Doug Elwell, Inc.: News: Chicago eBusiness Year in Review: A Report (Part 2 of 3)

Tuesday, May 13, 2008

March 20, 2002:
Chicago eBusiness Year in Review: A Report
(Part 2 of 3)

Event Date: Tues., Jan. 9, 2001
Location: IIT's Rice Campus, 201 East Loop Road, Wheaton, Illinois
Attendance: Around 50 people
Rating:

Speakers:
- Gary Ruderman: [Former] Editor-in-Chief, I-Street Magazine
- Brian Timpone, [Former] Chief Content Officer, ePrairie
- Ron May, The May Report
(Speakers are listed in order of appearance)
Hosted By:
Lawrence Lerner, President
The Association of Internet Professionals (AIP) - Chicago Chapter

Story: Part One | Part Two | Part Three
Transcript: Part One | Part Two | Part Three

by Doug Elwell

ooking back on the past year, it has been interesting to see which of the predictions Gary and Brian had made in Part 1 about what would happen in 2001 — who would succeed, who would fail, and why — both their predictions about specific companies and about general trends about what was in store for the so-called "New Economy". Unfortunately, two of the casualties of the Tech Crash of 2000 were Gary and Brian themselves, who no longer work for the same organizations that they worked for back in January 2001 when the meeting originally took place, due to that very same tech downturn. However, their talent and experience is no doubt being put to good use elsewhere, and their insight into the New Economy will remain here for everyone to review, for all time.

Enter the Sky King

One of the shining stars of the Chicago tech scene to be revealed in recent years has been one Ron May. An IT recruiter turned journalist, Ron rose to prominence in 1999 and 2000 reporting on the rise and fall of divine interVentures in his controversial online tech newsletter, The May Report. Often described as a "gossip columnist", and even as "the voice of the peasant", Ron and his Report have risen to prominence by blending an artful assembly of straight reporting, opinion, gossip, rumor, and unsolicited emails from thousands of readers ranging in intent from merely informative to savagely vindictive.

The latter source of information has perhaps been his most important because, as "the voice of the peasant", Ron's Report has allowed the average worker to voice their discontent against present or former employers whom they consider to be incompetent, corrupt, or otherwise deserving of retribution for one reason or another. This has had a chilling effect on the entire IT industry, as companies formerly accustomed to treating their employees like cattle now realize that a single angry email from a single disgruntled employee can have devastating effects upon their bottom line, the careers of their management, and even their company's survival. The May Report has thus filled in the vacuum between employer and employed that ethics and accountability once filled. And in this role it has truly excelled.

His most famous target of ire and amusement was the much ballyhooed divine interVentures (now divine, Inc.). Divine's daily ups and downs were closely documented by Ron, who hitched a ride on the divine gravy train early on and rode it to stardom. As the fortunes of divine rose and fell against the background of the increasingly unstable tech sector, The May Report grew in renown as the only source of (usually) accurate information about what was really going on inside divine, and in the various other local tech firms in the Chicago area. As Ron explained himself in his May 22, 2000 newsletter, "A jug of wine, divine, and me: our fates are intertwined."

Now, at the AIP's Chicago eBusiness Year in Review meeting, I was going to see Ron May, the terrible nemesis of divine who had caused Flip and Co. so much aggravation, for the first time. Near the end of my tenure at divine (Xqsite), before the "Black Wednesday" layoffs that took place one year to the day that I was hired (November 8, 1999), I had begun increasingly to rely on The May Report for the real story about what was actually happening at divine. As a result, I had already started interviewing with other companies, realizing that layoffs were clearly imminent. So, I was grateful at least for a warning, as divine management had given no indication that layoffs were imminent — in fact, the forecasts were generally positive right up to my last day. So, in my eyes, at that time Ron and his Report were the only voice of authority in the tech sector that I found I could trust.

The Birth of the Internet

After Ron got settled, Lawrence Lerner restarted the conversation with the concept of the Internet as only the latest wave in a series of technological innovations that have spawned entire industries: the PC, client-server technology and, most recently, the Internet.¹ This has always been true. The Industrial Revolution, spawned by such inventions as the cotton gin, caused dramatic changes in society as rural farming gradually gave way to factory work in increasingly centralized city areas. The assembly line pioneered by Henry Ford dramatically increased the quantity and homogeneity of machine parts, which allowed for the creation of vast quantities of complicated machinery. This in turn formed the basis for the creation of complex computer systems based upon mass-produced parts such as the vacuum tube, followed by the transistor and, most recently, the silicon chip. The silicon chip in turn made possible a new generation of desktop-based computers, or " PCs", which made the desktop computer available to the masses. And connecting all of these personal computers is the ubiquitous Internet, the latest in the series of technological innovations to spawn an entire industry.

The 20th Century also saw a dramatic increase in the urgency for technological advancement as industrialized countries realized that they needed to maintain a technologically advanced military as a means of self-defense against the increasingly sophisticated armed forces of other industrialized countries. Technological advancements in military weaponry have being going on since the beginning of recorded history, as man moved from stone to bronze to iron weapons, from the spear to the gun, each weapon system making previous weapon systems obsolete. However, the 20th century saw a dramatic increase in innovation and rapidity of technological diversification, motivated largely by the two World Wars and the Cold War that followed. Though there were many, the most prominent of these innovations were the tank, aircraft, automatic weapons, radar and, most recently, the atomic bomb, the latter of which was the catalyst for the creation of what we know today as the Internet.

The Internet was originally developed by the military as a last-ditch form of communication in case of nuclear attack. This early form of the Internet, the ARPAnet, was developed by the military in 1969 as a means of allowing computer networks to survive multiple nuclear strikes and still be able to communicate. This was accomplished by developing a protocol (IP) that allows for the dynamic rerouting of messages utilizing a decentralized network of small computers, each of which formed a single node on a vast network. Such a system would require the destruction of nearly all of the connected computers in order for it to be rendered inoperative, just as a spider's web has to lose most of its strands before it finally collapses.

The ARPAnet was initially limited to a handful of military computers, but was later expanded to include universities and research institutions, both in the United States and abroad. In 1991, the ARPAnet was opened for use by the general public, and the protocols governing it were upgraded (TCP/IP), allowing for the explosive growth in Internet usage seen throughout the 1990s. The Internet has now grown to be a major force in business and commerce, dramatically increasing the ability for businesses to communicate and conduct transactions with their customers, forming the foundation of what is commonly known as the "New Economy".

Attributes of Successful New Economy Companies

One audience member at the meeting wished to know more about businesses that have succeeded in the New Economy. "Is there nobody who is making good business using new technology in the New Economy? And, aren't there some people who are doing this, and isn't there a way that we could build more of an image around the successful ones?"²

Decentralization

Lerner replied that the New Economy companies that are successful are so because they do not rely on Old Economy command-and-control methods to do business, centralizing all their operations in one facility under a rigid bureaucratic structure. Rather, they decentralize their operations, spreading each part of the process out amongst numerous smaller companies and contractors, and focusing on their core competency of managing the process.

You want to talk about New Economy? Here's some real good examples: Cisco, Dell, and Motorola all have something in common besides being high tech companies: They don't build anything. They are very good at [being] what you would call New Economy companies. They have a very streamlined, pipelined process for innovating, for aggregating and putting together and researching — they come up with the chips, they come up with the breadboards — 86 Designs out there builds breadboards for Motorola's PDAs and for some of the chipsets. Motorola does not build that stuff for themselves anymore. It's cheaper, it's more efficient to build a network of suppliers to bring it in. As long as you know that your core competency is to kind of manage that process, that is a great example of it.³

In other words, successful New Economy companies have achieved their success by adopting the very same methods that the designers of the Internet originally used to ensure that it could survive a nuclear attack. By decentralizing their processes, successful New Economy companies can absorb the shock of disastrous events, such as the Tech Crash of 2000, and still survive. Though some of their partners and contractors, the "strands" of their "web" of processes, may be weakened or destroyed by such an event, the process as a whole will still survive, as the redundancy of the system allows for a high degree of flexibility and adaptation. In the case of Motorola, if one or more partners or vendors go out of business, they can easily be replaced, and the core business of managing the process will go on largely unaffected. Therefore, in order to succeed in the New Economy, businesses must adopt the very same structure of the medium that they wish to utilize — they must decentralize their operations and outsource as many of their processes as possible.

Multiple Revenue Streams

Another characteristic of successful New Economy companies is that they tend to offer a variety of products and services, resulting in a number of different revenue streams. This keeps the business from depending on one single product or service which, if it fails to succeed in the marketplace, will take the company down with it. Ruderman explains,

What I was trying to find was one product in this New Economy that is 'recession-proof'. And Darcy [Evon] made a very good point, that the New Economy is not so much a product, as it is an amalgam of services, of offerings of a way to transmit information. So the companies that don't have a 'product' per se are going to do well, because a product — I could decide tomorrow not to buy a blue shirt, and if it's blueshirt.com, they go down the tubes.⁴

Just as successful New Economy companies help stave off difficult times by decentralizing their processes, so too they survive by decentralizing their revenue streams.

Sales-Based Revenue Models

Basing their revenue models on realistic sales projections is another feature of successful New Economy companies.

The big problem that B2Bs had [is] the B2B companies started out by saying, 'This is a $10 trillion market out there. And we're going to take 2 percent of that, which is [$200 billion], and the VCs went, 'Sure. Here'. But in reality, you don't make [$200 billion] off of a $10 trillion market. You make your first sale, then you make your second sale. And your sales go up, or your sales go down.⁵

It is always wiser to base your revenue projections upon actual clients, rather than relying on potential clients that exist only in your business plan. The "build it and they will come" philosophy was at the heart of many of the most disastrous of the dot-com bombs. Base your revenue projections on realistic assumptions based upon current market conditions, not speculation. Be conservative.

Partnerships

Forming useful partnerships with companies that complement their basic product and service offerings is also a hallmark of successful New Economy companies. Ruderman explains, "Centerpost is a really good example.... They're a very good company, because they came up with an idea, with a hell of a good technology, they got a hell of a partner in Motorola, Motorola opened the door to United and said, 'Hey United, this is a good technology. Let's put it together.' So, we need more success stories like that."⁶ Partnerships are a further decentralization of the already decentralized approach used by successful New Economy companies. Whereas New Economy companies are structured like decentralized networks, containing multiple hubs with multiple redundant connections, partnering with other New Economy companies is like networks connecting with other networks, each dramatically increasing the power and capabilities of the other.

Client Focus

Focusing on building a solid core group of clients is another criterion exhibited by successful New Economy companies. May explains,

The whole idea [is] to focus on a couple, 2, 3, 4, 5 customers, who are doing a lot of business in a particular market — start with that anchor. There's the point. A lot of these companies I think that have the potential to be very successful have one side of the equation already filled in. They have the customers on one side, now they're going out to do the other side of the deal.⁷

By focusing on building a solid core group of customers, successful New Economy companies set their foundations firmly, helping guarantee the multiple revenue streams necessary for survival through difficult times.

Why Many New Economy Companies Failed

Though there are numerous reasons why many New Economy companies failed, there are several specific reasons that consistently stand out:

Lack of Industry-Specific Knowledge

One of the most important reasons that many dot coms bombed because they did not understand the industries that they claimed to serve.

Right now, the problem is, a lot of these companies were started by people who didn't understand the state they were in. And that happened a lot in Silicon Valley. Hey, you know, Jim Clark , you guys know who he is, he started Netscape, he started Healtheon, the WebMD? He didn't know anything about medicine at all and he started this company that was going to 'transform healthcare'. That happened a lot out there. And the problem is these people not only did not have connections in that space, alright, but they were arrogant enough to think that they were smarter than everybody else who was there, that the doctors, the insurance people didn't know, 'I know, I'm better'.⁸

The Internet's glamorous quality of being "the next big thing" gave would-be entrepreneurs the false belief that mastery of Internet technologies gave them a qualitative edge over competitors who had industry-specific experience and connections. This, however, was not the case, as industry-specific experience is always most important to a company that wants to gain traction in a given industry.

Poor Management

The second biggest problem with New Economy companies, if not the biggest, was a lack of competent management. Quite often, managers of these companies, or of their IT departments if web development services was not their main focus, typically came out of a programming background, where they developed prepackaged computer applications — products. Web development, however, is essentially a services industry, a concept that is foreign to programmers, many of whom are not used to interacting with clients on a project basis. As a result, many New Economy companies found they now had to spend additional time and energy in developing working relationships with the people to whom they were selling their services, something with which most programmers have little experience. Another limitation of web development services is that the revenue stream is less reliable than that usually generated by prepackaged software products, so companies that did not account for this issue had to quickly adjust their revenue models, often with dire results.

Lawrence Lerner brought up a specific example of how important qualified, competent management is to the success of any given venture:

Fifty-three percent of some of these client-server projects fail. Was it the technology? No. The technology is certainly sound. Was it the people? No, they were pretty smart. Was the planning bad? Was it poorly executed? You bet! I don't know how many times I had clients come to me and say, 'Hey, we've got a thousand Word Perfect documents, and we're going to swap over to Microsoft Word over the weekend. No big deal, right? Forget about the macros, it all converts. It says so in the documentation. You know what? If 20 percent of the documents don't convert over, that's 200 you've got. And that's a small, sort of trivial example. But the point is, [there wasn't good planning].⁹

Lack of Communication

Another common problem was the lack of communication between management and IT. Often the management was unable to properly communicate its vision to their IT departments of what they wanted their products and services to do for their customers. In other cases, the IT departments were either unable or unwilling to do what it took do make their products and services do what they were planned to do. Sometimes, probably most of the time, both were at fault, and the results were shoddy products, poor customer service and, in some cases, the destruction of the company. Timpone turned to the audience and addressed this issue directly:

A lot of you guys are programmers or have worked with project management or technology.... The problem is, you guys don't communicate with the people who know the business. And that's a big issue, I mean, look at the Chicago Tribune's website. They built their own content management platform. And it's a crummy site. I mean, they have tons and tons of content going back, you know, 100 years, and they didn't use any of it. And that's because, when they built it, I guarantee you the technology people, they didn't think one moment about what the people on the other side would need. And your Sun-Times [speaking to Gary Ruderman, formerly of the Sun-Times], I met with Dan Miller once about this, who is the business editor, and he said, 'We have all this great news we break intraday, but we can't get it up on the site because the site doesn't allow us to do that. That's a disconnect between the programmers, who are in their room with the door locked, with a sign up that says, 'If you knock on the door we're going to beat your head in', and the people who are doing the real business out in front.¹⁰

This reflects a larger problem in the Chicago tech community, where the business and technology schools in the area tend not to coordinate with each other. Ruderman recalled that this was a question that he commonly ran into:

People said to me, 'Why isn't there more technology transfer in Chicago, technology that goes into commercialization?' Because, in Chicago, the technology people don't talk to the business schools to get it going. So why isn't there a community here? There's not a community here because there's no 'dire need'. We don't need a community here to survive, if we're going to survive regardless of the community. And the other side is, the two sides don't talk to each other.¹¹

Conclusions

Successful New Economy companies have survived the Tech Crash and ongoing economic slowdown by aligning their business practices with the medium on which they have chosen to do business. These companies display the following characteristics, among others:

Decentralization
Multiple Revenue Streams
Sales-Based Revenue Models
Partnerships
Client Focus

Unsuccessful New Economy companies failed because they did not align their business practices with the medium on which they chose to do business. In addition, they tended to display the following characteristics:

Lack of Industry-Specific Knowledge
Poor Management
Lack of Communication

Therefore, in order to succeed in the New Economy, startups and existing companies trying to get into the web space need to closely study the characteristics of the companies that survived the Tech Crash of 2000, and avoid the mistakes of those who did not. Moreover, if the Chicago tech community is to go forward, we will need to start communicating and coordinating with each other better, or we risk making the same mistake twice.

[Make sure to visit next time to read part 3 of our Chicago eBusiness in Review report, where Ron and Co. focus specifically on the state of Chicago eBusiness.]

Story: Part One | Part Two | Part Three
Transcript: Part One | Part Two | Part Three

Brand Warfare: 10 Rules for Building the Killer Brand
David F. D'Alessandro
Rating:

Powerful lessons on how to build and sustain your own "killer brand". Creating and sustaining a good brand is the most complex and perilous task any business will ever face, yet nothing is as misunderstood. Under the direction of marketing wizard David D'Alessandro, John Hancock transformed itself from a sleepy old life insurer into a leading financial services giant, with a sustained 20% annual rate of growth. In Brand Warfare, D'Alessandro draws on his personal experience as a brand-builder and examples from America's smartest and most foolish corporations, developing principles that you can use in any market. At the same time, he creates an entertaining picture of the marketing business with anecdotes that convey a keen sense of the absurdities of corporate life, balanced by a tremendous respect for the consumer. This tough-minded, funny, and refreshingly candid book gives you a proven roadmap for marketing success as you learn:

Why every business needs a good brand to compete

Why consumers need good brands as much as good brands need them

Why sycophancy from the agency and meddling from inside the company will sink your campaign every time

About sponsorship: how to avoid being taken, and how to make the investment pay for your brand

Why it's as important to market your brand to your employees as it is to your customers

Why every business decision should be filtered through the prism of the brand

Gonzo Marketing: Winning Through Worst Practices
Christopher Locke
Rating:

The coauthor of the no-more-business-as-usual blockbuster The Cluetrain Manifesto — which basically told Net-age marketers to stop talking at their markets and start conversing with them — follows up with a book that's more a highly entertaining, nimbly erudite screed against our current mass-market, mass-media culture than it is a recipe book for e-commerce marketing success in the post-cyberboom era. Writing in a paler imitation of the profanely irreverent, freely associative "gonzo" journalism style pioneered by his obvious idol Hunter S. Thompson, Locke starts with the by-now-familiar idea that old-style mass-marketing "broadcast" advertising just won't work on the Web. Indeed, he says, conventional print-ad tactics as embodied online by banners and pop-ups might actually generate more ill will than sales, and that's why companies must use the Web to somehow enjoin their products and services to the quirky niche interests of the gazillion individual cybercommunities (or "micromarkets") whose greatest advantage for marketers is how freely and speedily their members talk among themselves, touting a brand when and if it's truly deserved.

The Virtue of Prosperity:
Finding Values In An Age Of Techno-Affluence
Dinesh D'Souza
Rating:

In The Virtue of Prosperity, former White House policy analyst Dinesh D'Souza offers the first in-depth analysis of the spiritual and social crisis that has been spawned by the New Economy and new technologies. The chief problem societies have faced "since the time of the Babylonians," writes Dinesh D'Souza, has been the problem of scarcity. "But now that age has passed, and America has a new problem: coping with prosperity." It's a good problem to have, but also a serious, even debilitating, one. "The moral conundrum of success," the author continues, means that all too often, "the body is flourishing, but somehow the soul still feels malnourished." D'Souza is well known for his bestselling conservative books Illiberal Education, The End of Racism, and Ronald Reagan. On these pages, however, he seems to set politics aside to ask deep questions about the meaning of life in a world of material abundance. (Review by Amazon.com)

The Monk and the Riddle:
The Education of a Silicon Valley Entrepreneur
Randy Komisar, Kent L. Lineback (Contributor)
Rating:

Prospective entrepreneurs may think they know everything there is to know about starting a business in Silicon Valley. They can draw up business plans, have meetings with venture capitalists, maybe even get funded and actually launch a start-up. However, in The Monk and the Riddle, Silicon Valley sage Randy Komisar reasons that's only half the equation for success. And it may not be the important half. Komisar has worked with a number of companies — Apple, LucasArts Entertainment (the gaming division of George Lucas's empire), and WebTV among them — and has come to a rather startling conclusion: if you can't see yourself doing this business for the rest of your life, don't start it. In other words, he wants to see passion and purpose in business, not just spreadsheets and a by-the-numbers business model.

To illustrate, Komisar takes the reader through a hypothetical Silicon Valley start-up, with an eager entrepreneur named Lenny trying to get funding for an online casket-selling business. As Komisar helps Lenny find the real purpose of the business, the passion behind the revenue projections, he reflects back on his life as an entrepreneur. Komisar emerges as a master storyteller, the kind of guy you'd feel honored to share a bottle of wine with. And you believe his conclusion: "When all is said and done, the journey is the reward." It's great if you've made billions on the journey, but the important thing is that you do something you can truly throw yourself into. (Review by Amazon.com)

Burn Rate
Michael Wolff
Journalist Michael Wolff is a recognized pioneer in the business of cyberspace, meaning he has been developing products and services for the online world since the dark ages of 1994. During the intervening years, however, not all the activities he engaged in, nor all the people he dealt with, left a pleasant taste in his mouth - although, to be sure, his cumulative adventures certainly have been very lucrative.

In Burn Rate: How I Survived the Gold Rush Years on the Internet, Wolff pulls few punches as he candidly and methodically recounts the single steps forward and multiple steps back that marked his experiences while trying to transform a fledgling print media enterprise into a towering New Media colossus. After developing a series of "NetGuide" books that proved hugely successful, he attempted to transfer the concept to a variety of online offshoots and in so doing connected with Wired magazine, Time-Warner's Pathfinder, the late Robert Maxwell's media empire, AOL , assorted venture capitalists, sundry competitors, and numerous would-be partners. Burn Rate is a fascinating tale that might best be characterized by the old adage that warns us to "be careful what we wish for, for we just might get it." (Review by Amazon.com)

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