for shareholder value in the age of the internet
living on the fault line
the audience: q&a
Sherman: That was a great match-up of theory and experience.
It played; this stuff works, so thanks for those insights.
I'm Andy Sherman, Vice President of Sales for NaviSite, and I
want to add that we're very, very excited to be here.
This is a great event, so thanks very much, Mario and your
team, for putting it together.
We are going to move into Q&A, and we'll be getting
questions from two sources. We've
got mikes on the floor and we'll be taking questions via email, so let
me start with one from the Webcast audience.
first question is from Richard Hayden, Advanced
Management Solutions: For companies that aren't public yet and
don't plan to IPO, is there an equivalent measure of performance to
Moore: Yes, there is; valuation does not require a public market.
The way you would do it is to ask yourself, “If I sold my
company today, what would it be worth?” You can use that as a metric.
One reason, among others, why you might want to bother to go
through that exercise, even if you don't intend to sell your company,
is that it gives you an outsider's view of your future unrealized
potential. Even if you
never sell this company, you continually want to increase that factor,
and this would give you feedback on it.
Daly: I’m Ray Daly from OnSports.
In Innovator's Dilemma, Christensen said that the only
way for a company to deal successfully with disruptive technology is
to create a new organization. How
does that jive with what you’re saying about getting rid of the
context and concentrating on the core?
Moore: I think Clay Christensen’s strategy is clearly legitimate,
saying don't even fight this context buildup problem, start a new
thing; just let it go and don't fight mortality.
By the way, that's a divestiture strategy or a strategy for
seeding a new startup or a tracking stock.
I just want more options on the table when I think of companies
that have this powerful mechanism behind them.
If they could free themselves from context, they would be much
more powerful than starting over from scratch.
If you start over from scratch, you have to build it all the
way back up again or sell it to somebody else that's already got it
built. Clay and I don't
agree on that one. He
would say that what I'm advocating is pretty dangerous, but I'm still
advocating it. We're in
Odio: I’m Daniel Odio from NetWhistle.
I'm not sure how easy it is to discern core from context.
For example, it sounds like way-back-when, IBM
decided that the operating system wasn't all that core to their
business. At a small
dot.com, it seems like context is simply what doesn't get done, but do
you have some benchmarks that you can use to answer whether this is
really core to my business?
Moore: Yes. We didn't
present this tonight, but we have a model which says that there are
fundamentally four sources of competitive advantage.
You can't do all four, so we work with our clients to
prioritize them. In
mature markets, offer power is one, and another is customer power where you focus on and nail a segment.
Another one is industry power where you try become a Microsoft
or some other standard, and the fourth is technology
power. Work with your
team to figure out which of those you are trying to optimize and which
you are not, and do the same with the value disciplines.
Are you going to be a product leadership player, a customer
intimacy player or an operational excellence player?
It's not that we can forgo operational excellence, but which is
the one that you are going to make your bones with?
We try to get it down to one from each of those two lists as to
what you are going to be great, great, great at, and that becomes the
touchstone for core. Everything
else becomes prioritized relative to that gold-mark standard.
Even in a small company, you can make that work.
My name is Asher Epstein.
I work for a company called dadash.
Our motto is to focus on the process of innovation rather than
on a product or service, so we're trying to stay focused on our core.
When looking at a company from an external perspective, how can
you evaluate whether they are actually following their core?
For example, a lot of these large technology companies now have
huge venture capital arms. In
some cases, like Cisco, they are using it to buy time, but, in other
cases, they are using it to increase their earnings per share.
To me, that doesn't seem consistent with their core focus.
Moore: It doesn't seem that way to me, either. When large companies do venture capital just to create money
on their balance sheet, it's interesting to watch the public stock
market's reaction. They don't give you stock price appreciation for
doing it, particularly when they can’t see it.
If you can mask it and they misinterpret it as core operations
improving, they will raise your stock price until they can see through
it. Once they do, they
actually crater that thing because stock is a function of future
unrealized potential and this isn't your potential. Nobody
bought your stock for you to be a venture investor. I'll give you an example.
made $300 million on their Netscape
investment, their stock didn't move.
It's important to realize that once the investment community
sees that, they'll look through it.
Epstein: A quick follow-up. If
you look at AT&T,
they spent a billion dollars on consultants in 1996.
You would think that they were outsourcing their context, but,
given their problems today, it seems like that probably wasn't the
case. Are there any other
metrics that you would look at?
Moore: Here is a negative metric; hopefully we can have some
positive ones, but the negative is that once you get a very, very
strong context population in place, it wants to justify its vision of
life. It hires
consultants to help develop a conceptual hallucination, which turns
out to be the most profitable form of consulting on the planet.
Also the least gratifying for anybody.
Often, one of the signs of an organization that's actually gone
past the ability to renew itself is that it spends a ton of money with
consultants and plans that get written up in gorgeous books but never
Mazuka: I’m Paul Mazuka, with City
Of Mind. I liked what
you said about bad revenues, but have some objections to it.
Patricia Seybold of the Patricia
Seybold Group had a good article recently saying don't sell your
Amazon.com stock, regardless of the naysaying analysts who lament a
25% growth versus the 26% growth from the previous quarter.
Can you comment on that?
Moore: Bad revenue is not a function of the amount of revenue; it's
a function of the amount of future resource commitment that it takes
to win the sale. If that
future resource commitment is deflected from your market goal, for
example, if you are heading to dominate one market but you make your
numbers by taking a deal in some totally inappropriate place, and then
you take your best engineers and put them on this project that has
nothing to do with your future; then you’ll make your numbers in the
quarter that you did that deal, but you've now diverted key resources
going forward. In every
future quarter, you’ll have to make a higher and higher number
because that's the way that chart goes, but you have fewer and fewer
resources working for it. This
customer over here, meanwhile, believes that you have committed to
them. They are going to
ask you for even more commitments in the future, so there’s more
compromising. That's the
idea of bad revenue.
Tomat: My name is Andrew Tomat from The
Adrenaline Group. We're
a product development and strategy firm and we're often advising both
large and small companies to create the disruptive technology.
One of the messages I bring to them is from Christensen's book,
and I would like to get your reaction.
In many cases, the disruptive technology does not come from
above; it comes below, and the best technology does not always win.
Moore: There are a couple of things here. One of the benefits of the venture model is that it highly
distributes the source of disruption¾many,
many people disrupting. Part of it is that they don't have a vested interest in the
status quo; another is that mavericks don't stay long in large
advantage for disruption tends to be with the smaller companies.
Inside the company, the advantage disruption has to do with the
fact that disruptive ideas happen at the point of work.
They are not made up by some wizard in an ivory tower, they
happen at the point of a problem getting solved.
You often see core improvements happening low in an
organization, as opposed to context improvement which can only be
managed from the top down. I
think it takes real executive leadership to manage context.
I actually think you can manage core by just getting the heck
out of your people's way
I’m Paul O'Keefe of SAIC.
I'd like to present a bear case, and I wonder what your
rebuttal would be. Looking
back at history, every great bull market has ended badly, and, as a
result of the accumulated debt, has caused a great recession or
depression that required the market to take something like 20 years to
recover its old highs. Not just in stocks. In
the last few years, the cost of capital was so artificially low that
anyone could be funded and anyone could go public.
Now you have the reverse case where it would seem to me that
the cost of capital will be extremely high.
Otherwise viable companies will be starved to death because of
the economic environment and lack of access to the capital they need.
Moore: Right. Got it.
We are at the fringes of my level of competence, moving rapidly
into my level of incompetence, but I would say this.
If we look at the world right now, we don't have 20% inflation,
so there is still capital which, by historical margins, is reasonably
good. We have this
information technology which is a phenomenal productivity source that
looks very encouraging. Even
if we didn't have any new companies for the next five years, we would
get productivity improvements every year by just absorbing what we
have already invested in today. Also,
I think that this infrastructure of the Internet, if it does enable
core/context outsourcing and companies can give up context themselves
to spend more time on core¾in
theory that's possible with this model¾then
the net new wealth creation will be real.
Coming out from bull to bear, the people who are bullish are
trying to find some way to explain away the bear market.
I'm not sure how convincing that argument is, but it's the one
that's at least allowing me to sleep at night.
Back to you, Andy, and thanks a lot.
Sherman: Thanks very much, everyone.
Finally for the wrap-up, I'd like to welcome a person who needs
no introduction to this audience.
He is an entrepreneur, a successful business executive, a
philanthropist and very notably, a rabid Cleveland fan, Mario Morino.
mario morino: wrap-up
you everybody. This has
been a great night. Geoff,
I thought it was phenomenal. I
felt like I earned about nine credits at the Harvard
Business School on the concepts of the New Economy this evening. It’s generally fairly easy for me to put together a
wrap-up, but this was tough. It
was tough because you went through so many effective points so
cohesively that it was tough to distill down what is such an
integrated dialogue. I'll do the best I can.
This was a compelling and realistic dissertation of what I'd
call business and economic fundamentals for the 21st
century. While I sat
here, so many of the points just resonated with me, and so many hit
very close to home. I
want to just give you some highlights, then talk about some anecdotal
things that I've observed.
I absolutely love the concept that context is core in the wrong
position. Besides my work
in the nonprofit space, I'm also Special Partner to a firm, General
Atlantic Partners, where we study the markets intensely.
One of the big areas we're looking at is outsourcing,
specifically business process outsourcing.
That’s the epitome of context being core in the wrong
position. We are watching
companies we invested in take entire processes out of organizations,
and recruit the expertise with them. When you see that, I agree that the New Economy is going to
be an integrated network of people who focus on core. It has tremendous implications for models that we will use in
business, whether you want to call it the flexible networks we've
known in certain market economies or the chaordic models that Dee Hock
innovated at VISA.
It really does portend how businesses are going to unfold and
whether or not we will see the disaggregation of context within the
Global 1000 and to, in turn, aggregate it to create core-driven
I also think that it plays to something Peter Drucker has
maintained for a long time, that you should not focus on your
weaknesses; you always build on your strengths.
The only way you can get quantum change is to build on
strengths. The way you'll
get incremental change is to focus on your weaknesses.
I think this is exactly the point Geoff is trying to reinforce.
I love the idea of good, indifferent and bad revenue, and this
piece hits too close to home. One
of my closest friends and I used to have a battle all the way through
the 1970s. For years he
was a bag carrier and a marketing and sales guy; I was a CEO.
We argued about the importance of selling.
He said, “Never confuse selling with installing.”
As CEO, you must
confuse selling with installing.
That’s the difference because it’s about what is good for
your business? Geoff’s points about bad revenue are remarkably important.
If you want to kill a company, get bad revenue.
If you want to kill it slowly, get indifferent revenue.
You must get business that counts.
If you can't get it, then get the heck out because you are not
going to make it. That's
reality. We sat through a discussion at a board meeting a few weeks
ago talking about how a few firms in a particular sector missed their
numbers. If you miss your
numbers, the market immediately assumes that you are going to miss
them for several quarters. Why?
Because you let bad revenue or bad structure affect your
company and infect your business.
They know that you now have weak fundamentals.
You often see a company miss one quarter and then miss numbers
in consecutive quarters thereafter.
It's a great lesson to heed because it brings the issue of bad
and indifferent money right to the issue of the early adopters versus
the pragmatists. This is
a coat I've worn a long time in my life and have actually missed huge
business opportunities because of it. I'll add two thoughts.
One, I dread it when somebody comes in and talks about how they
have an “elegant” solution. I want to gag because they're designing something for the
early adopters. The only
ones who can appreciate that elegance are generally the sophisticated
buyers. All of a sudden
it's not a chasm, it's seven chasms.
You never get to the pragmatists because they don't care.
It's a danger. If
you hear “elegant solution,” be very careful, because the solution
has to eventually be reasonable and apply to that herd of pragmatists. There are some solutions today that have never realized that,
and it's a trap.
Second, Bob Pittman of AOL has a great, great story.
He used to be in the theme park business and says that one of
the great dangers you can get into is not realizing that there's a
group of people who are amusement park devotees. They have their own
magazines and they're the ones who fill out the suggestion cards and
give you the feedback letters. They always rate places like Kennywood number one, never
Disney, because they use a different set of metrics from the mass
consumer. Are your kids
begging you to go to Kennywood or to Disney?
If you listen to them, you’ll react to only a tiny slice of
your marketplace, entirely missing all the pragmatists that you really
want to have over time. I encourage you to understand that because sometimes, when we
want to get our beta testers and early sites, we pick the most
sophisticated companies. What
we risk is totally missing the appeal to the pragmatists in the
marketplace. To me, this
was one of the most astute comments of the evening, and an area,
unfortunately, in which I've made mistakes at least twice that I can
As Geoff said, positioning yourself in the right category is
critical. When we went
public in 1986, we had come out of what today is known as the systems
management industry. In
the early 1980s, there was no systems management industry. There were slices, such as performance monitoring and
capacity planning, which we and our competitors were in, some names
you would not even recognize now.
The trouble was that those were very narrow categories.
When we went to Wall Street for our IPO, our challenge was to
explain that we weren't in a narrow category like those, we were part
of something called “systems management” and it was a huge
category. Once we got that point across, our future potential changed
demonstrably to the Street because they now understood that we were in
a very large category, not a narrow one.
When you look at your positioning, you've got to be able to
describe your category with specificity.
Don't misstep on that because it literally is your future.
Geoff’s point about institutionalized comparables is
something that blew my mind. Sometime
last spring I met a guy. We were having dinner with a mutual friend who I think is one
of the most astute investors in the country.
He said, “You know, it's amazing, we've had a jump into
Internet investing. I
never thought I'd use it in a million years.
It's stupid, but we're doing it.
What's happened is that we're into momentum investing.
We can't afford not to invest.”
You want to talk about being scared at a particular moment in
time? There it was.
You had the signs of exactly what we're seeing now, and it was
this issue of institutionalizing comparables.
The whole market was there, including institutional players who
vowed never to be in this place.
They had no choice but to come into the market, and all of a
sudden we weren't investing in fundamentals, we were investing in hype
or highly inflated returns or whatever you want to call it, hoping we
would play and get out before anybody else did.
Some people actually have been able to do that in the last six
months. Some have done
massive liquidations and they're wearing big smiles on their faces.
They have a lot of cash in the bank while all the other people
are sucking gas.
I think the point Geoff made about executives being green core
and middle managers being red context is just so appropriate.
We did a series of about 20 acquisitions in some 23 months.
I remember coming in one day; we had everybody in the room and
we were getting ready to tell them about this deal we had just done
that we thought was the greatest thing since sliced bread.
We were jacked. I'm
looking at all my friends in the first row and they looked like,
“Holy cow, here we go again!”
It was the red and the green.
They didn't want to hear about it.
This was more work, more aggravation, more integration.
This was the last thing they wanted to see.
If you want to see red and green, look at the telcos. There are these telco executives who want to move their
legacy ships. Guess what?
All around them it’s total red.
How are they going to drive those organizations?
That's going to be an interesting challenge.
To wrap up, the integral points that I think reinforce most
clearly what Jeff said are:
Avoid the crap, grow the GAP and extend the CAP.
That’s life, and I can't say it any clearer.
Stay away from the bad revenue.
Get your differentiation in place.
That is what business is about, but we take it for granted.
The minute you get all the red around you, your valuation
changes. There is going
to be a lot of opportunity for green around that red in the New
There is still a lot of whip left in the lash.
Boy, you better bet on it.
In the last 48 hours, we have had two sobering meetings. In one, a very top level investor said “batten down the
hatches, it's going to get a lot worse.”
Today we had a meeting with one of the top law firms and a
senior partner said, “Guess what?
It's going to get a lot worse.”
There is a lot of whip left in the lash.
I actually think that's good.
We have to clean out a system that got a little out of whack.
As Geoff indicated, the Internet sector is the greatest sector
we have ever seen in our economy.
Anybody with fundamentals is going to do very well.
That's the key, fundamentals.
You are going to have to have something that works.
The smoke's gone. Maybe
not all of it yet, but it's going to be gone pretty soon.
That's going to be true whether you are in wireless, photonics,
anything. The world has
gotten adjusted. You
haven't even seen how the bars in the venture shops are going up by
the hour in terms of what deals they are going to invest in.
It's going to change, but I don't think it's negative.
I think it's an adjustment that was due.
When we finish this, it's going to be very healthy.
The reality is that there is still an enormous amount of money.
You have funds created with $2 billion of assets to deploy. There is so much money sitting around to be invested that
there is a supply and demand ratio different from anything we have
ever seen. That's one of
the missing dynamics that nobody can figure out yet.
The fact of it is, life will get a little tougher, but, in
2001, it should still be a lot of fun.
What Geoff laid out tonight was, in my view, an erudite
description of what the economy is going to look like.
The types of things you represent are going to be remarkable
opportunities. Thank you
very much. It was a
Let me conclude with some appropriate thankyous.
Thanks to our sponsors; you are stepping forward to make the
ecology of this region continue to grow and come alive.
Your support is not only appreciated, it's necessary and we
thank you very much. I
want to thank Angie Kim, Brian Keane and Andy Sherman for your roles.
Let me correct one thing.
Several times my name was mentioned for acknowledgements and
thankyous, but all I do is show up and talk.
The people who make this work are Mary MacPherson, Fran Witzel,
Mitch Arnowitz, the entire Netpreneur.org team, the Morino Institute
team and all of the volunteers. I
just get here on the back end, so congratulations to Mary and the
team. Great job.
Finally, this is really about you in the audience here and
online. We are seeing a great phenomenon occur¾networking,
clustering, people coming together in regions where remarkable,
vibrant communities are being established.
We have one here in Greater Washington because you take time
out for a night like this. When
the high-tech councils run an event, 1000 people are showing up.
Venture Association is now the largest East Coast fair. There is so much going on.
So thank you entrepreneurs, funders, service providers,
everyone. You've made all
this possible. You are
making this region such a success.
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