Prophets at a Discount

Small-cap consultants DiamondCluster (Nasdaq: DTPI  ) and Sapient (Nasdaq: SAPE  ) are led by entrepreneurs who see the future of consulting better than most. Now the prophets are turning practical, with recent announcements of restructurings at both firms.

Diamond De-clusters
Diamond Chairman Mel Bergstein -- whose sage sayings will be missed on investor calls -- set Diamond up in 1994. Its new, home-groomed CEO, Adam Gutstein, is reviewing alternatives for international operations. The bulk is the old Cluster Consulting, which specializes in telecom consulting. Diamond acquired Cluster for an unearthly $3.2 million per consultant (290 of them), in September 2000. Then, the Telecom depression hit, puncturing Diamond with years of goodwill write-offs.

A Diamond de-clustered of its international operations should shine brightly. It is the McKinsey of technology-based consulting, with a chart-topping revenue-per-employee of $379 thousand per consultant in fiscal year 2005. And these consultants are objective advisors, unspoiled by urges to sell software or large system integration projects. Intellectual capital is strong, especially in new areas like health-care management accounts.

The old Cluster business can fetch a good price. As telecoms struggle to replace voice revenue with high-price mobile media content -- including "games, girls, and gambling" -- they need advice. Telecom is about 30% of Diamond's revenue; applying Diamond's current price-to-sales ratio of 2 produces a value nudging $100 million.

Sapient Strips
Jerry Greenberg and Stuart Moore (both former members of the Fortune Top-20 Richest Americans Under 40 list) created Sapient in 1991. Greenberg and Moore founded the firm on the fixed-time, fixed-price approach to consulting projects, and the capped costs have appealed to clients. Sapient built a global staffing model early: current staff is an almost symmetrical 47:53 split between the U.S. and India. This ratio is better than those of U.S.-heavy Accenture (NYSE: ACN  ) and BearingPoint (NYSE: BE  ) and India-heavy Wipro (NYSE: WIT  ) and Infosys (Nasdaq: INFY  ) . And Sapient has always positioned its business for emerging trends; seeing the online marketing revolution, Sapient acquired a specialist in online and multi-channel marketing strategies earlier this year.

Now Sapient needs to forget prophecy and cut costs. So far it has launched the "Velocity" program to reduce costs. General and administrative expenses are a portly 27% (Diamond's ratio is 20%) of revenues, with marketing at 8% (compared to Diamond's 2%). Even the finance function is being restructured and sent to India, which may explain yesterday's announcement that the CFO is leaving.

Once refreshed, Diamond and Sapient -- and their prophetic leaders -- offer the potential for sharp appreciations in value.

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Fool contributor John Finneran is a consultant, investment analyst, and writer specializing in the financial value of technology. He does not own shares of any of the stocks mentioned. Feel free to email him atjf@fintechvalue.com.


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