The road to profitability

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	Outsourcing Internet infrastructure

The road to profitability

By Susan E. Fisher
July 6, 2001 1:01 pm PT

	Stepping-stones to profitability An effective CTO can help keep a company with a solid business strategy on the profitability track, says Michael Drapkin, chair of e-commerce management at Columbia University. Drapkin acts as a "virtual CTO" for his consulting clients and has worked full-time as a CTO for a same-day courier company. Drapkin sees a number of steps CTOs can take to support the corporate push to keep Internet efforts in the black. Consider ROI. What a CTO needs to think about is does the company really need to have it? Consider if you really need to have these systems, all this equipment, and hire all these people. The company is going to invest in you to build systems that are supposed to get a return on investment. Think about the entire company's needs. Most CTOs are only concerned with the technology architecture as opposed to how to make the company profitable. It's sort of like someone who is brought into an operating room to work on one particular part of the body and is not concerned as to whether the body is going to live or die. Set the business goals first. Whenever you build technology, it's always a second step. A first step is figuring out what your goals are. Don't think, "Let's just build something and see how it works." CTOs have to identify what their business goals are. You have to figure out what your deliverables are. Then you can figure out the best mousetrap to build and how to solve the problem. Create a flexible organization. You really need flexibility if you are going to respond to the marketplace. In order to be flexible, you have to empower people. Flat organizational structures tend to be a lot more flexible. Unfortunately we still live in a time in which a lot of managers equate success by body count (the number of people reporting directly to them). Become a good salesperson externally. Increasingly, the role of CTO is being part of the team. Go out and close the deal. If you are a technology company, you better have someone selling the technology who can make the customers comfortable with it. Technologists today have to become communicators. Nobody understands it as well as you do. Become a good salesperson internally. CTOs have to be good salespeople to convince their own people that making the expenditure is worthwhile. CTOs need to convince their own colleagues that if they don't make that expenditure they aren't going to be able to run the company efficiently or do things the company needs to do to stay in business. Get feedback. Put in a lot of performance measures to determine what you are doing. Look where your revenue is coming from. That's the telltale performance measure. Who's actually buying what you are selling? If they are not, why or what can we do? Or, consider what the problem is. Really be in touch with your customers.

ACCORDING TO Michael Drapkin, chair of e-commerce management at Columbia University, "Everything that a CTO does needs to be tied back to profitability. [A good CTO] ends up becoming an investor in the company."

Although the paths to profitability may vary, the critical lessons learned from promising Internet efforts have a common theme: CTOs -- and the professionals that carry other titles but fulfill duties associated with that role -- must give their organizations a razor-sharp competitive edge through technology and help the company cement close relationships with worthwhile customers, all while keeping a lid on unnecessary expenses.

"The companies that are left standing -- the ones that are profitable and will continue to be -- are focused on helping customers solve a problem," says Patricia Seybold, founder of Boston-based Patricia Seybold Group and author of The Customer Revolution.

In the past, many business-to-consumer companies' basic strategy was simply to draw eyeballs to their Web sites, notes Steve Baloff, general partner at Advanced Technology Ventures, a venture capital firm based in Palo Alto, Calif. The thinking was "the more traffic I will get, the more money I will get later," Baloff says. "At the end of the day, there wasn't the demand."

The Internet companies that continue to appear promising are infrastructure companies that create Internet-related technology and businesses that have created something of value to customers that is completely new, leads its markets, or caters to profitable niches, notes Dana Serman, Internet analyst at Lazard Fr�res & Co., in New York.

In this downturn, profits are key. "The questions people were asking [during the Internet boom] had no ties to money whatsoever. ... They were asking, 'How much traffic am I getting? What are people looking at?' " says Eric Richard, CTO and co-founder of Web analysis software maker net.Genesis based in Cambridge, Mass. "[CTOs] have gotten the business maturity and the savvy to now start asking [different] questions. ... It's now tied much more clearly to the end business goals than before."

For a look down the Internet's often-thorny profitability path, consider efforts at Bricsnet, Monster.com, Ultimus, and Charles Schwab. Although the companies vary considerably by size, market, and business strategy, all have critical lessons to offer CTOs.

Bricsnet

Lesson for CTOs: Unify efforts and focus on the customer with clout. Bricsnet has a classic dot-com story to tell. It has provided technology solutions for the commercial building industry since 1986 and bet on the Internet to propel it to greater riches.

Like a lot of other companies in the go-go days of the Web, it placed its emphasis on growth, rather than profitability, and tried to cater to a wide variety of customers.Now as competitors stumble, Bricsnet is finding that success depends on holding the line on expenses and focusing on the center of profitability. With the help of CTO Maarten Van Emmerik, Bricsnet is focusing on the customer with the deepest pockets and the most clout in its market, the building owner, and rolling diverse efforts into a single, feature-rich core solution.

"The most important thing is focus," Van Emmerik says. "We were selling to a lot of different audiences, like architects, engineers, contractors, [and] manufacturers. It was just too complex -- too many products, too many markets."

In 1999, the company, which is based in Gent, Belgium, and Portsmouth, N.H., launched its Web initiative and went public with a $18.4 million IPO. Through some acquisitions and in-house development efforts it went to battle scores of emerging dot-coms, offering eight distinct Web-based services through an ASP (application service provider) model that ranged from a store of product information to collaboration tools and a public e-marketplace for procuring building supplies.

That growth path took the company into the red. It brought in revenue of Euro 10,402 for the year 2000. Bricsnet recorded a loss from operations before restructuring and write off charges of 16,640 Euro.

The company is betting it will move into the black this year as it pushes its unified solution called Building Center. Building Center is billed as a comprehensive ASP application that helps corporate real estate executives manage all operational aspects of a commercial building from design and construction, leasing, MRO, financial reports, franchise standards, and branding. Users pay a subscription fee to access the application through their browser. Bricsnet's pitch is the Web makes it cost-effective for everyone from janitors to architectures and developers and owners can access the information without the expense or IT headache of maintaining software and creating network connections, Van Emmerik notes. "We see [the Internet] as a very affordable, physical infrastructure to link geographically dispersed applications and data."

While building up Building Center, the company deconstructed some of its other efforts.

It also decided it would put less emphasis on its stand-alone products, the Windows-based desktop tools for computer-aided design and structural engineering. Key features from the various ASP offerings and the desktop tools -- including some eye-catching 3-D modeling capabilities -- would be incorporated into Building Center, the company decided.

The company also stepped away from plans to open its own e-marketplace for building suppliers, deciding it would be too difficult to get the necessary liquidity to make the venture profitable. Instead, Van Emmerik says, Bricsnet offers its marketplace technology to building owners who wanted to set up their own private business-to-business exchanges.

"We are more directly customer-focused vs. technology-focused. When you have a large budget you can do some below-the-horizon projects that can generate patents and unique selling points and barriers to entry for competitors but that becomes more difficult when you need to be profitable. So we focus more on the short term," he says.

Also, rather than bear the expense of doing a lot of up-front development, Van Emmerik's team tries to leverage custom development projects. "Customers actually pay for certain implementations and then we generalize that and put [it] into the core product," he says.

Getting focused didn't come without pain. The company decided to close its 15-person development Toronto office and reassign developers who worked on the stand-alone products to the Web solution.

Although he says 30 percent of the Toronto-based employees took other company assignments, the change wasn't pleasant. "If you have to reduce your head count, it's very painful, but people understand that our investors want profitability, that we need to adjust our plan," Van Emmerik says.

The CTO turned to outsourcing, tapping software developers in Russia as a way to add "very affordable resources" to the company without permanently adding headcount, Van Emmerik says.

The CTO also finds that he must wear a new hat: salesman. "We are very much a technology company, but now I think we also need to become a sales company and that's also a transition," he says. Van Emmerik is more involved in sales efforts and investment pitches, helping Bricsnet promote itself by providing a high-level technology vision.

Monster.com

Lesson for CTOs: Develop a flexible approach. Monster.com has fulfilled the Web entrepreneur's fantasy: They built it, and people came. Yet there has been a hitch: The job hunters have come and come and come. The career site's great success in drawing visitors is something of a mixed blessing. To channel the flood of traffic into a profit stream, the IT leadership faces the challenge of meeting heightened demands of distinctly different customers quickly while keeping an eye on expenses.

Even as the economy sours, that challenge has intensified, notes Monster.com CTO Brian Farrey. Traffic has surged as high-profile companies began their layoffs this year. Now, job seekers initiate 8 million to 10 million job searches a day through Monster.com and complete roughly 200,000 job applications a day.

"At this point, it's a matter of not getting in the way to allow the company to grow as fast as it can. I need to provide flexibility in the platform and the site," Farrey says. At the same time he says, "We do ROI on any new product initiative. ... It's not always about revenue but, in these times, it's about 'how are we are going to make money on this?' -- as it should be, it's a business."

Monster.com's parent company TMP reported adjusted operating income of $159 million the year ended Dec. 31, 2000, on total commissions and fees of $1.3 billion.

The close working relationship between IT and the sales staff is critical to the company's success, Farrey says. The IT professionals work with the sales force to develop customized solutions for well-heeled corporate clients, including private-labeled versions of the Monster.com Web site, technical integration with corporate HR systems, and intranets. "Our biggest priority is being able to react to the marketplace," he says. "We have lots of feedback loops with sales. We get a lot of product ideas and competitors' ideas from the field directly."Monster.com's CTO is comfortable with managing growth. When Brian Farrey joined Monster.com in 1999, the company was reeling from newly found success, including a huge spike in traffic following its first Super Bowl ad. Even as thousands of job-seekers' electronic r�sum�s poured into the company's databases, Monster.com had only a 30-person IT team. During the course of three years, Farrey has grown the IT staff team to 210 people, rolled out a new datacenter, and overseen the development of a scalable, flexible technological architecture based on Windows NT that allows the company to roll out new country-specific versions of the site in a matter of weeks.

Now traffic is balanced across datacenters in Indianapolis and Maynard, Mass., with approximately 400 servers in production. The company has never outsourced the hosting, finding it more cost-effective to own and operate its own hardware and software.

Ultimus

Lesson for CTOs: Live by your own means. Unlike many Internet startups in the dollar-driven days of the 1990s, Ultimus shunned venture capital. Rashid Khan, its CEO, likens venture capital to "artificial fertilizer" and decided to grow the company organically on its own cash flow. When the economy hit a snag last year, the workflow company wasn't one of the casualties.

"There are many companies that got a tremendous amount of venture capital; they grew very fast and suddenly they become dependent on artificial fertilizer. They did not develop deep roots [in the market]," Khan says.Khan, who also acts as the Cary, N.C.-based company's CTO, says Ultimus worked hard to establish itself by relying on sales to fuel growth. The company has grown in excess of 100 percent every year since its founding in 1994. Ultimus became profitable in 1997. Last year the private company claimed profits of $1 million on sales of $5 million, with half of the business coming from outside the United States.

The Ultimus Workflow Suite allows businesspeople to automate rather sophisticated workflow processes -- essentially anything that involves moving paper in an organization -- without any scripting or macros. Ultimus sells licenses for Web-based software to corporations and offers to host it as an ASP. There are versions of the software in seven languages, including Japanese and Chinese.

Although Khan's approach is conservative in many ways, his plans are not. He wants Ultimus Workflow Suite to become "the Excel of workflow. Our vision is to bring workflow automation to every desktop," he says.

The company is also bucking conventional wisdom by pursuing the market as a horizontal solution rather than picking a vertical niche. The 70-person company encourages its value-added resellers to pursue specialized markets.

The company also tries to practice what it preaches. It deploys its own software to automate customer service and internal processes. For example, if user contacts the Web site for technical support, a workflow process is kicked off that moves the request from person to person within the company until it is resolved. When a solution to the problem is reached, the system triggers another workflow process to story the information in the company knowledge base.

That big vision does not jive with the short-term thinking that ran rampant in the VC-fueled Internet frenzy market of the 1990s, he notes. "One of the drawbacks of venture capital funding [is that] they instill in you a short-term vision. The first thing they ask you is, 'What is your exit strategy?' " he says. "Any market where you are going to change the way people behave, you are going to need a long-term vision."

Still, Khan knows marketing and acquiring new customers is a costly proposition. Raising enough money from sales to educate and pursue a new set of customers will take some doing, he acknowledges.

Khan insists Ultimus will have staying power, in large part because it listens to its customers. "In each successive generation [of our product], we are adding features based on customer feedback. That is what allows you to build a passionate following from your customers," he says.

Charles Schwab

Lesson for CTOs: Sense and rapidly respond to customer needs. Giant online trader Charles Schwab had already delivered a tool that it thought would satisfy its active traders. The program, called Velocity, gives its signature customers faster access to data via Internet and proprietary protocols than Web-based Schwab.com was inherently capable of providing. Although Velocity has been well-received, Schwab discovered through surveys and other interactions with customers that the software still didn't provided enough features for extremely active traders.

Schwab executives figured that if that tool wasn't enough for some of its customers, it wasn't enough for the Schwab. So the San Francisco-based company is rolling out a new tool for these hyperactive traders called StreetSmart Pro.

The thinking illustrates the approach that has proved profitable for the financial services company: segment the customer base, determine that segment's desires, and address it with technology that jives with Schwab's other services -- all the while soliciting feedback and making sure that feedback gets back to the managers who need to see it.

Our goal is "to know the customer and provide value to that customer," says Vincent Philips, senior vice president of Schwab's active traders group in San Francisco. StreetSmart Pro gives the customers a "view of the market they didn't have before or were not able to have without paying for other software."

After piloting it with a select group of customers for six weeks, Schwab first rolled out StreetSmart Pro in March based on technology from a company it acquired, CyBerCorp. The version of the software slated to roll out this month enables clients to receive real-time feeds of stock market data and direct their orders to the market from their desktops. Through an integrated browser, they can jump from the trading application into the Web. When the customers need help, they can still get around-the-clock telephone support or head to branch offices to meet with investment professionals.

Those professionals are instructed to note any concerns or suggestions for improvement on a company intranet application through a formal feedback process called "the loop."

The software is offered for free to these very active traders who trade more than 48 times a year. The cost of development will be more than offset by anticipated increases in the additional trades and assets Schwab expects to attract, Philips says.

Meanwhile, the company targets Schwab.com at customers who trade up to 12 times a year and positions Velocity for customers who trade between 12 times and 48 times a year. All of the customers are invited to use both telephone and branch offices for additional services and support.

That segmented, multichannel strategy has served Schwab well. Schwab's operating income for 2000 was $849 million on revenue of $5.79 billion. Of course, Schwab has not been invulnerable to the downturn in the market. It recently announced layoffs and staff reductions of 11 percent to 13 percent.

Schwab believes it can remain profitable by both keeping a tight rein on expenses and embracing technology innovations. Pointing to StreetSmart Pro, Philips says, "We like to think that now that we have it before anyone else, it's a competitive necessity for anyone else."

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