Why is the JEE network so hard
Internet consultancies that entered the market at the beginning of the dot-com boom are now making headlines primarily through high losses and layoffs. Not only since the spectacular bankruptcy of the former stock exchange favorite Kabel New Media in the summer of last year, things have been going downhill for many web service providers. The latest example is the impending insolvency of the highly indebted Ision Internet AG.
Pixelpark with record loss The industry pioneer Pixelpark is also facing a pile of broken glass. The Internet service provider, which was founded in Berlin in 1993, posted a record loss of 86 million euros in the past financial year, which it claims to have been "the most difficult year in the company's history", which even exceeded sales (81.3 million euros). As part of a far-reaching restructuring, the workforce has now almost been halved. Without the support of Bertelsmann - the media group has a 60 percent stake in Pixelpark - the former model company would have had to give up a year ago.
One of the reasons for the sudden fall of the former stock exchange favorites was their rapid growth during the Internet boom. Kabel New Media, for example, started out with four employees - less than two years later, the Hamburg-based company employed almost 1,000 people. The workforce at Razorfish and the equally badly ailing Concept AG developed in a similarly explosive manner.
In doing so, the Internet consulting firms took over, some of which were barely comprehensible acquisitions, with which they wanted to position themselves as full-service agencies. But the acquisitions could only be integrated with great effort and expense, because the necessary internal structures were not in place. "We grew too fast and too unstructured in the Internet euphoria," admits Paulus Neef, founder and CEO of Pixelpark, looking back.
The rapid growth was often at the expense of customers. "There was hardly any time to build balanced project teams," admits Stefan Hetges, managing director of the web agency Razorfish Germany, which has been operating independently of the US parent since the beginning of the year. That had shaken trust in the competence of the web service providers for a long time.
The image has suffered "There was a whole series of agencies that have practically everything - from conception to brand competence and design to SAP integration - criticized Matthias Schrader, board member of E -Commerce specialist service provider Sinner Schrader. Promises that could not be kept: "These providers have left a lot of scorched earth and damaged the reputation of the entire industry."
In addition, there was the bursting of the dot-com bubble: The web service providers no longer run into open doors today as they did in the times of the Internet boom, when in the old economy there was still little knowledge about the possibilities of the web and their implementation. Almost all companies now have their own website - the primary activity of the agencies at the time, web design, is hardly in demand anymore. "The internet business almost completely dissolved in the last year", summarizes Ulrich Dietz from GFT Technologies from St. Georgen in the Black Forest. "Nice-to-have projects are no longer at all - other web activities are only tackled gradually," confirms Schrader. "Even firmly budgeted projects are often not approved."
Growing consolidation The weak order situation since the beginning of the dot-com crisis has led to lower capacity utilization, low margins in the core business, extreme price pressure and ultimately to increasing consolidation. Because of their low stock market value, many of the remaining service providers are attractive takeover candidates - especially for large IT service groups that want to add design components to their portfolio. Advertising agencies also see the acquisition of Internet consulting firms as an opportunity to offer their customers classic advertising and online services from a single source. An example of this strategy is the takeover of Concept AG by WPP / Ogilvy One.
For what the web agencies still have potential business, they are now fighting with the classic consulting firms. The analysts of the Meta Group assume that the Internet service providers listed on the Neuer Markt will divide up a maximum of ten percent of the market among themselves in 2004/05. The eight largest global IT consulting firms alone would have a turnover of more than $ 20 billion worldwide in 2004. According to Meta Group consultant Achim Heidebrecht, that is twice the turnover that all web agencies generate together.
Web design hardly brings any moneyThe reason for the increasing dominance of the large consulting firms in the Internet business is, in addition to their long-standing customer relationships, above all the growing complexity of e-business projects, which most agencies have so far mainly dealt with website design and design earned their money, did not grow. "The market for web design at the front end has imploded," says Markus Kerber, Chief Financial Officer (CFO) at GFT, summarizing the dilemma.
Instead, today it is primarily about connecting the e-business applications to the backend systems. And here, according to Meta-Consultant Heidebrecht, the traditional consulting firms have a clear lead over the Internet service providers. Especially in the B-to-B and B-to-E (business-to-employee) area, the focus is not on the design, but on the integration of the applications: "The design - that accounts for a maximum of ten percent of the costs . Around 20 percent is used for technology, and the rest - that is the mapping of processes between suppliers, partners and customers. "
In order to successfully integrate Linux, database and network servers, wide area networks and all sorts of different clients, the former stars of the New Economy, according to Heidebrecht, do not necessarily lack the appropriate knowledge, but they lack experience. "They often don't know how to get data out of a mainframe." The agencies could not keep up with the classic IT consultants and system integrators in system and security management either: "If someone can do that, then only the big consulting firms," says the expert.
Sinner Schrader board member Matthias Schrader rejects this accusation. He does admit that the implementation of J2EE, XML or Soap are now standard skills that the providers can no longer use to differentiate themselves from one another. In his opinion, however, even projects that are purely aimed at business process optimization do not offer a competitive advantage. "In future, most of the changes will take place at the interface between companies, suppliers, partners and end customers," believes the company boss. "And that only works with a customer-oriented perspective." It is therefore crucial to be able to offer solutions from a single source: "The integration of the front-end processes in the IT as well as marketing and customer loyalty processes and personalization - a service provider that is purely technology-oriented cannot do that," Schrader is convinced.
Differentiation from classic consultants The Pixelpark management also hopes to differentiate itself from pure IT consultants with its new positioning as a "web agency with implementation expertise". "We do not want to compete against McKinsey and Co.", said company boss Neef. Since Pixelpark mainly serves companies from the B-to-C (business-to-consumer) business such as banks or television broadcasters through its individually tailored web advice with a focus on the frontend, the creative component should not be neglected.
Nevertheless, emphasizes Neef, Pixelpark has adjusted to the changed market situation. Already today, 70 percent of the activities are related to the implementation and related consulting of applications: "We have developed into an IT company." The added value compared to traditional consulting firms, however, consists in being able to offer everything from a single source. "In this way we create a bridge between technology and marketing."
Razorfish boss Hetges sees it similarly: "Sure, we can't offer the integration of mainframes," he admits. But the classic consulting companies lack the creative performance to implement the strategy in line with the brand. In the end, it makes sense to complement each other - through partnerships.
It remains to be seen whether the much-cited peaceful coexistence of web agencies and IT consultants has a future. Other providers prefer to go two ways by relying more on the technological implementation of web projects. GFT, for example, sees itself in a "sandwich position" between the large consultants such as Accenture or IBM Global Services and the smaller competitors.
Sapient GmbH, one of the few providers that reported a positive net result - albeit a small one - in 2001 does not see itself as a pure Internet service provider, but as a provider of strategy, creation, technology and project management from a single source. "Although the critical mass is unfortunately still missing for the backend integration, we are more focused on implementation than many of our competitors," claims Arndt Rautenberg, management spokesman for the subsidiary of the US industry pioneer Sapient, which has been operating in Germany for a year. "We therefore tend to consider Accenture or Cap Gemini as competitors - not companies like Pixelpark or Sinner Schrader."
Improvement in the second half of the year at the earliest Regardless of how the individual providers position themselves, it remains difficult in the hotly contested market for web services. Apart from Sapient GmbH, which was able to increase its sales in Germany last year, and GFT Technologies AG, which benefited from the takeover of the Deutsche Bank subsidiary Emagine, hardly anyone expects growth this year.
Rather, the business is going back even further. Pixelpark AG expects its income in the 2002 financial year to be "significantly" below that of the previous year. Other providers don't publish business figures at all if they don't have to - not to mention forecasts.
It all looks as if the Internet service providers will have to adjust to a longer dry spell. As the market continues to consolidate in giant strides, the decision as to which of the remaining players will benefit from the streamlining of the scene will not be long in coming.
Repositioning of Pixelpark In order to be able to react appropriately to the changed market conditions, Pixelpark AG, which apart from Germany is now only represented in Austria, Switzerland, France and Brazil, has repositioned itself. In addition to consistently concentrating on the core business of Internet consulting, the ailing industry pioneer wants to expand its technological competence through partnerships - for example with SAP, the e-procurement specialist Hybris and the content management provider Core Media. With a stronger sales orientation, Pixelpark also hopes to adapt to the change from the buyer to the seller's market and to shorten the decision-making processes: In the newly created Marketing & Sales area, the consulting, sales and marketing competencies are to be bundled across locations and in this way the previous one rather neglected sales are strengthened. "This will enable us to polish up the industry's tarnished image," hopes Pixelpark CEO Paulus Neef.
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