Sapient an Interactive Agency or not?

I finished the GITS story on the econsulting/interactive agency sector. I didn't have enough length to do the story I researched, so pieces of it are going to show up here. A big help in framing the story was Harley Manning, a longtime Forrester Research analyst. Manning got cut from the final edit on the piece, which was unfortunate. There aren't too many analysts covering the sector, or who've been around long enough to put some perspective on what's happened since the dotcom runup.

The big surprise in the reporting was that Advertising Age had named Sapient #2 Interactive Agency in this year's annual ranking of the top 50 Interactive Agencies. The report was published in the April-May time frame and rankled a few competitors that I talked to. Almost unanimously the CEOs and high level execs I spoke with discounted that Sapient was in the sector at all. Only one competitor that had fairly personal knowledge of the company's strategy in interactive, disagreed. Here are some sample remarks:

"No way is Sapient in our space… these guys only make things more interesting for us." CEO, large Interactive Agency

"Sapient is a solid firm, no question… really more of a mini-Accenture than anything else. Great for jobs in the $500k-$1M range, and an attractive alternative to hiring the big, big guys. But an interactive shop? Nah." CEO, small Interactive Agency

However, rounding out the perspective was Alan Osetek, VP Isobar US, who lobbed in this commentary while traveling in South Africa:

"Sapient is an interactive powerhouse to be reckoned with. They were a systems integrator, offshoring house up until about a year, year and a half ago. They've taken a turn to go after companies like Digitas and Isobar and build up their digital marketing capability. They've got about 1000 people in the US [doing this] and about 2000 in India now, a large, significant operation. They're a well-deserved #2."

Now. I called Ad Age to pry into how they arrived at Sapient's number and what they were counting for "Interactive Revenue." I spoke to Craig Endicott at Ad Age who told me the publication sends out a questionnaire and the companies submit their numbers. So, in essence, they accept what the companies submit to them. He told me, however, that Sapient did not respond last year at all to the survey. In the Agency Profiles Supplement, there is more detail on how they arrived at Sapient's number ($176 million). And via Sapient, interactive revenue is reportedly "marketing-related web development, including using the Internet as a medium" according to Ad Age.

So, there you have it. Undoubtedly this arena is where Sapient is interested in moving, but did Sapient deserve the #2 ranking? That is the question.

Getting Settled in the Market

When my oldest daughter was very young, she used to say to me, "Mom! You can't make up any of your minds!" Of course, that's adorable, but I think of that every now and then when I'm having trouble deciding which course to take on an important decision. The major decision of where to establish myself in the market has been a difficult journey. From my earliest post on this blog (January?), I've been touring around the business, catching up with old friends, meeting new personalities, reading everything that seemed noteworthy. and trying to figure out what the meaningful trends are.

I'm happy to report I'm narrowing down the choices.  I'm definitely going to start tracking the web consultancy/interactive agency sector. This is the sector I was tracking before– in 1999-2000. There are obviously new firms in this space, but the entire sector is growing and moving in a direction I want to go. In addition, there are firms who've survived from the early days, well one– Sapient, who has a heritage as a systems integrator. The firms who are building brands online and through all digital meda include companies like aQuantive which owns the category leader Avenue A|Razorfish (remember that name?) and Digitas.

As you're reading this, I want you to think about the answer to this question: When is the last time you watched television? Not HBO, not a pay-per-view movie or something you recorded on your DVR, but a T.V. show? Today's equivalent of Laverne & Shirley? Does it seem like sometime in the 80s? For a lot of us, that's a reality. Chief Marketing Officers of global brands are realizing that spending all their ad budgets on broadcast (t.v.) and print (magazines/newspapers) is old school. (Read how advertising is under crisis.) Billions of dollars, yes billions of dollars, are going to be surging into the digital channel over the next few years as advertisers look to reach consumers where they are– on their laptops, their BlackBerries, their PSPs, their iPods. This spike will flow to the digital agencies. They may party like it's 1999 all over again for a little while, but soon enough, they're going to have to start building capability as their global customers pull them deeper into transaction-oriented e-commerce.

I was talking last week to VP Bill Kanarick who's over in Sapient's London office. He said, "Any one who truly understands these markets would probably concur that delivery of technology capability through the lens of being an interactive agency is going to be increasing important. I think companies that are not able to do that and that exist squarely in the interactive agency space are going to find themselves downstream because clients are going to be asking for more of that and the inability to deliver that is going to hurt them."

So there you have it. Marketing and Technology. And a new generation of users who demand excellence from both. Awesome.

Internet Professional Services Redux

So, it seems Robert Pickering is rocking the Casbah in Western Europe. Another old pal of mine, Richard Holway (a demi-god in UK IT Services), sent me a note yesterday, informing me that Robert had just announced an agreement March 21st to merge his company,LBIcon with Framfab. This announcement really moved me. As many of you know, I veered away from the traditional outsourcing market to start tracking the Internet professional services firms in 1999. I published an exhaustive study (300 pages) on the top 30 firms and their capabilities. Of course, we know what happened to Scient, Zefer, iXL… (As a matter of fact, I received a class action suit notice yesterday in the mail against iXL. I didn't even know I bought iXL stock. Whatever.) Nonetheless, Sapient survived. I listened to CEO Jerry Greenberg's session at Greg Gould's (Goldman Sachs) Technology Conference a couple weeks ago. And I hear Digitas is doing very well. There are a host of others in this space that are doing really interesting work. Richard's company (Ovum) had very promising things to say about Robert's new merged company. They've not chosen a name yet. He joked they should call it, "March 21st" (referencing the rollup king, "March 1st" in the same space). I told him "Veritage" was available.

This market excites me. It rocks; it's sexy. The hot air blew out of it 5 years ago. What's left are serious companies who are using the mature benefits of internet technology to advance their clients' businesses.

Here is what Ovum published on the merger:

10:10 LB Icon and Framfab to merge
Douglas Hayward
LB Icon and Framfab this morning said they had agreed to merge to form a pan-European new-media services specialist with pro-forma sales (in 2005) of €149m, making the new company by far the biggest independent new-media specialist in Europe. The two companies provide a range of web design and digital-marketing services to companies, including many blue-chip corporations.
The merger is expected to complete by July 2006, and LB Icon's shareholders will hold a majority of shares. Robert Pickering, CEO of LB Icon, will be CEO of the combined group, which will be listed on the Stockholm exchange and the Euronext exchange in Amsterdam. Sven Skarendahl, chairman of Framfab, will be chairman of the new company.
The UK will be the largest subsidiary, with 32% of sales, followed by Germany (21%), Benelux (16%), the Nordics (14%), Spain (5%) and Italy (3%). The US will account for 9% of sales.
The two companies gave a number of reasons for the merger, including: customer demand for geographical reach, supplier consolidation by clients, the need to attract and retain staff, and of course cost and revenue synergies. The two companies said they expected the merger to be EPS-enhancing in the 2007 financial year. The combined company had pro-forma FY 2005 EBIT margin of just under 9%.
Comment: We may comment further tomorrow. For now, it's worth noting that the two dotcom survivors clearly see the need to combine, not just to gain efficiencies by positioning themselves against new competition. We've recently seen growing interest in this space from IT services players, including Sapient and Accenture, to name but two. This is a nice defensible niche, combining media creativity and deep domain knowledge of marketing-related issues, but that defensibility makes it attractive to new entrants.
The new company (no name has yet been chosen) has the opportunity to establish itself as the dominant pan-European brand in this niche. It's got a blind spot in France, where it doesn't play yet, and it could be bigger in Germany. We'd expect Pickering to buy into France and to expand the Germany operation by bolt-on acquisition in H2 this year, following the official merger.
Can it create significant barriers to entry? This is difficult in a people industry. But this is a market that combines people-centric creativity with technology and analytic skills (the latter is important in analysing and improving clients' new-media marketing operations), so it's not "just" a people business.
The big risk is that LB Icon handles the integration badly, alienating staff and/or customers, or gets too bureaucratic. The latter is unlikely, as I think the country operations will have a lot of autonomy. A bigger threat might be the failure to get the promised revenue synergies. It also faces the threat of marketing consultancies and IT services players eating its lunch. But LB Icon and Framfab are survivors par excellence in a market that went through dreadful times after the dotcom boom, so they stand an excellent chance of puling this off.