead, "The next economy has hit the brakes. We're looking at a choppy, rocky, stormy market." Apple Computer, Microsoft, Motorola, and Nortel Networks all have warned of profit disappointments to come. Chief executives at client companies are growing wary. Capital spending on technology is softening. "And we don't know when that's going to end," says Lochhead.

Suddenly, that's a common refrain. Uncertainty pervades the consulting trade, mirroring the anxiety and self-doubt eating at the economy. Analysts and many executives within the industry expect rapid, painful consolidation in the next year. Some of the newer entrants, they expect, will simply fold; many others will be absorbed by the Big Five or by other large rivals. The consulting business will step out an evolutionary dance that it has done before.

What we are witnessing, experts say, is the death of the Internet consultant. As Internet technology becomes ingrained in business strategy, the appeal of firms that specialize in e-business solutions will diminish rapidly. Instead, clients will seek in consultants that which they always have sought -- great ideas and flawless execution.

Most observers expect that Scient will survive the transition, along with Diamond Technology Partners, Sapient, and a few others with enough scale, talent, and institutional credibility to do so. But ultimately, who knows? If the new economy is dead, the next economy hasn't quite arrived. Scient is locked, for now, in the "flaky economy" -- where anything can happen.

In any case, Bob Howe hopes for something more than survival, of course. He left IBM not to start something ordinary but to build one of the great franchises of the service world. "People talk about Goldman or McKinsey in a certain way," he says. "Those are fabled companies. We'll know we're a fabled company when everyone talks about us in the same tones as those companies."

Scient will become fabled if it offers superior value to its clients, if it remains a great place for people to work, and if it brings wealth to its shareholders. It will win if it delivers on its six core values. "It has to become what we say it is," Howe says.

Scient will win, ultimately, if it has the organizational mettle to weather "the worst day in our history" and the turmoil that certainly will follow. It must survive the present. And it wouldn't hurt if the next economy got here real fast.

Keith H. Hammonds (Khammonds@fastcompany.com) is a Fast Company Senior Editor based in New York. Learn more about Scient on the web (www.scient.com).

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