Guy Battista smiles when he hears those recorded announcements saying, “Your call may be monitored for quality assurance.” He’s been there, done that. Last September, the First Data Corp. (FDC) CIO went, as they say, “double-jack” with an operator, listening in to calls at an Irish call center 5,000 miles from FDC’s Atlanta headquarters. That kind of attention to detail is a regular part of Battista’s evaluation process when FDC, a $5.5 billion financial services company whose subsidiaries include Western Union and TeleCheck, is thinking about investing in a company. n In this case, FDC was looking to invest in Fexco, a Killorglin, County Kerry-based customer service outsourcer.
(If you dial the toll-free number on the back of a can of Guinness, you’ll reach a Fexco call center.) FDC makes no secret of its desire to expand globally, and Fexco, which already works in Europe with Western Union, seemed like a logical way for the American company to plant its flag on the continent.
But before investing, Battista needed to make certain that Fexco was what FDC wanted. He wasn’t satisfied simply meeting the Fexco suits or bench testing their software; he wanted to watch the apps in action and see how the service representatives treated customers. He came away impressed. The software worked; the operators were polite and efficient. Battista and his team gave the deal the thumbs up. And in December 2000, FDC took a 25 percent equity stake in Fexco.
Battista, an 11-year veteran of FDC and CIO since 1997, didn’t set out in life to be an investment adviser or a venture capitalist, but his business and technical skills have played a crucial role in FDC’s enterprise investment strategy. “Today,” says Battista, “I had three different conference calls on three different companies [targets for acquisition, targets for investment]. And tomorrow I’m meeting with our president to go over them.”
THE CIO AS VENTURE CAPITALIST
This same scenario is playing out in boardrooms and corner offices all over the country as businesses turn to their CIOs, leveraging their technical skills and business knowledge, to help guide their investments in emerging technologies. Companies see investments as a way to gain a competitive, early-mover advantage. And given the rapid rate of technological innovation that advantage is more critical than ever before.
“What we’re talking about,” says Nancy Koehn, a business historian at Harvard Business School, “is not just a chance to be on the new playing field, but a chance to help set the rules. We are talking about a chance to help set the standards. And that is extremely important.” As a result, predicts Koehn, no company will prosper without looking outside its walls. Without, in other words, corporate venturing.
There’s risk involved, of course. Richard Shaffer, president of the New York City-based VC firm Technologic Partners, says that to succeed as a venture capitalist you must be continuously willing to bet your career. The same holds true, Shaffer says, for CIOs attempting to play that role within their companies. The recent wave of corporate venturing has already claimed victims. Former Fireman’s Fund CIO Deems Davis left in February 2000 after a couple of ventures he championed for the Novato, Calif.-based insurance company failed. In the late ’90s, Motorola closed an entire corporate venture department. Blood flowed; bodies moved. And, of course, the economic downturn of 2001 has made venturing riskier still. However, says Heidi Mason, managing director of Silicon Valley-based venture consultancy the Bell-Mason Group, while dollars may be drying up, innovation is still happening at a record pace. In fact, it may be easier than ever for a company willing to venture to tap in to that innovation.
“Three years ago, trying to pay the ante to get in was too high; you had to pay nosebleed prices,” says Mason. “But now a lot of that is coming back to the realm of the real.”
Whatever the immediate economic climate, there’s no question that for businesses seeking to become industry leaders, managing an investment portfolio is quickly becoming a critical part of a CIO’s job.
WHY FIRST MOVERS WIN
If nothing else, 30 years in business has taught Eastman Chemicals CIO Roger Mowen one thing: First movers win, laggards lose. He knew that the $5.3 billion Kingsport, Tenn., giant had to be flexible and nimble to succeed in the new economy, and he saw venture investing as the way to achieve this. When he took over the CIO job in February 2000 (prior to that he was Eastman’s vice president of global customer services, a position he still holds), he insisted on founding and managing an independently budgeted venture group within the organization.
“To me, this was about speed,” says Mowen, who boasts that he can get a major investment deal done within a single day. Developing new technologies within Eastman was, in Mowen’s opinion, a much slower route to industry leadership than hunting for them in the field.
Mowen’s group identifies investments that could give Eastman a strategic advantage, such as an online marketplace or an inventory management technology (see “The Eastman Portfolio,” Page 90). In each case, it is a technology that has a chance to change and improve the way Eastman conducts its business.
Mowen sees several long-term advantages to investing in the companies developing new technologies rather than outsourcing business processes to them or simply buying their products. He believes that an investment “tells our organization that this [product] is critically important. It’s not just a solution we’re using as a customer. We think it’s best in breed and so it’s imperative that you use this.” This message, Mowen strongly believes, speeds the rate of adoption with the company.
Eastman’s equity stake “also tells our trading partners how good we think this is. We put our money where our mouth is.” In this way, Eastman increases the chances that its partners will follow its technology lead?the essence of the early-mover advantage.
The venture approach to research and development also minimizes the damage caused by failed projects undertaken in-house. Rather than deal with the layoffs and morale problems after something goes down the tubes, says Mowen, “I can easily walk away and move on to the next one.” He knows that only two or three out of every 10 investments will actually work. And while no company in his portfolio has gone out of business, it’s just a matter of time. “Check back in a month,” he notes dryly.
Eastman has already gained a head start on its competitors through one investment. In March 2000, Eastman took a significant stake in Fairfax, Va.-based XML vendor Webmethods.
Improving connectivity to Eastman’s customers is central to Mowen’s vision. In an economy where it is difficult to gain and maintain customers, better connections and the improved service that results are, in his mind, the keys to building customer loyalty. “If my experience is so good on Amazon.com, why would I even think of going to Barnes & Noble?” he asks. “I don’t think consumer behavior patterns are a lot different in the B2B world.” By using Webmethods’ XML to connect to suppliers and customers, Mowen created transparencies in the supply chain, giving Eastman a view in to its trading partners’ inventories. Eastman now knows how much of any given chemical a customer has in stock. Because of the enhanced visibility, Eastman is able to make more accurate inventory decisions.
As of December, Eastman had connections in place with 15 supply chain partners. And these partners, according to Mowen, are going to their partners, telling them to get on the XML bandwagon. “We get these calls all the time from customers asking us to talk to them about XML and getting connected,” says Mowen.
Through this viral-like spread, Webmethods’ version of XML becomes the industry standard. That’s good news for Eastman, which will probably never have to retool or reengineer its connections to its customers and suppliers on anything but its own terms.
It’s also good for Mowen’s portfolio.
START THEM UP
By Jan. 2, 2000, it was evident that the Y2K bug was not going to make planes fall out of the sky, and the airline industry turned its attention to B2B e-commerce. Like most airlines, Northwest spends billions of dollars a year on parts and usually has more than a million dollars in inventory at any given time. Northwest CIO John Parker knew an online airline parts procurement marketplace was inevitable. The question was what role Northwest should take. Did the St. Paul, Minn.-based carrier want to wait for someone else to start the company and become a customer, or did it want to take it upon itself to create the exchange?
After listening to dozens of pitches for parts-procurement exchanges, Parker decided to take the lead. This meant investing the founding partner share, several million dollars, and placing members of the Northwest team in key positions to lead the nascent Aeroxchange, which it founded in the summer of 2000. (Sticking with the strategy, one of Parker’s IT leaders has also served as interim CTO at Jeta.com, a Naperville Ill.-based airline fuel marketplace in which Northwest also took an early and active role.)
The biggest factor in Parker’s decision was the opportunity a major investment would create to influence Aeroxchange’s direction. Northwest needed the Irving, Texas-based Aeroxchange, which it jointly owns with Air Canada, America West, FedEx, alliance partner KLM and several others, to provide back-end integration to its participants so that even an airline without a sophisticated ERP system could reconcile parts bought through the marketplace with its existing inventory channel. If an exchange became dominant that did not offer ERP, Northwest would face a costly implementation.
Several of Northwest’s partners such as FedEx already had ERP systems and therefore didn’t count ERP as critical. But the dominant role Northwest played in Aeroxchange’s founding ensured that the exchange, which went live in the first quarter of 2001, will indeed offer Web-based ERP capabilities.
A VENTURING WE WILL GO
The CIO’s ideal skill set?knowledge of technology, familiarity with his company’s business goals?makes him a good candidate to help lead a corporate venturing initiative, but it in no way guarantees success. (See “The Big Three,” Page 100.) The fact of the matter is that while opportunity abounds, there is an even greater amount of risk. Investments fail, and startups rarely succeed. “It’s like turtle eggs,” says Technologic’s Shaffer. “A turtle swims ashore, lays thousands of eggs and most of them die. But the few that survive are enough to propagate the species.”
The turtle hedges its bets by laying lots and lots of eggs. The same strategy is necessary to survive in the investment arena. The problem for the aspiring CIO venture capitalist, says Bell-Mason’s Mason, is that laying tons of eggs and hoping some of them hatch is fundamentally at odds with the way most corporations work. Traditionally, large corporations take a cautious approach to new initiatives, testing the water with one project before committing on a larger scale. This, says Mason, is the best way to fail in the venturing world. “There has to be a minimum recognition that a portfolio strategy is better than a one-off strategy,” she says. With a one-off approach there “is too much emphasis on one deal. And in any event, even if it wins wonderfully, you don’t have any organization set up to repeat the win.”
A narrow approach is what doomed the venturing initiative of the Fireman’s Fund, says its former CIO Davis. In 1999, Fireman’s Fund invested substantially in two insurance e-businesses. When those two investments came a cropper, Fireman’s shut down its venturing operation. Davis left shortly thereafter.
There are other potholes along the venturing road. Because failure is inevitable, Davis maintains that you must have the full backing of the CEO and the board before even thinking about playing venture capitalist. According to Eastman’s Mowen, they must be committed to transforming the business through venture investments. And the commitment, he says, must be long term. Since the successes are scattered among the many failures, says Mowen, “you can’t just do it in the good times. You have to have continuity over a number of years or else there is no point in starting.”
Furthermore, the CIO must understand the difference between traditional venture capitalism and the kind practiced by a successful corporation. While a VC firm, like the turtle, is playing for that one financial home run that renders all the failed investments irrelevant, a company benefits most when a usable technology or side business emerges. Motorola learned this the hard way.
For most of the ’90s, the Chicago-based telecommunications titan had a ventures unit dedicated to investments with a five- to seven-year return window. What went wrong, says Warren Holtsberg, Motorola Corporate vice president and director of Motorola Ventures, was that “they spent a lot of time worrying about future businesses, things like life sciences and new fuel cell development, environmental systems.” These technologies, although promising, were not core to Motorola’s business.
In June 1999, Motorola tried again, this time with a mandate that investments show strategic value to the company within 12 to 18 months, such as producing technology that could be used by a Motorola unit or bringing Motorola new customers. While the new group has spent more than $100 million on 30 investments, none were made, says Holtsberg, without “a commitment from one of our businesses that they would embrace that company or technology.”
IT’S NOT ABOUT THE MONEY
Mike Koehler, former vice president of technology at Ameriserve and Delta Air Lines, now COO of the Dallas-based Feld Group, a consultancy comprising former CIOs, says that it’s important to keep the company’s core competencies in mind when investing because the stock market doesn’t really reward companies on the basis of sheer financial success. “The market sees that as a windfall profit,” he says, “because it didn’t affect your P/E ratio or any of the fundamentals of your company. You just had a windfall of $100 million bucks in a single year. Period.”
Northwest’s recent divestiture of its interest in U.K.-based telecommunications company Equant illustrates this point. Despite the $28 million profit Northwest earned by its February 1999 sale of its shares in Equant, which it helped found in 1995, Northwest’s stock held steady. Indeed, following its sale of $58 million in Priceline.com stock in February 2000, on which Northwest CIO Parker says the company made a several-million-dollar profit, the airline’s price per share hit a 52-week low.
“While we love to see those payouts,” says Parker, “we enter ventures for different reasons. We are primarily looking to influence their solutions to help enhance the airline.”
Instead of chasing the pot of gold, agrees Koehler, the CIO should have a strategic map that identifies where he’s trying to take the company. Whenever a company comes to his attention, he should first ask if it fits the map.
“The companies that are winning the game today,” says the Feld Group’s Koehler, “are the ones who have taken chances on emerging companies.”
Helping their companies take that step, becoming, in effect, a VC for the enterprise, is a big leap for many CIOs, especially those who came up through traditional IT departments. “There is a whole new set of skills that I wasn’t expecting when I took this job,” says Parker. “Making an investment is primarily a deal and not a technology project; you have to put your business hat on, and specifically put your deal maker hat on.”
With the right team and the full support of the CEO, a CIO can be an agent of change and lead his company into the future. FDC’s Battista remembers the days when some executive or salesperson would “open the door, throw something in and say, ’Oh, we bought this.’” Now, says Battista, “I am constantly out there looking for businesses.”
Staff Writer Ben Worthen would love to hear about your investment strategies. He can be reached at firstname.lastname@example.org.