CRN Interview: David Wright, Legato Systems

Only two years ago, Legato Systems reeled from shaky finances and a class-action lawsuit. But the Mountain View, Calif.-based company, under the command of Chairman and CEO David Wright for the past two years, has prospered despite the adversity. The company has remodeled itself from a developer of backup software to a provider of storage and content management solutions thanks to last year's acquisition of OTG Software. Wright recently sat down with Joseph F. Kovar, senior editor at CRN, to talk about storage, content management, channels and the integration of OTG

CRN: I'd just like to start off with a simple three-word question: What is Legato?

Wright: Well, Legato is probably a lot different today than it was two years ago when I got here. My feeling is, it's a company that offers services and solutions that focus on keeping a customer's data available, protected, and also at the same time delivers enterprise-class service and support. [It's also] focused on mission-critical applications. Software companies have become a much more important commodity in the storage management mode. ... Because two-thirds of the spend is going to software and services in the storage world, software companies have become a lot more attractive, both from the customer standpoint and the business perspective. What we feel we have is a company that used to be a backup company [and] is now a company that has taken backup and moved it to the future, which is data availability and access. We feel real good about what we are.

CRN: Legato is probably the most talked about acquisition target today. You recently said you expect to see the "Legato" name being around for years to come. Does that mean you expect Legato to remain a stand-alone company, or is there some advantage to Legato tying up with a larger company?

Wright: We're roughly about a $300 million company today. To be a presence in the market, I think you need to be at least a half-a-billion dollars. That's our objective at this point in time--to drive our business to a half-billion. At the same time, I have responsibilities to shareholders, stakeholders, employees, to do the right thing for the company in the long term. ... Now that we're cleaned up and we look good and we're starting to drive profitability and also drive cash to the balance sheet, everybody says they're going to buy us because we're a jewel. We're going to live with that for a long time, I guess.

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CRN: The biggest change from last year was your acquisition of OTG. I'm wondering if you can talk a little bit about how the integration with OTG has gone, what did you get from OTG, and where does the OTG/Legato combination actually put you in terms of the competitive environment?

Wright: That's a good question. When you acquire companies, one of the things that you have to look at is, what are you really buying? Some people buy revenue, some people buy channels, or technology. I think we bought everything. We bought what I consider a good, sound revenue stream. We bought the ability to do business with very unique partners, and we'll talk about that. We were able to acquire outstanding employees that look at data from a different perspective than Legato has in the past. And then we acquired technology that enables us to get out of the boiler room.

We had to change the rules for our company. When you're not the gorilla in the marketplace, what you have to do is look at the market and say, 'OK, what rules can we play by to win and succeed?' And if you look at our strategy, it's really unique compared to everybody else. Where a lot of people are still in there managing heterogeneous environments, which we do, we have decided to get much more business-focused with our delivery. So e-mail, medical industry, education industry, the financial institutions, these are things [where] we believe we can actually go in and help our customers keep their data available from an information perspective.

CRN: How strong is integration between the content management and the application-specific portion of OTG with the data protection capabilities of Legato?

Wright: My style is to give you the brutal facts, and then tell you how we'll prevail. Let me tell you this. From an interlink on the technology side, we're not there yet. We can put solutions around our customers where we can take the content on the content side and hook it, for example, into NetWorker in the backup side. ... Long term, we think we can do that much more seamlessly through the integration of our software. So I'd say we're probably 12 months away from having what I'd call a fully integrated offering to the customers right now, but we can solve their problems on a tactical perspective.

CRN: When you brought OTG and Legato together, you actually brought two channel organizations together. Was there that much overlap with the past? Is that changing?

Wright: No overlap. We counted the partners and added it up, and we had very few. In fact we have very little, in some ways, customer overlap. When we first acquired OTG, a lot of the [partners] from the content and the mail and messaging side of the business were very concerned that we were going to get out of that business. They were very concerned about it. I spent a lot of time with them. We put many of our executives in front of those people because I always felt [those executives] could definitely sell the back-end solutions to [OTG's] content and messaging business. It was much easier to connect to the back end, whether it was archiving, backup, replication. So what we're seeing now is a lot of those people delivering the whole full package. What we've not had happen, which I didn't expect that would happen, is a lot of my infrastructure partners ... getting into the application. And that's fine. I didn't count on that.

CRN: How important is it to have that large channel presence?

Wright: Let me tell you why you need partners. We're a software company. We're not a services company. We have support and updates, but that's a different piece of the conversation. When I got here, the last thing I wanted to go and do was invest [in] and buy a services company because it's a whole different set of metrics, a different model, a different type of manager, a different type of people. I ran one of those companies in the past, and I understood that. So we kind of got out of that business and looked at our partners to supply the solution, the services, the integration to the customer. Therefore, the channel strategy is very key to us. We look at partners that have that ability to do it. That's No. 1.

CRN: Does Legato compensate its direct sales at all for indirect channel sales?

Wright: Yes. We make it favorable for them to use a channel partner. The reason is I don't want them getting confused. I don't want them to take the transaction away from the channel partner. I want the channel partner to feel that they're being favored in some way, shape and form. Let's face it, [salespeople]--and I grew up in sales--are mercenary. And that's good. That's what you want. I guess I took a page out of [Sun Microsystems Chairman and CEO] Scott McNealy's book. I guess Sun did a great job a long time ago when they had a lot of business go through channels. And Scott was very, very committed to paying the sales force a premium to go through channels.

CRN: Are your executives compensated based on channel satisfaction?

Wright: I look at my executives in two ways. One, the quantitative part of the business, which is how the numbers work. The second is the qualitative piece. If you look at my presentation, I gave out some very, very strong goals for the company. Customer satisfaction above 90 percent. Renewals around 95 percent. That's the qualitative piece of their measurement. And if we don't hit those objectives, then there's no bonus. It's that simple.

CRN: How many channel partners does Legato have in North America?

Wright: I would say it's somewhere between 400 to 500 channel partners. ... I don't consider somebody who puts a Legato shingle out as a partner if they're not driving revenue and getting a return and look at us as important.

CRN: Would you like to see that number grow?

Wright: It goes back to the loyalty conversation with your partners, which is very interesting. What I want to do is, I want to churn it. Let me explain. If somebody's not showing up, then I don't have the resources or the time to keep them on our portfolio. And so therefore, I might have to go replace [them] with a new one. I'd like to add some more of the premium ones, obviously. I wouldn't make a binary decision, saying I'm going to bring that partner in and cut this partner's business out. We have to be very sensitive to that. So the answer is, yeah, sure, I want to grow. But I don't think I'm going to try to make it grow leaps and bounds.

CRN: Where do you see Legato a year from now? What are some things that will look different?

Wright: One of the things we'll probably be known for a year from now is the company you want to come to when it comes to e-mail compliance and management. I think you'll see over a period of time more and more people will endorse our products. I think you'll see companies like HP, IBM, Iron Mountain endorse our products. I think you'll see a company that has much more knowledge around the policy and management of data as related to certain industries. Let me give you an example. I think one of the things that will come on strong over a period of time is our ability to talk to customers about how you manage data in the medical industry and what trade-offs you make. I see a company that has a run rate of close to $400 million a year.

CRN: Close to that half-billion-dollar mark you said you need to be at?

Wright: My objective is to leave the year with a quarterly run rate that has a $400 million a year tag on it. That's kind of what we've been driving to. We don't have it in our business plans. You have to make a decision. Are you the hunter, or the huntee, over the next 12 months? And my feeling is, the more I talk to my board and employees, that there's a very good possibility that we'll be the hunter. Because I think there's some companies out there that we can look at from a technology standpoint and bring it in. So I don't think we're done driving our strategy. And if I can buy vs. make, I'll do that.

CRN: What would you be looking at in terms of acquisitions, assuming you're the hunter?

Wright: More probably in the content and e-mail environments. We'd look at those pretty strongly. Archiving, how do we continue to enhance our business in that area? You know, there's nothing wrong with consolidating some of the backup market. That's something we know. [Most storage software vendors] have a small piece of their business in backup, and probably it's more of a nuisance than it is an advantage. ... So maybe we have to go make an acquisition in that area.