DiamondCluster International (DTPI)
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of technology is giving DiamondCluster International a competitive edge on other
Mel E. Bergstein
Chief Executive Officer
Interview conducted by:
Headquartered in Chicago, Mel leads an organization today that includes 500 professionals in offices across Europe, North America, and South America. DiamondCluster was established in 2000, following the merger of Diamond Technology Partners (which he co-founded in 1994), and Cluster Consulting, a pan-European consultancy.
Prior to founding Diamond, Mel served in management roles at Technology Solutions Company, and at CSC Consulting, where he played an integral leadership role as senior vice president of systems integration. His distinguished consulting career unfolded first during 21 years with Arthur Andersen & Company's consulting division (now Accenture), where he was a partner, served as a member of the board, and was also managing director of worldwide technology.
Mel is a member of the advisory board of the Cross
Atlantic Technology Fund, L.P., a venture capital fund focused in Europe. He serves on the
Board of Directors of Simon Property Group and on the board of overseers of the University
of Pennsylvania School of Engineering. He is a trustee of the Committee for Economic
Development; serves on the Board of Directors of the Executives' Club of Chicago; and is a
trustee of the Chicago Symphony Orchestra and The Ravinia Festival. He is also a
member of The Chicago Club, the Economic Club and the Commercial Club of Chicago.
Mr. Bergstein: The vision that we had is consistent with where we are today. Ten years ago, we thought that CEOs and other senior managers of large companies were being underserved in terms of the advice that they were getting around technology. Our view of the world was that the big consulting companies such as McKinsey and Company, with traditional strengths in business strategy operations and organization consulting, had very little to do in the way of technology. Our view was that technology was on every CEOs agenda or should be, and that they were going to need advice from an objective independent source. The people that had the deep skills, were not in the business of offering advice, they were in the business of selling solutions. We saw an unfilled need in the market, and that was the solution.
CEOCFOinterviews: The last couple of years have been difficult; what is happening today and how is change happening?
Mr. Bergstein: To say the least, the last couple of years have been difficult. Our company has gone from a peak of eleven hundred and forty consultants, to under five hundred consultants. We have had to manage costs carefully and downsize the company as the consulting market collapsed. As we look at it today, in the June quarter, we grew 29% sequentially, on the June quarter over the March quarter on a global basis, with 45% in North America and 9% in Europe and Latin America. We have seen a sharp shift in demand. As we look into September, our guidance to investors was thirty-five to thirty-seven million in revenue up from thirty-four million in the June quarter, which was well over our guidance of thirty, to thirty-two million, that we had given at the end of April and the beginning of May. We are seeing a sharp pick up in demand. Most observers believe that because we are a company that works with large companies, and we work at seniors levels and our work has a high planning component in it, most observers would think that we are early in the cycle. I think that as we see the sharp shift in demand, my sense is that it is good news for the technology industry in general. It certainly is an indication that the economy is picking up and businesses are beginning to think about spending again.
CEOCFOinterviews: What services are you providing and has that changed recently?
Mr. Bergstein: Since the company was founded over nine years ago, we have helped senior executives implement growth strategies, improve operations and capitalize on technology. Three years ago, we were in the business of helping large companies develop Killer Apps.. Unleashing the Killer App, was actually written by one of our partners; CHUNKA Mui. We were in the business of helping large companies take advantage of the Internet and create the kind of market capitalization that we had during the bubble. We also were in the business of helping people in Europe doing wireless telecom start-ups. Both of those things died a sudden death when we saw the bubble burst during 2000. Today, we are really getting back to our roots. What our clients come to us for is mainly productivity. Productivity comes in two flavors: productivity within their IT organization, and using information technology to drive productivity in the rest of the business.
CEOCFOinterviews: How have your consultants been able to make that shift, and do you look for people today with different skills than you did in the past?
Mr. Bergstein: We believe that at the core of these firms, there are basic competencies, and the competencies have to do with business analytics or technology design or value management, and sub competencies. Value management is about managing large complex programs. Those competencies can be applied to productivity issues or growth. If you look back two years ago, a great majority of our practice was focused on growth and that was the Killer Apps and wireless productivity or wireless telecom start-ups. Today, our competencies are applied to productivity and very little to growth. The underlying skills of the people remain the same.
CEOCFOinterviews: Do you think the general trend toward outsourcing is helpful for you?
Mr. Bergstein: We think the trend toward outsourcing and off shoring, are all extremely helpful for our business, because we help management teams decide what to do, what the value is and how to extract that value. For us, these kinds of opportunities for our clients represent opportunities for us.
CEOCFOinterviews: Is the international component of your business coming back as well?
Mr. Bergstein: Europe is slower, and the cycles that we have seen, have shown that Europe is six to nine months behind us.
CEOCFOinterviews: How do you market your services to your potential clients?
Mr. Bergstein: Our services are marketed generally by word-of-mouth from our clients. Our partners are the ones that develop contacts and who help prospects understand what our capabilities are and how we might help them. We run a series of seminars three times a year. We help people understand what the opportunities are and what the value is. We dont advertise and we dont have a sales force, our view is that it is not required.
CEOCFOinterviews: Do you operate project-by-project, or do you help a company implement a new strategy?
Mr. Bergstein: The roles we play are as advisors and managers. We will advise a clienton their opportunities and what actions to take. We will help them manage the implementation of strategy. We are not integrators or outsourcers, and our teams are small and strong. We dont have any products.
CEOCFOinterviews: Is there much competition in your area, and why are clients coming to you?
Mr. Bergstein: I think we have a highly differentiated positioning; I think that if you look at the other consulting firms, they just dont have the depth of technology that we have. McKinsey and Company has started their business technology office and tried to compete in our space, we actually think it is healthy because it demonstrates to us that we are in a good space. We have not seen a lot of competition from McKinsey and Company. We will see the large solutions advisors, try to give away the planning advisory work, but most sophisticated clients tend to understand that it is really more consultative selling than it is consulting. We are very comfortable with our capabilities and we are typically very successful in these competitions.
CEOCFOinterviews: Will you tell us about the financial condition of the company today?
Mr. Bergstein: The balance sheet is quite strong. We have over sixty-five million dollars in cash and no debt. We typically collect our cash from clients very quickly. It is a simple and healthy business, particularly now that we are growing again. We have burned some cash over the last two quarters, and we would expect to be back to cash flow positive over the next two quarters.
CEOCFOinterviews: What are your major expenses?
Mr. Bergstein: Our major expense is for the salaries of our people. We spend money on training and facilities. We have offices in Europe, London, Spain and Germany and Brazil. We spend some money on marketing. We are a public company, so we have a relatively sophisticated finance function, and human resource function. We spend a fair amount of money recruiting. Overwhelmingly it is payroll that is our largest expense.
CEOCFOinterviews: Are there geographic areas where you would like to be involved?
Mr. Bergstein: I think eventually we need to be in Asia. I think we need to get the business back to the financial model, which we ran for a long time. It is 25% topline growth with 12-18% operating profit, which means 10-12% after tax. We like to see our DSOs at 35-45 days, and a revenue per professional somewhere around three hundred thousand to three hundred and fifty thousand dollars. We like to see our turnover 12-15% annualized. Our sense is that we need to get back to the traditional metrics before we move to other parts of the world.
CEOCFOinterviews: Do you get a lot of repeat business?
Mr. Bergstein: We have a very high retention rate; the longest client we have has been a client for six-and-a-half years. We get many clients we worked for and then we will have a hiatus and then come back.
CEOCFOinterviews: In closing, what should potential investors understand about Diamond Cluster International?
Mr. Bergstein: I think from an investors standpoint, we believe this is an attractive business. There is very good profitability of 18-20% operating margins. It has extraordinary cash flow because there is very little cap-ex in this business. It is not a business that is lumping within quarters; in other words, it is not like a software business that the majority of sales happen within the last couple of weeks of the quarter. We see the revenue throughout the quarter. The down side, is that this is a cyclical business, but as we come out of the down cycle, we are seeing good growth and profitability as we go forward.
CEOCFOinterviews: Will you be better prepared for the next down cycle?
Mr. Bergstein: I think we will be better prepared. I think in the bubble, we got growing faster than we should have and it was against our better judgment. The management group has learned that slower and steady growth is the way to increase profitability and have less fluctuation.
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