Lynden Tennison is an entrepreneur. He runs several businesses, including one that sells workforce-management software and another that markets telecommunications bandwidth.
He’s also the CIO at Union Pacific. Those software and services that Tennison markets? They grew from internal IT projects the $17 billion railroad company developed for in-house use and then decided to commercialize, bringing in $45 million to $60 million in revenue. “We looked around at things and thought, ‘Hey, we can make some money on that,’” says Tennison, who has worked at the railroad for more than 18 years, six as CIO.
Like a lemonade stand in summer, the idea to sell cool internal IT isn’t new. The difference now is that there has never been a more hospitable climate for putting internal IT marvels on the market, says David Sovie, a managing director at Accenture. For one, developments such as cloud computing have decreased the cost of supplying IT products and services and expanded the geographic areas a startup venture can reach, lowering the hurdles to entering the IT market. Plus, the role of CIO has evolved to include big slices of business and strategic thinking. “Being CIO is not just about running the shop anymore, but the different ways you can help your business,” says Tom Uva, CIO at Sensis, a private airline and defense services company that hopes to turn internal analytics software into a profitable venture. (For advice on turning a profit on internal IT, see “Does Your IT Idea Have Legs?“)
But challenges abound, even for business-minded CIOs. You have to identify a likely market for the product, price it right, market it well and prepare to support customers who need hand-holding. You also have to honestly assess the ability of your IT group to become, essentially, a vendor. All the while, you must not drain money or staff from your company’s core business, and you must continue to meet your company’s internal IT responsibilities.
Even then, the twists and turns all companies navigate could crimp your plans to commercialize: Your IT creation may vie against other business ideas and lose. After all, Sovie says, “most companies aren’t in business to create ideas to spin off.”
But if you’ve still got a wild hair, fellow CIO entrepreneurs offer you some hard-won advice.
Got the Chops?
Fueling corporate growth is a key aspect of the CIO’s job, according to our State of the CIO research. That includes helping to acquire and retain customers. Although it’s risky, commercializing pieces of internal IT is one way CIOs can demonstrate IT’s value and generate revenue.
CIOs must, of course, know about finance, Uva says. To widen his prospects and propel him toward his goal of someday building a business, Uva enhanced his computer science skills by getting an MBA with a concentration in finance and taking 220 hours of Six Sigma training, along with other professional-development training. Six Sigma honed his skills in diagnosing and fixing problems—handy, he says, when managing a new venture.
Robert Carter, CIO and executive vice president of FedEx Information Services, has made a career of pioneering new technologies, not just to meet business demands, but also to create customer demand. Years ago, FedEx set up wireless networking and handheld devices that allowed drivers to feed information back into the tracking system. Were most customers content simply to know when items were sent and received, oblivious to what happened en route? Probably. But FedEx pushed to differentiate itself by offering information online about the stops between origin and destination. That is, the company used technology to produce a clamor for services customers didn’t know they wanted, establishing FedEx’s reputation as an industry leader.
Carter knows how to make a market, and now he’s helping FedEx create another one. IT has worked closely with FedEx’s innovation team—engineers, researchers and customer experts—to create a system that gives customers even more data about their packages in transit. To build the product, called SenseAware, FedEx designed sensors that attach to packages and a network that processes and communicates the continuous stream of data the sensors emit. Then the system records and relays information about light, temperature and package location so that hospitals and life sciences companies, for example, can use a Web dashboard to monitor the condition of sensitive shipments.
The technology started as an internal experiment that FedEx considered using to track such shipments for its own purposes. The company was awarded a patent on it in 2009 and has since been working with a handful of customers to complete the last 20 percent of the product. As it shifted focus from using SenseAware internally to selling it externally, Carter says, FedEx created more services to market along with the basic technology.
For example, FedEx can help customers integrate SenseAware data with information already flowing through their own supply chains to find trouble spots or inefficiencies. A sensor might detect that a package has been sitting on a loading dock too long, leaving the contents vulnerable to spoilage. The sensor can send an email alert to a manager to take action, and then that data can be added to information on file about that location. Over time, business analysts could use analytics tools to uncover problems with how goods move through the supply chain and suggest fixes. FedEx got an allowance from the Federal Aviation Administration to keep SenseAware devices on packages on FedEx aircrafts so customers can monitor in-air conditions, such as temperature and light exposure.
Carter says customers will become more loyal to FedEx as it provides a view into the supply chain that didn’t exist before. “We find the edge of technology and integrate it into our business.”
Some CIOs, though, lack that kind of business insight, says Accenture’s Sovie. Typical IT career paths don’t groom technologists to be entrepreneurs, he says. “It’s not that they can’t do it, but they weren’t rewarded for that,” Sovie says. “They don’t have the skill set because they didn’t need it.”
Find the Right Idea
Some ideas for turning internal IT into external products pop up naturally. Union Pacific, for example, had built a fiber-optic network across most of the United States years ago so that its trains, dispatchers and rail yards could communicate without relying on outside providers. That network’s extra capacity is ready-made to sell, Tennison says.
The railroad also owns 1,700 radio towers, many in remote areas. Through a third-party leasing company, Union Pacific rents space on the towers to cell companies, who erect antennae that carry signals to their own customers.
At Sensis last fall, CEO Jud Gostin asked Uva to explore whether an analytics system the company had built to interpret petabytes of data for its military customers had any commercial potential. Uva determined that big financial services firms and major utilities might be interested in the technology. A company like Citibank could improve fraud detection on credit card transactions, he says, and utilities could use it to sift through usage patterns to predict and perhaps prevent outages.
Other ideas are much more complex. Quintiles Transnational is a privately held company that provides biopharmaceutical customers with clinical, commercial, consulting and capital services that help bring new medicines to market. It has developed software and consulting services that help manage the different phases of this process, and in its 29 years in business, Quintiles has compiled more than 3 petabytes of data related to drug development.
Quintiles helped develop or commercialize the top 50 best-selling drugs or compounds in the world in 2009. Quintiles offers analysis of factors such as the speed with which patients can be found for clinical trials, the risks to consider when marketing drugs to specific populations and regulations that govern drug development in different countries.
Now Quintiles plans to offer a range of services, software and hosting in a suite of products called Quintiles Infosario. It would combine its aggregated data sets and analytics with its hosted applications to provide customers with unique insights and the ability to make better decisions more quickly. Its software would help users manage and expedite activities during the drug testing process and monitor patient safety. The offering would also provide software and services for marketing, sales and after-market work, as well as consulting and specialized software from niche vendors, hosting the products in its private cloud.
“Today, we provide services for clinical research and marketing. We think [customers] would like to buy end to end—technology, people and data,” says Richard Thomas, CIO of Quintiles Transnational, a pharmaceutical services company. The company already operates these applications and services worldwide. “Extending those for customer use makes perfect sense,” he says. “We don’t have to go to the drawing board and create something new.”
To better understand what customers would want, Quintiles hired a market research firm to poll pharmaceutical companies. The results of those surveys confirmed that Infosario’s features would be appealing to drug developers, Thomas says, adding that some firms, unprompted by the researchers, named Quintiles as a company with the right technology and industry knowledge to serve this market. The results accelerated Quintiles’ plans, and the company expects to introduce Infosario at a pharmaceutical trade show this month. “We’re encouraged,” Thomas says.
He cautions, however, that some CIOs can get enamored of jazzy new technology that their staff builds and see commercial potential where there is none. The IT project may serve the company quite well, but that doesn’t necessarily mean anyone else would want to buy it, Thomas says, adding that CIOs need to make an honest assessment of what differentiator they offer. For Union Pacific, it’s existing infrastructure in coveted locations. For Sensis, it’s sophisticated analytics capabilities. For Quintiles, it’s historical data that can’t be duplicated by competitors, expertise in complicated subject matter, and integrated software.
Thomas notes, however, that customer response to Infosario’s launch this month will reveal whether he’s right. “The graveyard is littered with folks who tried and failed,” he acknowledges.
Choose the Right Business Model
The best way to price and configure a technology product depends on several factors that seem straightforward: the costs of creating the product or service, of recreating it for many customers, and of marketing, selling and supporting it.
To the eternal consternation of CFOs, not many CIOs can whip out a spreadsheet quantifying these items even for internal IT. Yet to spin off a product and price it profitably, that’s what needs to happen, says Union Pacific’s Tennison.
Tennison knows how much Union Pacific spent to build its workforce-management and crew-scheduling software a few years ago. He has also estimated what it would take to build comparable applications today or to buy the apps from a vendor and customize them. When he started selling Union Pacific’s software to, say, state transit authorities or other railroads, he would price them at about 70 percent of those costs. That price “is appealing to the customer because it’s lower risk to them than if they did the development and customization,” he says. And the railroad still comes out ahead.
Selling real products to outside companies improves how Union Pacific’s IT staffers manage their internal work, Tennison says. They do meticulous cost accounting for their time, equipment, contractors and other resources. These are skills all technology professionals should have, he says, because companies increasingly demand such accountability. “IT has to be an organization driven by the concepts of sales and marketing. We have to reinforce why we are of value,” he says. “When you have a person with profit-and-loss responsibility, they live that every day.”
Cloud technology makes computing models less expensive not just for vendors and internal IT, but also for IT groups looking to become vendors. Sovie estimates that an organization can start a new company or product line at just 20 percent to 30 percent of the cost of doing so with old-fashioned methods, such as stamping out software discs for on-premise computing. Even Web downloads are not as simple or frictionless as touching a button on a mobile phone to grab an applet, he says.
The low cost and wide distribution of cloud computing helps make Infosario even more viable, Thomas says. By building a private cloud of secured, virtualized servers that its customers can access over the Internet, the company can market to many more geographic areas than it could otherwise. The company already runs Oracle’s Siebel software to manage its clinical trials, one of the biggest implementations of that suite. Infosario will make that available to Quintiles’ external customers via the cloud. It also makes it affordable to custom-crunch its data for customers, he says.
Although he feels pretty confident that he has identified the costs of providing Infosario, Thomas says it’s more difficult to quantify the value of the service, software and data. And value, of course, must be factored into pricing. He is working with Quintiles marketing and clinical services teams to develop the product line and determine market strategy and pricing. They are discussing, for example, ways to measure Infosario’s effect on speeding up decision making. “How do we charge?” he asks. “It’s still an art.”
Hire the Right People
Commercial dreams can’t come true without the support of senior executives. Sensis’ Uva knows CEO Gostin is behind him; it was Gostin who broached the idea of selling the internal analytics software. Thomas says one indicator that he had the right people working on Quintiles’ venture was that the marketing department and IT together came up with the name Infosario. Carter at FedEx works closely with Mark Hamm, vice president of innovation, to match technology with early customer trends.
But the success of a new product also depends on the rank-and-file IT personnel assigned to the project. Staff on the commercial team must be able to answer questions about target customers, the product’s value and pricing, Sovie says. Thinking in these terms isn’t typically part of IT jobs.
Union Pacific, meanwhile, makes such skills part of its job descriptions, Tennison says. He likes to assign positions managing the railroad’s spin-off products to members of internal IT, to help them gain sales, marketing and management skills. It helps Union Pacific’s own staff develop leadership skills and keeps costs down. He recently assigned two more IT people to market the railroad’s workforce-management software, a business that is growing rapidly, he says.
At Quintiles, Thomas has assigned Infosario staff carefully, looking for past commercial experience. An entrepreneurial staff with high energy and business acumen will be more likely to motivate customers to buy, compared with a staff that has no business experience, he says. Some Infosario team members came from IT vendors, including Oracle, OpenText, EDS and IBM. But—and this is key—as CIO roles shift toward enabling business growth, the mind-set further down in the IT ranks is also reorienting. That’s changing regardless of any move to commercialize internal IT, Thomas says, adding that sales and marketing savvy are becoming more valuable skills in IT generally.
The personnel mix on the SenseAware team at FedEx has changed as the idea went from concept to testing to market, Carter says. Technologists who are masters of development must hand off their babies to experts in marketing and sales at the right time, he says. “Everybody thinks they possess both [kinds of skills], but very few people do.”
Sustaining the team’s momentum during the years from patent to product takes continuous support from on high, Hamm says. The company began work on what would become SenseAware in 2005, Hamm says, and patents were granted in 2009. Fred Smith, chairman, president and CEO of FedEx, wrote about the technology in Forbes magazine in 2007, the same year Carter demonstrated it at an industry conference. FedEx formally announced it in 2009, publicized that it was working with customers last year and this year in a limited release, and, finally, is planning a big rollout of SenseAware in the United States this summer.
Consistent involvement with customers has helped the FedEx team keep up its enthusiasm, Hamm says. Regular, sometimes weekly, meetings between FedEx product managers and customers testing SenseAware drove an agile development cycle and kept staff focused, he says. “We like that this was designed for [customers] and tuned by them in their real operations.”
Build the Existing Business
Even when the right skills are set loose on marketing a good product with a promising business model, the venture still may not fly.
At Sensis, the airline and defense services company, Uva vetted the potential market for the company’s analytics tools with his own research and with the help of consultants from market researcher IDC (a sister company to CIO’s publisher). He says he began seeking partnerships among universities for funding and marketing late last year but then had to put the project on hold in order to focus on larger business strategy questions (about which he declines to elaborate). He expects to take up the commercialization project again, however, perhaps after this summer. “We’re putting this on the shelf, not killing it,” he says. “We have intellectual property that we want to see materialize into something.”
Increasingly, CIOs have to consider the business outcomes of IT investments to satisfy the demands of their business peers. (See “IT Value Is Dead. Long Live Business Value.”) Starting a business built on internal IT takes that idea one step further. CEOs are most willing to support such ideas, however, if they enhance the existing business, a la Quintiles’ Infosario plans, says Accenture’s Sovie.
Quintiles’ Thomas doubts that any CIO will get approval to start a technology spin-off unless he has buttoned down internal IT. That means running IT operations well, understanding costs and using technology to advance the business. “You have to have your house in order,” he says. “You can’t afford for one minute to neglect internal work.”
Follow Senior Editor Kim S. Nash on Twitter: @knash99.