for shareholder value in the age of the internet
living on the fault line
keane, kim & moore: a conversation in the
MacPherson: I think
we’re the ones who want to say thank you, Geoff.
Thanks very much.
When we were planning the program, we thought it would be a
great opportunity to have Geoff chat with a couple of local
entrepreneurs to see if we could take some of these concepts and bring
them home to people within our community.
Kim is co-founder and President of EqualFooting.com,
a leading B2B online marketplace for small manufacturing and
construction businesses. You
may have seen her featured this week in Washtech
as one of the region's most admired bosses.
Her quote about her worst decision had to do with outsourcing,
so she’ll have some interesting perspectives on that.
Keane is Executive Vice President of Corporate Development at Aether
System where he is responsible for mergers and acquisitions,
strategic investments, joint ventures and new strategic business
initiatives. In his prior
lives he has been a CFO and an investment banker, so he’ll bring
unique insights as well.
Moore: It's all very well for some guy to stand up here with a bunch
of PowerPoint slides and hold forth, but can this stuff get from the
speaker's dais to the real world?
We have a couple of guinea pigs with us that we are going to
try to test it out on to see where it goes.
The first model I want to test is the technology adoption life
cycle. I think I'll start
with you, Angie. Did you
make that big promise to investors, and, if so, where are you in that
Kim: Absolutely, we made that promise to investors back in June of
1999 when we founded EqualFooting.com.
There were three of us, and we promised investors that we were
going after the blue-collar, small business segment, which is probably
the slowest adopter of Internet.
I'm not sure exactly how we sold it, but we did.
We promised that when that adoption happens¾and
we had all of these innovative guerilla PR and marketing tactics for
how things were going to work¾we
were going to be right there when it hit since we seemed to be the
only people interested in going after the segment.
Our segment is manufacturing and construction small businesses,
ones with around eight to twelve employees or so.
We're probably still at the initial early adopter stage, and we
haven't quite hit the chasm yet.
We are at the stage where people are starting to get excited
about this innovative thing they're hearing about. We
are having to do certain things, for example, encouraging people to do
their first transaction through more traditional methods like
telephone or fax to get to know us, then move them over to the
Moore: Brian, how about you?
Keane: Wireless data didn't exist much four years ago when Aether
was founded, so we went after enterprise markets with complex
applications on fairly thick devices, at least when compared to a
device like a telephone. Our
CEO is the brains and inspiration behind this.
A year ago, when we went public, everybody was doing things on
was public, and everybody thought that phones were going to be where
the game was played. We
went after a different market completely, the enterprise market with
more intelligent applications on thicker devices¾Palms,
RIM pagers, pocket PCs¾and
tried to push that market. We were the first ones doing it and have been quite
successful. We can talk
about how we've tried to increase our CAP and our GAP, but we went
after this enterprise market and have been the market leader.
Moore: Where do you think the enterprise is with these wireless
devices? Is it in the
early market or has it moved across the chasm?
Keane: It depends on the market.
In the financial trading arena, for example, it clearly has
crossed the chasm for enterprises such as Charles
Schwab, Merrill Lynch
They have all pursued wireless data with real-time stock
trading applications. A
lot of us here probably don't trade stocks wirelessly, but the
enterprises are offering it to their customers.
Other vertical markets such as public safety, where we have
50,000 police using wireless terminals in their police cars, they do
it out of necessity, so it really depends on the market.
Where there is a return on investment for transportation,
public safety, financials and enterprises, they have crossed the
chasm. It's something of
a B2B2C model. The Bs
that we sell to have crossed it; the Cs are still getting there.
Moore: I want to share with you a thought that we have developed at
the Chasm Group. When you
cross the chasm you need to make pragmatists move.
Their instinct is not to want to go first, so you must target a
subset of your market which we call “pragmatists in pain.” They're usually in charge of a broken, mission-critical
business process where, if they don't solve this problem, they are
going to get fired or they are going to bring down the value
proposition of their enterprise.
Within your general purpose market, is there a constituency
that has such a painful problem that they wouldn't have to be courted?
They'd actually come willingly if you could solve their problem
end-to-end? Brian, I'll
start with you.
Keane: Yes, we have a good example.
has 2,500 trucks. We're
rolling it out to all the trucks, but, today, about half the trucks
carry a ruggedized Palm device so that when they make business
deliveries to their enterprise customers they get signature capture.
They put the device in a cradle with a radio that sends a
real-time proof of delivery back to their billing operation because
about 25% of their big customers wouldn't pay the bill until they had
proof of delivery. Paper
gets lost; truck drivers are busy people who may jam a piece of paper
into a folder, lose it or it gets otherwise delayed.
Sometimes they couldn't get paid for weeks or months and they'd
have to reissue invoices. Now
they have electronic proof of delivery. They can email it, fax it,
whatever. It's improved
their cash flow dramatically, so they came willingly.
Moore: That's a great example of somebody who would have been fired
if they continued on the old vector; it's not an acceptable business
performance. How about in
your market, Angie?
Kim: Ironically, we have had to go outside of the market for the
people who would find our solution to be core to their business and to
their job. We are still
going after the owners of these blue-collar small businesses, but here
is the slight problem that we found: they're very busy.
Owners of small businesses tend to focus on sales and marketing
rather than cutting costs on indirect supplies.
They are huge drivers of margins, but not the most exciting
thing and not very core. What
we ended up doing is going after purchasing managers, finance managers
and shipping managers of middle market and larger companies who found
our solutions compelling and core to the particular job that they did
themselves. Then, through testimonials and word of mouth marketing, we
brought that message down to our small business customers and proved
that what they considered to be context actually turns out to be
Moore: Again, there is a sense in the large company that they have
to figure out how to manage their context tasks.
It's like cholesterol; if it builds up enough, it has serious
I'm going to use this as an occasion to move to the
core/context question, and I want to ask this question twice.
First, I want you to look inside your company and apply the
core/context test to your own operations.
Have you identified areas of context and, if so, how have you
responded to it? Second,
look at your customers. How
might you better serve them in this regard?
Keane: I'll give two examples.
One is in traditional ERP (enterprise resource planning).
We're doing an upgrade now to PeopleSoft,
and we are outsourcing it to a Big 5 consultant.
It scares all of us to death because of the horror stories we
hear about the Big 5. A
year ago, we were 50 people struggling for cash, so the idea of
spending millions of dollars is very painful for us.
Even though we raised a billion dollars back in March, we still
have a small company mentality and the idea of outsourcing is a tough
one for us, but we're doing it.
Another one which was core to us a few years ago is building
the applications. We
built the Charles Schwab trading application.
It was core to our business, but doing application development
is not something we are necessarily best at.
One of our partners, Proxicom,
and companies like that are probably better.
We have the core technology and some other outsourcing
services, but there's no reason why we can't outsource application
development to some of these professional, custom software developers.
We've moved some of our work from our important customers to
these IT consulting partners.
Moore: There are a couple of patterns in what Brian said that I want
to reinforce because we see them a lot.
One he just mentioned, when you start a market initially you
often have to provide most of the entire product internally because
people haven't bought into the notion that you are a good partner or
that there really is a market. As
you demonstrate a market with your early applications, then you can
begin to pull back and let partners backfill the demand.
That is when core becomes context, and their core becomes more
powerful going forward. That's
a pretty big deal.
A lot of businesses have an ASP model in the back of their
mind, with the idea that after they get you on the next release of
PeopleSoft or Oracle, they'd like to run it for you.
Is that an option in your company?
Keane: Absolutely. In
fact, we were something of a wireless ASP, so we encouraged our
partners to outsource their wireless needs to us.
To be consistent, we've talked a lot about outsourcing our
Moore: By the way, when it's mission- critical, the management team
freezes up, but the truth is that the dangerous context is always
mission-critical and you have to figure out a solution to the problem.
Angie, how about core/context at EqualFooting?
Kim: It's been a very bizarre journey for us over the last year.
We started a year ago with only three of us working out of my
basement. It's not that
we considered anything to be context, but we were forced into a
situation where, if we really wanted to move quickly, we had to
outsource a lot. For
example, we decided to outsource our Web site to get something up
quickly without spending a lot of time recruiting technical talent.
Instead of creating a great marketing group internally, we
decided to outsource that to a marketing agency.
Now we’ve built the internal talent over time and have about
240 full-time people who are able to do a lot more.
Even within that, however, I think it's interesting how our own
ideas of what's core and what's context have completely reversed.
That's one of the key challenges in your prescription about
core and context¾identifying
exactly what it really, truly is.
For example, when we started, we got a lot of advice from
people that customer service is a context thing.
For most people, it usually is.
Building call centers is not what most dot.coms want to do, so
outsource it. We did that
for a little while, but as we listened to a lot more customer phone
calls, we started to realize that it was one of the most core things
we could do, precisely because we were dealing with these early
adopter and slow adopters who didn't want to rely on the Internet.
I think it's really important to step back and think about what
is core and what is context, and keep re-evaluating it precisely.
Moore: Angie is drawing our attention to the issue that you may
start with the wrong vision or you may get to a point where your
market evolves, so you have to be able to rethink core each year.
There's something called value
discipline, which often helps.
Listening to Angie, I was thinking that customer intimacy
wasn't the value discipline she may have thought she was going to
start with, but it clearly is the one she is now focusing on.
The other thing about outsourcing is that it's about time,
talent and management attention.
If there are three of you in a garage, you are scarce
resources. Venture folks love to see companies design context out from
day one. The advantage of
some of the Silicon Valley-funded companies is that they never
internalized their manufacturing and some other things.
It's much harder to get rid of it after you've brought it in
Let's look at the value proposition you bring to your
customers. Does the
core/context argument create a compelling reason for them to do
business with you?
Kim: Absolutely. One
of the main value propositions that we bring to our small business
customers is that they don't have time to create a core purchasing
function, especially for indirect supplies.
Why not outsource that purchasing function to us?
We actually use the word “outsourcing” sometimes in our
direct marketing and advertising materials, using the argument that
this is clearly context for you and not something that a small company
should be focusing on. That's
worked well, and it's driven the kind of adoption we have seen.
We currently have about 100,000 small business members, and,
when we surveyed them, they told us the reason they came to us is
precisely because we used that rationale.
Moore: Right. As a
small business you are very cash sensitive.
You don't value your time, talent and management attention. You
get very conservative with any amount of money spent on outsourcing.
I'm not surprised that your bigger clients are playing capital
against time and talent; they have that discretion.
It's harder with the owner-operated business.
The worse shape they get in, the more they tend not to
outsource, which means they have less time to spend building their
businesses. It's actually
a negative spiral if you are not careful.
Kim: Exactly. If you
make the argument to them that this isn't core to your business, their
immediate response, one you have to fight over and over again, is,
“Well, if this isn't so core to my business, why should I even worry
about learning this new technology?”
It is precisely why we went after the purchasing managers,
because what we do is core to their jobs, if not to their companies.
Moore: It's a challenge. The
small market is huge, it's very exciting, but it's more conservative
than other markets so it is a bigger challenge.
How about the context outsourcing offer in your business,
Keane: We build wireless data systems and host the wireless
connections. Go back a
year when we were 50 people with 30 developers.
We’d go into a massive company and say, “Let us be your
one. Outsource all your
wireless needs to Aether.” After
they finished laughing they would say, “Give us some of your
technology and we can do it ourselves.”
Many times, it's the IT people who want to do that.
The business people, if they thought about it, would realize
that wireless data is not core to their business, but the IT people
see a new, cool project to work on.
“I can run an application in a Palm or RIM pager doing
protocol translation over wireless networks.
Pretty cool stuff.” A
lot of times the IT people insist on doing it internally. Many
times, after a few months, they come back to us and say, “This is
really hard. Why don't
you guys do it for us.” Many
times we may end up getting the business back after they spend several
months trying to do it internally.
Our big challenge is convincing big companies that, “Your
core business, Charles Schwab, is not building a wireless application,
it's trading stocks and giving research to customers.
Office Depot, it’s taking care of your customers, not
building cool systems on symbol devices.”
Moore: One of the things that Brian is talking about, and that we
see a lot, is that it's very hard to ask the person who owns the
context job to outsource it. Typically,
you have to sell the value proposition at one level higher, often to
the line business person rather than the functional person.
That raises a bunch of issues about human capital and what
happens to people in such a situation.
It turns out, however, that you can make two very good offers
to the person who has a context job today.
You can say, “Look, if you love the company, stay here, but I
want you to stop working on context and work on core.”
Or you can say, “If you love the work, stay with the work but
change companies so that your work will be core at our outsourcing
company.” Either one of
those, I would argue, is better than being a middle manager with a
context job with no upside and only downside.
I have been talking about GAP and CAP, but there is also a
question of “crap.” When
a consultant comes in and mouths off for an hour, no matter how hard
we try, there is always a little bit of crap in the talk.
If your crap detector went off, ask about it in the Q&A,
especially if there was an idea you think may need additional work.
I'm going to offer that opportunity to Brian and Angie first,
since they were our guinea pigs.
What is one place tonight where you thought, “I don't think I
bought that part,” or that just didn't resonate for you?
Keane: The one thing that struck me when I was reading your book was
the Old Economy, pre-April view of the land grab¾get
revenues. We actually
have done a lot of it with Aether.
When we went public, we said that we would grab land, we built
our market share and did our secondary in March.
Now, the view from the buy side has completely turned around,
to, “When are you going EBITDA-positive?
What's your path to profitability?”
The whole context of how you manage the business for the
shareholders really has changed for us, and we're thinking internally
a lot about some of those things like profitability, EBITDA, not just
going for the massive land grab.
We still will do it to a large degree, but not nearly in the
unbridled way we were doing it nine months ago.
Moore: I think I have to take that hit.
One of the things that happens in a technology adoption life
cycle is that it's sometimes hard to tell the difference between the
early market and the tornado. You
think that you are in the tornado; everybody around you is giving you
that same self-reinforcing message.
When the stock market does it, that's all the additional
delusional help you need. The strategy of “grab market share and everything else be
damned” is a tornado strategy, and it's totally inappropriate to the
early market. I think a
lot of the explanation for what we're going through is that we thought
we were further along than we were, and now we're in the chasm.
That is an appropriate adjustment.
Keane: One other thing about bad revenues which I find interesting.
If you've been in a small company, you almost always have that
one giant customer who means bad revenues.
For us it was Schwab, but we would do it again and again and
again because it was our marquee customer and they really helped us
get to the next level and get a lot of credibility.
We were a private company at the time, and probably couldn't do
it today as a public company, but those were arguably bad revenues.
Moore: I don't think so. I
would actually argue that because you got the market value from it, I
would be willing to call it good revenue.
I realize it wasn't profitable revenue; I realize that you
spent against it, but it actually helped create your company.
Schwab is a wonderful reference. If you had done it for the
Venezuelan Oil Institute, that would have been bad revenue. Nothing against Venezuela, by the way. Angie?
Kim: That's actually what I was going to say, especially with the
recent P2P hype, which I think is very, very good hype, but I would
question this whole notion of bad revenue.
One of the main things you stated is that through the chasm
period, you must not run out of money.
To the extent that you can get any revenue to help you not run
out of money, or at least sustain yourself until adoption does take
off, how could that possibly be bad revenue, at least in the short
Moore: I got it, but I'm going to push back against that one because
there is kind of a back and forth here.
I would argue that when we're in the chasm, our entire fate
depends on whether we can create a viable
market before we run out of money.
A viable market is one where customers actually come to you
voluntarily, partners bring deals to each other, there's enough
momentum in the market that it works and every day you wake up and
there's more business in front of you because the market's working.
It's an increasing returns phenomenon, and it's a little bit
like getting a merry-go-round to spin fast enough so that it gets
momentum. It's important
that every effort you make during that period be toward increasing the
momentum. If you take
transactions that decrease the momentum, even though the cash would be
nice, you would be net further behind at the end.
That's a little easier for a consultant to say than for
somebody who runs a company, however.
With that, I would like to you join me in thanking our panelists for
contributing to this show.
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