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With the honeymoon now well and truly over for certain new-media

players, the flood of easy business that once fed the world of digital

agencies has significantly dried up.

As a result, agencies are cutting staff to keep afloat in the face of

shrinking revenues, or merging with rivals or simply disappearing.

As the year has progressed, and the cutbacks in the sector have become

more severe, some agencies have started to question whether

consolidation in the sector has gone beyond a healthy clear-out.

Do the companies which are slashing their workforces represent a

sensible readjustment for a sector which has failed to think about the

long-term? Or are the cutbacks now damaging the sector?

Rob Love, chief executive at Victoria Real, claims that the current

new-media gloom is overplayed. He argues that the digital agency sector

is not in decline, but is simply responding to a fall-away in the strong

growth that was evident in the early years.

Stephen Fletcher, managing director of Razorfish's London office,

agrees. "The slump of the last two years has meant the market is now

readjusting after what was once a mad gold-rush," he says.

Fletcher had not considered his agency to be overstaffed before the

slump. It was meeting demand in the market. But as demand fell, jobs

cuts were inevitable.

New-media agency Wheel, which only last year boasted the title of the

sector's biggest employer, is another company which has been handing out

the P45s of late - including former chief executive Phil Redding.

Newly-appointed chief executive Philip Hunt believes that a hard-headed

approach to business is vital, which means matching resources to the

revenues that are available.

"Everyone saw the volume of new business surge a while back, and people

geared up to accommodate it. But after autumn last year, there was an

over-capacity in the marketplace," he says. "A massive downturn meant

that the available revenues forced agencies to fight for business," he

explains.

But although the industry has undergone some painful downsizing, the

process had to happen so that agencies could realign themselves with

demand. And now, the industry is looking stronger than it did three

months ago, Hunt concludes.

Not every agency has seen it necessary to cut jobs. Chris Perry ,

managing director of DNA, says that his agency has increased its

business recently, and puts this down to recruiting a strong team from

the outset. "We invested in our people and picked the right people to do

our work," he says.

"Lots of clients - both in the retail and financial sectors - are still

spending, although the experimental stage in the marketplace has now

been replaced with more cautious spending. Budgets have now been drawn.

So the way that people want to be dealt with has changed," he adds.

Annie Lord, client services director at marketing agency TEAMLGM, is

more candid about the current fall-out. She says that the response to

last year's boom in the new-media sector was handled badly by digital

agencies who took on more staff then they could ever hope to sustain in

the long term.

"Many traditional agencies lost good staff to dotcom agencies which went

on to fail. Now a lot of good people are back on the market," she

says.

It may be of little comfort to those who have fallen foul of the boom

and bust, but it does appear that consolidation in the sector has now

focused minds on how to build sustainable businesses for the future.

Razorfish's Fletcher says that in the post start-up world, it will be

important for agencies to focus on where the money will be in the

future - which is in servicing larger organisations.

"Those with considerable amounts to spend on digital technology will

still want to concentrate on their core speciality, whilst evolving with

technological considerations. Here's where they will continue to buy in

skills," he says.

Victoria Real's Love suggests that this could mean the end for many

independent agencies. "I think it is likely that agencies will become

part of larger parent groups to develop synergies across client bases

and offer specialisms," he says.

Whether more agencies go under or not, Paul Mallett, a director at Fi

System Brand New Media, agrees that the shake-out has been vital for the

health of the sector overall.

"A lot of large agencies who grew aggressively in the beginning have

done a major reality check recently. This is commercial reality and not

over-consolidation," he says.

"Many web agencies are maturing as businesses, and are moving from an

aggressive growth mentality to an environment in which they need to

produce real profits for their shareholders or backers," he adds.