A Tale of Two Consultants

DiamondCluster International and Sapient appear to be on the same upward trajectory, as the consulting firms take different paths to new highs on the financial improvement track.

The companies talked business fundamentals last week during quarterly earnings calls. Both companies’ results seem to point toward an improved environment. DiamondCluster‘s North American net revenue was up 33 percent year-over-year for the quarter ended Sept. 30.

Company executives said the company is making progress toward its revenue-per-employee target of $425,000 (the company hit the $400,000 mark). And, in another healthy sign, DiamondCluster has expanded on-campus recruiting from six to eight core MBA schools.

Mel Bergstein, DiamondCluster’s chairman and CEO, cited “strong demand for services,” particularly in North America.

At Sapient, executives reported operating margin of 12 percent for the company’s September-ended third quarter. The company’s target was 10 percent. Sapient also grew net income 38 percent compared with Q2. Jerry Greenberg, Sapient’s co-chairman and co-CEO, cited the company’s profit-line focus.

As for demand, Greenberg called the market for services “good, but not great.”

DiamondCluster and Sapient are in roughly the same boat. Both companies went public in the mid-1990s. Both survived the tech meltdown. And both are working toward future growth. But this is where the similarities stop. In terms of business models, the companies appear headed in opposite directions.

Sapient, for its part, is pushing for recurring revenue from long-term engagements. Such projects represented 25 percent of the company’s Q3 revenue, the first time its recurring revenue has reached that mark.

Greenberg said recurring revenue “allows us to have a much more robust business model.” He said the approach provides safety in difficult times and enables a connection to customers over a longer span of time.

DiamondCluster, meanwhile, emphasizes a “relationship-based, multiple-project business model,” Bergstein said. He said this model has cash flow and margin advantages over long-term contracts. Those contracts have inherent risks, he said, citing “compressed margins” and “unforeseen contract cancellations.”

The go-to-market decisions Sapient and DiamondCluster have made are ones that face all service companies. Is it better to hedge one’s bets with multiple quick-hitting, short-term projects or pursue multiyear deals with the promise of recurring revenue?

The long-term deal approach dovetails nicely with the outsourcing trend, which should continue. But the project-based approach avoids mega-deal startup costs, while limiting exposure to requirements creep, midcourse corrections and outright terminations.

DiamondCluster and Sapient, no doubt, believe they’ve chosen the right path. But pluses and pitfalls exist whichever way they turn. And that’s the long and the short of it.