InformationWeek
Defining The Business Value Of Technology
|
January 22, 2001 |
 |
Redefining Business
The End Of Internet Time
continued...page 2 of 2
By Chris Murphy
|
| More on business strategies: |
|
|
 Send Us Your Feedback |
Uncertainty Ahead
No one can be sure whether the IPO market will heat up again this year, and whether that might mark a return to Internet time. IPO.com reports that 75 companies that filed their intent to go public in the first half of 2000 are still in the pipeline, waiting for the market to return to life. But others, such as Logical Design Solutions Inc. in Morristown, N.J., have decided it's best to forget about IPO funding for now and return their focus to growth from within.
Logical Design managed to avoid getting swept up in the Internet time that dominated its E-services sector--but just barely. Founded in 1990 by AT&T executive Mimi Brooks, the company evolved from providing internal communication systems to creating complete Web E-commerce services, all the while growing internally as a profitable company. But this steady pace started to look dangerous amid the red-hot emerging category of E-service providers. This was an industry marked by such public offerings as Scient Corp.'s $69 million IPO in May 1999, despite losing $3.7 million the previous year, and by megamergers, such as the one between USWeb/CKS and Whittman-Hart that created the 8,500-consultant firm MarchFirst Inc. Meanwhile, Logical Design was a 200-employee firm with no dot-com business and 52% of its revenue coming from just two clients, AT&T and Lucent Technologies, according to its Securities and Exchange Commission filing. Its customer list was solid rather than sexy, heavy on East Coast blue chips--Aetna U.S. Healthcare, Chase Manhattan, Johnson & Johnson, and Philip Morris.
Given the ambitious competition, a faster-growth strategy fueled by cash from an IPO seemed prudent for Logical Design to keep pace and build a national brand. "The market was so bullish, and our competitors were growing so quickly with public funds, that we felt we had to look at it to keep up," says Marilynne White, the company's general counsel and VP. "They were doubling and tripling their size."
Logical Design started taking losses in 1998 and 1999--the company's first--as it increased personnel and selling costs in anticipation of future growth. It bought Jump Information Technologies in late 1999. And it was executing well on the faster-growth-at-the-expense-of-profits strategy: Revenue increased 40% in 1999 to reach $5.8 million, and its client roster rose from 32 to 44, according to its SEC filing.
But last April, just as Logical Design filed its intention to hold an IPO, the stock-market skid began. The E-services industry has since been hit by stunning layoffs, as the dot-com business dries up and large corporate clients spend more cautiously on E-business initiatives. MarchFirst has laid off more than 1,000 consultants, seen its stock plunge, and sold one-third of the company to venture capitalists to get enough cash to get through the end of last year. It's now focusing on serving fewer, higher-quality clients rather than trying to grow at all costs.
Logical Design formally withdrew its IPO plans the week before Christmas. White says the public offering would've been a choice for a faster-growth opportunity but--while some of the money would have been used for acquisitions--the central strategy always was to grow internally, since that's less disruptive to the company's culture of putting integrated teams of several disciplines on any project. White says Logical Design will keep monitoring IPO possibilities, but that it's is well-positioned for the new market conditions. "We're continuing to grow organically," she says. "In our market, we've seen a significant amount of layoffs, and the shift is to profits."
Changing The Culture
Where Internet time had one of its strongest impacts was on hiring, as startups dangled rich cash-and-incentive packages in their sprint to staff up to meet growth plans. Now, caution is creeping into the hiring process. Paul Cooper, CEO and founder of 5-year-old, 56-employee Perceptual Robotics Inc., says the layoffs and failures of Internet businesses change the outlook even for companies like his, with cash in the bank and a growing client list. "The mood affects you, and the mood had been, 'The sky's the limit, and nothing can go wrong,'" he says.
Perceptual Robotics makes software that lets companies feature live or archived video on their Web sites. Cooper received total investments of $15 million in cash from Motorola Inc. and Divine InterVentures Inc., plus $3 million in Divine stock, at the beginning of last year when his company had 12 employees. Cooper was seen as conservative for only increasing staff fivefold once he had funding. Now, employee growth is basically zero. "We're back in the mode we were originally in, which is being extraordinarily picky," Cooper says.
Cooper's Chicago company was founded in 1995, before the first Internet IPOs and well before Internet time took over. Its clients today include General Electric Co., which is experimenting with Web-based visual monitoring of power-plant construction, and Clear Channel Communications Inc., which, as the owner of 900 radio stations, is building online content to pair with its broadcasts. Cooper considers the atmosphere today more intense than the hypergrowth atmosphere of the past 18 months, but says anyone serious about building a great company will welcome the change. "Sanity is a better environment for those of us who feel we're building a sustainable business," Cooper says.
Even companies that are expanding are cautious. Vivek Wadhwa, CEO of Relativity Technologies Inc. in Raleigh, N.C., is adding 15 to 20 people in the next two months to his 4-year-old, 160-person company, which develops software that makes legacy mainframe data Web-accessible. He expects to double revenue this year, to about $18 million, but he's losing $1 million a quarter, so he's relying on the $12 million investment he received from Intel and two venture-capital firms in late 1999. Wadhwa says he could have raised another $10 million from VC investors that were encouraging him to shoot for at least twice the level of growth he planned on. "If I were young and ambitious, like these dot-coms, I would've tried to grow it two or three times, and then I probably would've screwed it up," he says.
Yet, while Internet time's unrestrained faith in growth has withered, it has clearly left a cultural legacy. Radha Radhakrishnan, CIO of Boeing Satellite Systems, points to a greater appreciation of the value of IT workers, and the importance of retaining them. "Now, losing IT people has a huge impact on infrastructure, and there's a greater awareness of how marketable they are," he says.
Most important, Radhakrishnan sees a willingness at his and other established companies to look for new ways of doing business, with IT as a critical partner--whether it's on the shop floor, at a marketing meeting, or at an employee interview. Boeing Satellite employees, used to searching for personal information online, expect the same instant access when they have a question about the El Segundo, Calif., company's health insurance or retirement plan. Customers, too, expect instant answers and real-time information to build long-term relationships. "Agility is the No. 1 factor for being successful," Radhakrishnan says.
It may not be Internet time, but it still ain't easy.
Illustration by Brian Raszka
Photo of Cooper by David Joel
return to page 1
Back to Redefining Business Main Page
Back to This Week's Issue
Send Us Your Feedback
Top of the Page
