Diamond Cluster International, Inc.

views updated

Diamond Cluster International, Inc.

Suite 3000
John Hancock Center
875 N. Michigan Avenue
Chicago, Illinois 60611
U.S.A.
Telephone: (312) 255-5000
Fax: (312) 255-6000
Web site: http://www.DiamondCluster.com

Public Company
Incorporated: 1994 as Diamond Technology Partners, Inc.
Employees: 1,478
Sales: $259.34 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: DTPI
NAIC: 541611 Administrative Management and General Management Consulting Services; 541618 Telecommunications Management Consulting Services

DiamondCluster International, Inc. is a consulting firm that helps companies develop their Internet-based business and telecommunications strategies. The company, which was created in 2000 with the merger of American firm Diamond Technology Partners, Inc. and Cluster Consulting of Spain, is headquartered in Chicago and has offices in Europe, the United States, and Brazil. The public firm is headed by Diamond Technology Partners co-founder Melvyn Bergstein.

Beginnings

DiamondCluster traces its beginnings to February 1994, when former Technology Solutions Corp. co-chief executive Melvyn E. Bergstein decided to start his own consultancy business. Bergstein, who had lost his job in a recent management shakeup, joined with Christopher Moffitt, Michael Mikolajczyk and eleven others to come up with $7 million in startup funds, also securing $5 million from venture capital firm Safeguard Scientifics, Inc. The new company, Diamond Technology Partners, Inc., was chartered to operate as a consulting firm that would help design and implement computer system integration projects for Fortune 100 companies in the financial services and healthcare industries.

Diamond chose to deploy smaller, more experienced consulting teams than the industry norm, with its recruitment efforts focused on people with 8 to 15 years consulting experience, in addition to an M.B.A. degree. The company required that each new partner would have to be elected by 80 percent of the existing ones, and if a pay offer was rejected by two thirds of the group the chief executive would have to resign. Bergstein, who had also worked for 21 years at the accounting firm of Arthur Andersen, took the jobs of president and CEO. Many of Diamond’s 29 original employees came from Technology Solutions, who later sued the firm for damages. During its first months of operation Diamond established relationships with nine clients.

The company’s first year was a good one, with $13 million in revenues and expansion to 70 employees. In 1996, Diamond formed a strategic alliance with B. Joseph Pine II and James H. Gilmore of Strategic Horizons LLP to offer “Mass Customization” consulting services. The pair’s theory laid out ways of managing that could enable businesses to provide customized products to customers while relying on mass production. By this time Diamond had opened a second office in Cleveland, the home base of Strategic Horizons. For fiscal 1996 Diamond’s income doubled to $26 million, though the company posted a deficit because it had lost two of its largest customers. The firm now had 145 employees and was doing business with 29 clients.

In 1997, Diamond went public when Safeguard Scientific offered its shareholders the right to purchase one share of Diamond for every ten they owned of Safeguard. A total of 3.2 million shares were offered on the NASDAQ. The firm also formed the Diamond Network during the year, which utilized the expertise of top outside experts like Joseph H. Pine, Microsoft’s Gordon Bell, and Disney’s Alan Kay to help the company keep on top of developing technology trends. Network members who worked on Diamond projects shared in the proceeds with the firm.

Developing Contacts

The Diamond Network was one element of the firm’s public relations strategy, which included sending key staffers on speaking engagements, publishing articles and surveys in journals such as the Harvard Business Review, and pitching the firm’s services directly to top executives. Keeping its employees happy was another important part of Diamond’s business plan, and the firm had a lower-than-average turnover rate for the industry. Among other perks, Diamond paid 100 percent of medical expenses, and allowed partners, who were frequently on the road, to live anywhere they chose to. To keep in touch, the company sent frequent email and voice mail messages and developed a proprietary software system that helped compile the consultants’ knowledge so it was available to everyone in the firm. Diamond also held several face-to-face group meetings in Chicago each year.

The company’s efforts to keep its name in front of potential clients led to the creation of the Diamond Exchange, a thrice-yearly forum for invited senior executives intended to help them learn about the potential value of digital technology to their businesses. In the fall of 1997, the company also began publishing Context, a quarterly magazine that covered technological change in the world of business. Context, which was put together by former Wall Street Journal editor Paul Carroll, was distributed to 35,000 senior U.S. executives. The magazine’s debut issue featured an interview with Microsoft CEO Bill Gates. Context was a slick, newsstand-friendly publication with ads from the likes of BMW, Microsoft, and American Airlines. The company had reportedly spent $250,000 on the first issue, with Carroll made a full partner in the firm. Context vied for executives’ attention with several similar publications already on the market.

By the end of Diamond’s fourth fiscal year, in April 1998, sales had grown to $58.4 million, with income of $6 million. An additional offering of three million shares of stock was made just before the accounting period ended. In June, the firm celebrated the release of Unleashing the Killer App: Digital Strategies for Market Dominance by Diamond Partner Chunka Mui and company fellow Larry Downes. The book gained a great deal of attention in the media and went on to sell 100,000 copies. It was described by Diamond CEO Bergstein as “a how-to book for CEO’s trying to figure out how to compete in a world transformed by technology [that also] provides a guide for investors who want to understand who the winners and losers will be in the digital future.” June also saw Bergstein give up the role of president to Michael E. Mikolajczyk, the firm’s chief financial officer. He retained the jobs of CEO and chairman.

In April 1999, Diamond made its first acquisition, purchasing OmniTech Consulting Group of Chicago for approximately $7.5 million. OmniTech, a management consulting firm that specialized in web-based and multimedia corporate training, had been founded in 1985 and employed 43 at offices in Chicago, Boston, and Bridgewater, New Jersey. Its clients included AT&T, Xerox, and Microsoft.

Zeroing in on E-Commerce

By this time, Diamond’s practice had become heavily focused on Internet-based business consulting and the now rapidly growing company began ramping up its hiring of support staff to design Web pages and help with so-called “e-com-merce” businesses. A new unit, Diamond Marketplace Solutions, was formed to handle work from the many established “bricks and mortar” firms that wanted to get their businesses quickly online, as the rush to get in on the anticipated Internet bonanza became a flood tide. The company’s stock price was emulating that of the market’s tech stocks, rising 300 percent during 1999. The year also saw the firm open a San Francisco office and acquire the Leverage Group, another consulting firm.

In early 2000, to help deal with its explosive growth, Diamond announced it was creating a new structure and dividing its business into East, Central, West, and European sectors, with a new office also established in London. The firm now had more than 450 employees, and the latest fiscal year ended with a record $136 million in revenues.

Diamond was working with some of the largest corporations in the world on major projects like the Internet-based business-to-business exchange Covisint, formed as a joint venture by Ford, General Motors, and DiamlerChrysler to help the automakers reduce costs in purchasing parts. Diamond was also involved with development of Enron Corp.’s bandwidth trading unit, Enron Broadband Service. Other major clients included Goldman, Sachs; First Data Corp.; Clayton, Dubilier & Rice; and Simon Property Group. Diamond preferred to work with established firms rather than new dot-com startups which had no immediate revenue prospects, a move that brought the company one of the industry’s best records for paid-up accounts. Rather than simply establishing a generic online presence for its clients, Diamond consultants worked directly with the companies’ CEO’s to develop a so-called “killer app” strategy which would utilize the possibilities of the Internet in a way unique to the medium.

Company Perspectives:

We believe that inevitably, whatever can be digital and wireless —will be. DiamondCluster develops and implements mobile and digital strategies that capitalize on the expanding opportunities posed by new and disruptive technologies to deliver breakthrough value. We’re positioned for this amazing upsurge in mobility, offering thorough expertise in the telecommunications and wireless sectors, and leveraging it with our solid experience in world-class business strategy and design.

In April 2000, Diamond formed a joint venture with Silgan Holdings and Morgan Stanley Dean Whitter Private Equity to form Packtion, a new business-to-business packaging service intended to improve efficiency in the $400 billion global packaging industry. The three firms invested a total of $53 million in the project. The same month Diamond acquired Momentus Group Ltd. of London, which was renamed Diamond Technology Partners Ltd. and merged with Diamond’s London office. The three-year old Momentus, acquired for $10 million, was a consulting firm with 21 employees that focused on Web-based business. April also saw Diamond invest in Participate.com, a new firm that was formed to manage Web communities for other companies. At the same time, the company promoted 13 executives to partner status, raising the total to 74.

In the summer of 2000, Diamond created a formal partnering program to work with outside firms to deliver services. The first to be signed up was iSyndicate, an Internet content creator. Others soon followed, including chipmaking giant Intel, who came aboard in August. By this time Diamond was ranked by Fortune as the ninth fastest growing company in the United States.

Merger with Cluster

September 2000 brought news that Diamond would merge with Cluster Consulting, a Spanish firm that offered consulting services primarily for wireless telecommunications providers. Cluster was the leading telecom advising firm in Europe, with 370 consultants, and clients throughout Europe and in the United States and Brazil. The deal gave Cluster $44 million in cash and 6 million shares of Diamond stock, which was then worth more than $430 million. Cluster was also given options on another seven million shares of the combined company. After the merger, the firm, which changed its name to DiamondCluster International, Inc., would have offices in Chicago, Barcelona, Boston, Dusseldorf, Lisbon, London, Madrid, Munich, New York, Paris, San Francisco, and Sao Paulo. Mel Bergstein continued to head the operation, with Javier Rubio, Cluster’s CEO, placed in charge of the company’s European and Latin American operations. Cluster had been formed in 1993 and had grown rapidly. Its client list included the likes of Sprint PCS, Ericsson, and Deutsche Telekom. Privately held Cluster’s revenues were an estimated $80 million, just under two-thirds of Diamond’s total. The move was a necessary one for Diamond according to CEO Bergstein, who told the Chicago Tribune, “We’d been called to the carpet recently. Unless we have a meaningful presence in Europe, we will not be able to compete for that core transformation work.” Diamond had also become highly dependent on a few major clients like Goldman, Sachs, which accounted for ten percent of the firm’s annual revenues, and Cluster brought an entirely different set of customers to the table.

Analysts were now predicting an imminent shakedown in the Internet consultancy field, as the rush to the Web slowed down and many promising dot-com’s began to show serious signs of trouble. DiamondCluster’s share price, which had hit a peak of $98 in July 2000, dropped to $7.50 by the following April, though it began to rebound slightly. As firms began to question their commitment to e-commerce, business began to fall off drastically, and in May the company’s partners voted to take a ten percent pay cut, with the rest of the employees urged to take voluntary cuts in exchange for stock options. CEO Bergstein, who pledged no consultants would be laid off, halved his own salary. Several months later, cuts of ten percent were made mandatory for all employees earning more than $50,000 a year, and 200 consultants were placed on furloughs of six months at one-third salary, with everyone at the firm required to take a two-week unpaid vacation. DiamondCluster’s 107 partners also agreed to increase their pay cuts to 15 percent, and Bergstein gave his entire paycheck back to the firm. Despite the firm’s troubles, 2001 saw DiamondCluster form The Center for Market Leadership, a think tank based at the firm’s Boston office, and the Center for Technology Innovation, another research center based at its Chicago headquarters.

All of the cutbacks were not enough to prevent layoffs, however, and with the company counting losses of over $112 million for the first three quarters of the fiscal year on revenues of $145 million, DiamondCluster began to let some consultants go, as well as telling recent M.B.A.’s it had promised jobs to look for work elsewhere. At the end of December, the company was down to 958 consultants, 100 less than a year before, and the size of the firm’s support staff had also dropped. DiamondCluster had cash reserves of $113 million available to help ride out the downturn in business, and at the start of 2002 CEO Bergstein voiced his take on the company’s outlook, which mirrored that of most firms in its field, commenting, “We think we have seen the bottom.”

With the most prolonged crisis in years hitting the consulting field, DiamondCluster International was doing its best to hang tough and weather the storm. When the U.S. economy made it back to solid footing, the firm would hopefully be ready to resume its work helping build the still-young Internet and telecommunications industries.

Principal Subsidiaries

Leverage Information Systems, Inc.; OmniTech Consulting Group, Inc.; Momentus Group Limited (U.K.).

Principal Competitors

Andersen Consulting; McKinsey & Co.; Bain & Co.; Braun Consulting, Inc.; The Boston Consulting Group.

Key Dates:

1994:: Diamond Technology Partners, Inc. is formed by Melvyn E. Bergstein and others.
1997:: Diamond Technology goes public on the NASDAQ.
1999:: The company is acquired by OmniTech Consulting Group.
2000:: Diamond Technology merges with Cluster Consulting, and the company’s name is changed to DiamondCluster International.
2001:: Amid mounting losses the company cuts salaries, lays off staff.