InformationWeek

Intrapreneurs: From The Inside Out--IS managers are taking charge of businesses spun out to promote new products. But it's not easy money.
By Udayan Gupta (Issue date: August 7, 1995)

ost corporate technology managers only dream of owning their own million-dollar businesses. Former information systems executive Dave Gosselin, president of TennEcon Services, saw his dream become a reality. Today, he runs a $25 million company. * Gosselin had some help. His former employer, Tenneco Inc., spun out TennEcon from an IS project two years ago.

Gosselin joins a growing number of technology managers wrestling with the joys--and travails--of entrepreneurship . While companies have always spun off new firms, what's different over the past several years is a growing awareness on the part of the parent company that new products that don't fit into their strategic plans sometimes can best be developed and marketed by an independent firm. And that may be the best way to make money from these ideas.

But independence comes at a price. Some technology managers have learned the hard way that entrepreneurial freedom is exhilarating but difficult. Several tech spin-offs, including one funded by Merrill Lynch & Co. and IBM, have failed. They were torpedoed by factors that range from insufficient funding and poor parent-company support to an ill-conceived business plan.

Still, corporations that are downsizing find it's easier to mai ntain an equity position in an IS spin-off than to develop the function from within. "As an internal unit, you're graded on the amount you can save," says Gosselin of TennEcon. If you're independent, you're judged on "the service you provide."

Count The Ways
Some ventures spin out of the IS group of nontechnical companies; others originate from within companies that do their main business in information technology. Each sponsoring company creates an IS spin-off for a different reason.

Houston-based Tenneco, for example, hoped to get more mileage from the heavy-equipment products and gas and petroleum services that it had developed and used internally. Book publisher Houghton Mifflin Co. actively searched for IS offshoots of its main business that might better be exploited independently. And Automatic Data Processing Inc. (ADP), the payroll and general services company, spun off Multex Systems when it discovered that a small project could better reach its p otential independently.

Intrapreneurship
The process of creating entrepreneurial ventures from within corporations--once labeled "intrapreneurship" for lack of a better term--has become a fairly widespread phenomenon. In the 1980s, the term stood mainly for independent projects managed and operated under the aegis of a big corporation. But the '90s have given the term new meaning--and potential. Now, intrapreneurs take internally spawned projects and create independent concerns.

But the act of spinning out an IS-oriented company is no guarantee of success. "In the '80s, people had a simplistic notion that if you built it, they would come," says Lee Greenhouse, an IT consultant in Larchmont, N.Y., who was involved in technology spin-offs at Chemical Bank in the early '80s. "They didn't spend a lot of time developing a business infrastructure."

IT ventures face the same enormous risks of failure encountered by any startup. "You know the product works, you have a clear idea about the mar ket," says Richard Shaffer, editor of Technologic Computer Letter, a New York newsletter that covers technology startups. "The real questions are: How big is the market and can the product reach that market?"

There were several antecedents to the technology spin-off phenomena in the '80s. During that decade, for example, First Boston Corp. created applications development software house Seer Technologies with financial aid from IBM. United Airlines launched Covia from its computer-reservation systems to start a travel reservations firm.

In the cost-conscious '90s, companies view IS spin-offs as money-makers. TennEcon was dreamed up two years ago by a group of Tenneco senior executives during a brainstorming session to find new revenue sources. One attendee suggested that the company bundle several of its internal communications and IS services and sell that package. The plan struck many participants as unconventional, yet compelling.

There were naysayers. Some Tenneco managers felt that the quali ty of internal information and communications could be corrupted if the technology unit focused its attention on outside sales. Others believed the company's image would suffer if it began to market products and services far removed from Tenneco's main lines of business.

But Gosselin argued that the revenue generated by the new unit would produce earnings that the parent company itself could never generate. When he agreed to head the new unit, he got the go-ahead to start a services effort.

Support Is Key
Key to IS startups and spin-offs, say technology managers, is support from the parent company's top executives. Xerox, for instance, routinely funds the internal development of ideas through its own venture capital fund. If a new idea can form the foundation of an independent, standalone company, it's given additional financing and spun off. If the idea is narrow, it's simply run by existing Xerox units or sold to another company.

"You need a champion within the organization who beli eves in you and is willing to push your cause," says Steven Vana-Paxhia, president and CEO of Inso, a software company that was spun off from Houghton Mifflin in Boston. Corporate parents must be convinced that they will benefit more from creating a spin-off than they would by keeping it part of the corporate whole, he says.

Inso, formerly InfoSoft International Inc., started life in 1982 as Houghton Mifflin's software division. Its initial role was to develop software products and tools--including spell-checkers, grammar tools, and access to reference databases--for book editing and publishing.

InfoSoft eventually licensed its technology to companies that included Microsoft and Lotus Development. The company's initial revenue growth was slow, but Houghton Mifflin, encouraged by the growing use of programs such as Microsoft Word and Lotus Notes, decided to experiment with an expanded--and independent--role for the internal unit. In late 1992, the software unit's managers wrote an aggressive business plan and took it to Michael Melody, then VP of Houghton Mifflin's college division. Melody and the unit's executives went on a retreat to figure out how to take the software unit to the next level. "We came up with a plan to refine our parent-child relationship," recalls Vana-Paxhia.

The team identified internal areas that could be grown quickly and others that were better obtained through acquisition. "We discussed which structure would make the most sense for the overall development of the software unit," recalls Vana-Paxhia. The executives agreed that the initial development could best be undertaken within Houghton Mifflin. Later, they followed the '90s trend--agreeing that the two businesses were too different and should operate independently.

Support Pays Off
Houghton Mifflin announced its decision to spin off the software group in early 1993. InfoSoft International went public in March 1994. At the end of that year, it reported a profit of $5.7 million on revenue of $23.5 million, u p from net income of $2.6 million on revenue of $13.8 million a year earlier, when it was still part of Houghton Mifflin.

The transition from a corporate unit to an independent company worked in large part because Houghton Mifflin created the right conditions for success well before the move, says Vana-Paxhia. "Houghton Mifflin was extremely supportive of us from the very beginning," he says. "Their operating theme was to give us more room and greater autonomy."

In practice, that translated into the unit planning and managing its budget, making product decisions at the unit level, and, most important, plowing profits back into the effort. "You can't be an independent operation overnight," Vana-Paxhia explains. "You have to experience what being independent means."

The Houghton Mifflin tale is an IS-manager-turned-entrepreneur's sweetest dream; other spin-offs provide the raw material for nightmares. International Market Network (Imnet) was spun out of Merrill Lynch in 1984 with backing from part ner IBM. The company was formed to provide branch-automation systems for brokers. But in three years, it managed to attract only 50 external customers. After burning investment dollars that reportedly totaled tens of millions, the two partners shut down Imnet in early 1987.

There are lessons for would-be entrepreneurs from other technology spin-offs, whether or not they're run by former IS executives. Sometimes the efforts languish within a large corporation before they get the attention they need. They end up competing for resources with other products and technologies--often failing to reach their full potential. "Some of these ideas can be bigger [if they're managed inside] independent companies," explains Technologic Computer Letter's Shaffer.

Bloc Development Corp., a $61 million software maker in Coral Gables, Fla., sold off its Expert Software unit in 1992 to the founding team and a group of investors for $8.4 million. When Expert, also in Coral Gables, went public this year, it had a market v alue of $85 million. Why go independent? Expert had suffered as part of Bloc because Bloc couldn't reinvest its profits into new products at the rate that Expert needed, says Steven Clearman of Geocapital Partners, an investor in Expert and now a company director.

Technology managers will continue to dream of leveraging internal expertise and working for the perfect boss: themselves. But they better be sure they have a solid business plan, great business partners, sufficient capital, and--most important--the support of a corporate sponsor.

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