The Daily Doyle

Nov. 12, 2003: What's Your Offshore Play?

Customers don't necessarily want to review an exhaustive body of work done offshore by the company or take a tour of any offshore development facility owned by it, but they do want to know whether the company "has a pipeline," says Calderin. That's a laymen's term for do you have a strategy, an aliance, a capability or a play in some inexpensive labor market?

That's a significant change from just two years ago when few companies asked about an offshore play. But with more budgets under pressure, more CIOs are interested in learning just how many of their IT partners can save them money if needed.

I point out his experience because this is the second time in a month that the offshore outsourcing question has come up with a relatively small IT solution provider that serves local customers. A Microsoft partner that I'll feature in our Dec., 1, 2003, issue also asks about the impact that offshore providers will have on IT solutions providers based in North America. (I took that inquiry directly to Microsoft CEO Steve Ballmer, who provides an interesting answer on the entire phenomenon in our upcoming Steve Ballmer & You feature.)

Whether you're small or large, offshore programming and integration is an issue you're going to have to address sooner or later. Probably sooner. In Calderin's case, he's got customers that think they'll get savings of 30 percent or more if they move work done by domestic IT experts to areas where labor rates are cheaper. That's why Anexinet is negotiating with an offshore provider that has operations in India, Eastern Europe and Canada to serve as a standby if lower-cost solutions are required by its customers.

High-end architecture design and other work will stay here for obvious reasons, but other things? Some could move elsewhere, where customers are not based, he says. So his company, which offers infrastructure upgrades, applications integration and other services, is preparing itself just in case.

Good idea. I recall earlier this year, June to be exact, when VARBusiness held a roundtable discussion for members of the VARBusiness 500, that this issue came up in a big way. In New York City's famed Rainbow Room, the editors of i>VARBusiness

"We started with a joint venture with an offshore and are looking seriously at building our own," he said. "I'd have to say that probably of all the fundamental changes, I see a tremendous shift over the last 24 months to absolute insistence when we go into a client, particularly a large client, on what's our offshore story. That's No. 1."

I thought he was being dramatic. Five months after the event, I have to confess that I wasn't adequately clued in. Now I am. That's why we have two of our reporters, Rob Wright and Jeffrey Schwartz, researching a feature article that will try to gauge just how many IT solution providers are likely to be impacted by offshore providers.

Some more thoughts on Anexinet. Although it formed just as the IT economy was heading in the toilet, Anexinet has managed to grow each year it has been in business. This year, sales could hit $10 million. Furthermore, it's profitable. My favorite aspect about the company is how it shrewdly takes advantage of vacancy rates in greater Philadelphia, where some choice digs can be had for pennies on the dollar, according to Calderin. On four different occasions, the company has found a sweetheart deal on space and rented offices adjacent to customers. Vacancies are so high in downtown Philly that Anexinet can usually rent space within talking distance of customers. It sets up satellite offices adjacent to customers and is literally there at the drop of a hat to meet their needs. In one case, the company sublet space from a company that has a division that theoretically could have catered to the customer itself. Of course, its labor rates probably meant that it could not have profitably served the customer. If only it had an offshore play%85

Nov. 6, 2003: Verio Hits Milestone, Plans for Disaster Recovery
Had a phone interview with NTT/Verio CEO Justin Jaschke Thursday. Like many CEOs today, he was in an agreeable mood. Although his beloved Colorado Buffs are a crummy 3-6 this year and face the No. 22 Missouri Tigers on Saturday, his company is turning things around. Last quarter saw the biggest jump in sales since the end of the dot com era and, better, yet, NTT/Verio recorded an EBITDA profit.

Though he refuses to call the IT recession over--"There's still excess capacity out there and tough price competition," he says--he sees encouraging signs.

In case you don't know NTT/Verio, the company is one of the largest web hosting and access providers in the business. Once a roll-up of smaller players, the company was acquired by NTT three years ago. Just before the dot com bubble collapsed, the company built out tons of capacity thinking that demand for hosting would soar. Boy was that a wrong bet. But many others who made the same one aren't around, so NTT/Verio deserves credit for holding on in tough times.

MCI has also held on and emerged from bankruptcy, though Jaschke wonders if struggling companies like it won't end up in bankruptcy due to their current business model. Certainly, he's confident that he has the company on the right track. Among other things, NTT/Verio has expanded into security and even Web services by helping fledgling .Net developers test and troubleshoot their applications. Now he's turning his attention on providing disaster recovery solutions for those who cannot afford some of the options other companies offer today. By providing a bevy of different services, such as true data protection without a hefty premium for instant system recovery, he thinks NTT/Verio might just find an entire new set of customers. Watch for something from the company in the second half of 2004.

Momentum aside, Jaschke needs you. Whether you offer your own hosting today or merely want to provide that capability to your customers, NTT/Verio thinks you'll find what it has to offer appealing. For starters, the company wants to shift its business and become more dependent on third party allies. Today, just one-third of NTT/Verio's business goes through partners. Next year, Jaschke thinks that could increase to half. In the future, he thinks as much as two-thirds of his business could come from partners. Maybe by then, the Buffs won't be cellar dwellers in the Big 12. That would make Jaschke really happy.

Nov. 5, 2003: Novell Makes a Break
UnixWare. Portable NetWare. Processor-Independent NetWare. SuperNOS. IntraNetWare. Followers of Novell will no doubt remember these and other ill-fated endeavors to reinvent the Utah software company. But none were as bold or ambitious as the company's latest move, its $210 million cash offer for SuSE Linux. If all goes according to plan, the deal will be done by the first quarter of 2004.

It could not have come at a better time. Next month, when VARBusiness publishes our annual State of Market issue, we'll showcase the results of a survey we did with more than 1,100 readers. In the issue, we reveal which vendors VARs expect to do well in 2004 and which ones they think will struggle. Out of 28 companies studied, Novell was at the top of the list of companies VARs said they expect will see a decrease in sales.

But the deal with SuSE Linux should go a long way to shifting perceptions. In an interview on Tuesday, Novell vice chairman Chris Stone said the deal with SuSE is an industry-changing event, not just a Novell-changing event. If that's true, Novell could very well reclaim its place among the top U.S. software companies. Already, though, the deal is proving to be a Novell-changing event. Since the announcement, shares are up more than 15 percent.

Nov. 4, 2003: Gateway's Channel Intentions
I landed in San Diego this week where VARBusiness senior writer Luc Hatlestad had arranged for us to interview Gateway founder and CEO Ted Waitt at his company's headquarters in nearby Poway, Calif. (You'll recall that Waitt uprooted the company several years ago and transplanted it from North Sioux City, S.D., to Southern California.)

En route to San Diego, I had a chance to pore over Gateway's most recent quarterly earnings and an excellent Fortune Magazine cover story titled, "Guess Who Wants to Entertain You," by Adam Lashinsky, in which Waitt is featured.

Much has been written about Gateway, Dell and others trying to move aggressively into consumer electronics (CE), where, believe it or not, gross margins on products are often double what they are on PCs despite price wars and extremely short product life cycles. On the flight over, I prepared nine basic questions for Waitt. Among them, I wanted to learn how he planned to bring better efficiencies to the CE space, how he could stretch a single brand over everything from MP3 players to four-way servers, how he planned to distinguish Gateway from rivals that were following his lead and relying on original hardware designers in the Far East for basic CE products, and how he planned to grow his mostly direct business through third-party allies, including VARs, systems integrators, agents, mail-order companies and IT consultants.

As the plane maneuvered over San Diego for its landing, all eyes in the cabin turned to the windows, looking for signs of the horrific fires that scorched the nearby countryside. From 1,000 feet up, however, all appeared normal. Encouraging, I thought.

The interview with Waitt and newly named executive vice president Jocelyne Attal, who runs the company's business and enterprise efforts, had been scheduled for last week but was postponed due to the fires that overwhelmed the surrounding area. Although you couldn't tell from the air on Monday how bad things must have been, I got a sense on the ground the minute I turned on the air conditioner of the rental car. Out of the vents came black flecks that I first thought were bugs. I pulled over to brush them off my raincoat. When they smeared across the treated poplin of the jacket, however, I realized they weren't insects but bits of soot instead. Fortified with a newfound appreciation of Gateway's challenges and the severity of the local fire conditions, I proceeded north on California Highway 163 to Poway. When I exited on Pomerado Road and began to get close to Poway, I saw firsthand the devastation brought by the fires.

The hillsides were charred. All the ground vegetation and underbrush were consumed. Only black, burnt trees remained, some amazingly intact at their highest reaches where darkened leaves still clung to the branches. Flames had encroached on homes, apartment buildings and the nearby Naval and Marine reserve center. Fire and cleanup crews from the City of San Diego's Parks and Recreation department abounded. Chainsaws and tree chippers broke the eerie silence that had descended upon the area. I could see residents on the hillsides peering down to where the flames had crept up to their property lines and, in some cases, beyond. Several homes along Pomerado Road en route to Gateway's headquarters were burned; all that remained were the smoky, charred remnants of fireplace chimneys.

Amid all this, I spied an advertisement that reminded me that I was there on business: A hand-stenciled sign read: "Powerwash the Ashes Away." On it was a local phone number of some enterprising soul.

At Gateway, I was greeted by senior manager of PR Ted Ladd. He gave Luc and me a tour of the facility, which is one of the more remarkable corporate headquarters I've encountered. I've been to ones that were more hip, ones that were more posh and ones that were more dramatic, but never to one so inventive.

Imagine a giant, three story Wal-Mart without the interior support posts and racks of clothes, power tools, toys and hair-care products. Now imagine it done up in Starbucks greens, browns and honey-yellows. Add 600 people and very smart, ergonomic furniture, and you get the picture. Virtually everyone but legal and accounting professionals work in an open, bull-pen layout. There are no walls, cubicles or partitions of any kind, save for a few in the back of the building where Waitt and some other senior executives have private offices. The rest of the team, including directors and even some vice presidents, work out in the open where anyone can see what they are doing at all times.

Working in that setting took some getting used to, but the benefits were numerous, Ladd said. For starters, you can get answers, buy-in and/or sign-off on various tasks so much more quickly.

After a quick tour, we huddled in the cafeteria with former Qwest and IBM partner architect Errett Kroeter. He now serves as Gateway's director of partner programs and echoes what Ladd told Luc and me about the benefits of hunkering down in a bull pen and working for a company that puts getting things done ahead of how things get done. Kroeter arrived in July and by October was ready to launch Gateway's new ProNet program. The lanky Kroeter said that meant 60- to 80-hour workweeks, but the time was still remarkably short.

Luc and I grilled Kroeter about the feedback he's getting and what success he's having with the program. The program is already attracting interest from disgruntled Hewlett-Packard partners, he said, plus some partners that have worked with Dell but want a more predictable ally going forward.

The program, which provides a way for commercial, government and education resellers, plus agents, to engage with Gateway on a formal basis, has all the requisite benefits and requirements. Most of the company's existing 900 or so partners have been grandfathered into the program, but they'll likely get bounced if they don't produce. There are two levels to Gateway's program: a tier for Premier resellers, of which there are likely to be only a handful, and a tier for basic members. The latter need to sell at least $50,000 worth of Gateway gear per quarter to qualify for membership, plus employ two dedicated sales professionals and two dedicated technical professionals.

I told Kroeter that his program, while comprehensive, will not readily recognize and reward smaller VARs that made Gateway a cornerstone of their businesses. "The program is tied too much to revenue contributions," I said. Kroeter acknowledged that volume is an important consideration and bigger players will indeed enjoy bigger discounts. Besides, he said, if any VAR that joins Gateway's programs tries to make it on hardware margins alone, the company will likely fail.

No argument from me on that, but I still think the program would benefit from some uplifts to those that make an exclusive commitment to the company, provide unrivaled technical expertise or crack desired end-user accounts on behalf of Gateway.

Regardless, Gateway is serious about building its business with partners. Unlike Dell, Gateway has a formal program with benefits and requirements spelled out. Furthermore, it wants people to call themselves Gateway VARs and agents, unlike Dell, which frowns on resellers when they try to use the Dell brand to their advantage. In addition, Gateway has a neutral compensation plan for its direct-sales staff, meaning they get the same commission regardless of whether they sell through a partner or take a deal direct. Kroeter said that change took Gateway only six weeks to enact while his former employer, Qwest, stewed on that decision for three years.

One reason Gateway moves more quickly than most is attributable, of course, to Waitt. Not only does he move fast, but he seems committed to channels. Attal and Waitt agree that as much as 50 percent of the company's sales to SMB customers could go through partners. Today, that portion is less than 10 percent.

In our interview, Waitt covered a variety of topics, including channels, although he deferred to Attal to address specifics. Among the more interesting revelations, which we will showcase in depth in an upcoming issue, is the role Waitt sees for a company like his to develop intellectual property using open standards to ensure that convergence,the melding of CE and PC technology,does indeed take place as many hope. Also, Waitt said he personally killed a line of Gateway PDAs because he thought they were too me-too. Nothing will get a Gateway bezel, he said, unless it truly is a differentiated, clever and well-executed product. That includes those that the company sources from offshore suppliers. Most, he said, will be designed by Gateway, regardless of who actually makes the product.

In the parking lot afterward, Luc and I traded notes. Mostly, we were impressed by what we heard and saw, though Gateway's financial picture, we agreed, remains very, very cloudy. (Waitt said he's very nearly finished building a new foundation for the company, one that will support future growth.)

With that, Luc and I packed up our gear and headed off to our next destinations. He headed toward San Francisco and I went home to Park City, Utah, where snow was falling like rain, straight down and thick, with no regard for a tired traveler.