Sept. 11, 2000

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Simplicity Takes Hard Work

3Com manages to remake itself with the active involvement of IT

By Marianne Kolbasuk McGee

Part of the reason 3Com is successful is that it believes in using its own technologies, CEO Benhamou says, and IT is a "key enabler"

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he tone of 3Com Corp.'s new $100 million advertising campaign is lighthearted, and the commercials' tag line touting the networking products company's new easy-to-use Internet products is "simple sets you free." But for 3Com's IT organization, this year's work has been anything but lighthearted and simple.

3Com is in the midst of a major transformation from a struggling, reseller-dependent vendor of network products for large enterprises to a promising developer of "radically simple" (translation: sophisticated but easy-to-use) Internet products sold directly to consumers and small businesses over the Web. IT has been busily leading the transformation.

The intricacies of this metamorphosis include Web-enabling most internal 3Com processes to improve efficiencies. It also means creating new IT groups for operations 3Com is spinning off, including 3Com's handheld computer business, Palm Inc., which gained independence this summer.

To put it simply, 3Com's 800-person IT organization has been very busy. But the work is paying off in many ways, not the least of which is that the company's innovative use of IT in this challenging corporate restructuring has landed it at the top of this year's InformationWeek 500 ranking.

A year ago, 3Com's business-to-consumer and business-to-business sale activities on the Web barely existed. Today, online sales to consumers and small businesses of products such as Internet firewalls and filters drive revenue and generate profit. Meanwhile, about 80% of 3Com's business activity with large resellers and distributors, such as Ingram Micro Inc. and Merisel Inc., is done electronically, including order entry and tracking. "We went from nothing on the Net to there in six or eight months," says 3Com senior VP and CIO David Starr, describing the company's online leap.

Indeed, while 3Com's withdrawal from selling enterprise WAN products can be viewed as a concession of defeat to archrival Cisco Systems, the Web is the perfect place for 3Com to hone its new consumer-and small-business-oriented market focus. 3Com products--including Internet filters, Web firewalls, and network interface cards--are ideally suited for online sales, because those products help control access to the Web and provide security. "There's a very good match between the Web and where we wanted to take the company," says Dennis Connors, 3Com's senior VP of E-commerce.

Selling PC cards and Web cams directly to consumers via the Web means 3Com can potentially disintermediate retailers that sell its products. But to pacify these retailers, 3Com sets online prices at least 5% higher than those charged by retailers. In this way, dealers can compete against 3Com on price while online sales remain profitable. Consumers pay a premium for the convenience of buying from 3Com online. "We're making a ton of money on this," says Ari Bose, VP of E-business and emerging technologies.

Certainly, a chance to generate new revenue and profits is something 3Com is in no position to turn down. The company's restructuring, including the recent Palm spin-off and upcoming U.S. Robotics analog modem divestiture, will reduce 3Com's size by about a third, to about $4 billion in annual revenue from nearly $6 billion last year.

But the shift to consumer and small-business Internet products will refocus 3Com on high-growth markets, where sales could soar at a 40% annual rate, Starr says, compared with the flat sales of modems and WAN products.

Galen Schreck, an analyst in Forrester Research's E-business infrastructure group, praises 3Com's timing in abandoning the enterprise WAN market. "It was the right thing to do--get out of markets where the company was being hammered and focus on high-growth markets instead," Schreck says. "How successful they are will depend on how well they execute this new strategy. The jury is still out."

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