The Service Crunch: Scient And IXL Are NextThe Service Crunch: Scient And IXL Are Next

The predicted E-services consolidation is fully under way. Scient Corp. says it will merge with former rival iXL Enterprises Inc. by year's end. Scient and iXL would become subsidiaries of a new parent company headquartered in New York and would operate under the Scient name.

After the merger is approved, iXL CEO Chris Formant would be CEO of the new firm. Bob Howe, who is CEO of Scient, would become chairman of the new company. IXL ended June with 1,025 employees, 780 of them billable consultants, and Scient ended June with 510 employees, 399 of them billable.

The merger has been approved by the boards of both companies, but is still subject to the will of shareholders on both sides. News of Scient's proposed merger with iXL follows Scient's first-quarter net loss of $66.3 million on $11.3 million in revenue. A year ago, Scient reported earnings of $5.8 million on revenue of $91.4 million.

IXL on Tuesday reported a net loss of $51.9 million on $32.7 million in revenue for its second fiscal quarter of 2001. A year ago, the company's net loss was $28.5 million on revenue of $118.4 million.

This year's slowed growth is forcing many service providers that specialize in Internet strategy and Web-based services to seek shelter either in more established companies outside the services industry, as Proxicom did earlier this year with Dimension Data, or seek strength in their combined resources. Service providers that emerged when the Internet became hot and whose strength has been building Web-based E-commerce front ends have found this year particularly difficult, says Natalie Walrond, a research analyst with Pacific Growth Equities.

The E-services market has seen a flurry of activity within the past week, with this proposed deal as well as similar deals between Groundswell and Form & Function Consulting, and CGI Group and IMRglobal. One of last year's significant E-services acquisitions, DiamondCluster International Inc., itself the combination of Cluster Consulting and Diamond Technology, provides a window into the long and arduous task these new mergers face as they struggle to win market share and achieve profitability.

DiamondCluster on Tuesday reported a net loss of $30.4 million on revenue of $57.2 million for the consulting firm's first fiscal quarter, ended June 30. The firm attributes much of this loss to compensation paid out to former partners and employees of Cluster, which Diamond acquired in November for about $575 million in cash and stock. Excluding goodwill amortization and compensation costs, the firm earned $105,000 for the quarter. Diamond earned $9.4 million for the first quarter of its fiscal 2001 on $52.5 million in revenue.

DiamondCluster, while not yet profitable, has been a success to date, Walrond says. Though the service firm has lowered its financial guidance for the September quarter, she says, the compatibility of consulting skills and strategy that Diamond and Cluster share has led to a low rate of consultant turnover and a strong presence in its niche--digital strategy--with 24 new clients signed during the quarter.