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managing for shareholder value in the  age of the internet
living on the fault line

page four of five | previous page

four: keane, kim & moore: a conversation in the trenches

Ms. 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.

          Angie 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.  Brian 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.

Mr. 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 journey?

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Ms 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 Internet.

Mr. Moore:  Brian, how about you?

Mr. 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 phones.  Phone.com 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.

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Mr. 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?

Mr. 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 and E*Trade.  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.

Mr. 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.

Mr. Keane:  Yes, we have a good example.  Office Depot 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.

Mr. 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?

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Ms. 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 pretty important.

Mr. 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 consequences.

          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?  Brian?

Mr. 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.

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Mr. 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?

Mr. 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 back-office functions.

Mr. 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?

Ms: 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.

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Mr. 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 house.

          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?

Ms. 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.

Mr. 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.

Ms. 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.

Mr. 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, Brian?

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Mr. 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.”

Mr. 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?

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Mr. 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.

Mr. 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.

Mr. 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.

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Mr. 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?

Ms. 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 term?

Mr. 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.

[continued]

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