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IT Spin-Offs

Many companies would like to milk revenue from their IT investments. Some have found new ways to do it.

1Apr

Could an idea whose time has come and gone have come again? In the 1980s and early '90s, leading-edge companies in every business sector imaginable believed they could spin off all or part of their IT organizations and turn sizable internal investments into lucrative ancillary businesses. Most of these failed. Seer Technologies, for example, spun out of First Boston Corp. in 1994 with additional backing from IBM. It sought to turn a set of application development tools created at First Boston into a commercial product. After several stumbles, it was acquired by Level 8 Systems Inc. in 1998 for just 35 cents a share. Other spin-offs have staggered through a host of strategic redirections, stock collapses, and bargain-basement acquisitions.


The rise of E-business and the battle cry of "core competencies" seemed to quell enthusiasm for the concept, but in the past year, several companies have shown renewed interest.


In February, GE Plastics created the GE Services Network, which offers its customers everything from marketing services to an innovative one-click patent-licensing system. Vince Cole, global business leader for the new unit, says the network was created to satisfy the requests of business partners that wanted to emulate some of GE Plastics's practices. Now the service acts as a marketing outsourcer to small and midsize companies, providing everything from E-seminars to E-mail campaigns. It also provides a "pass-through" mechanism for other GE divisions with products or services that have potential to generate revenue. "And because we can leverage the existing GE E-business infrastructure," says Cole, "we can expand this service network with almost no investment."


The desire to minimize investment is evident in many IT spin-off deals today. Some companies, in fact, are trying to simultaneously tap new market opportunities and save money. Two recent Canadian outsourcing deals, one involving Ontario Power Generation Inc. of Toronto and the other involving financial services firm Mouvement Desjardins of Montreal, both turned over most IT operations to third parties, with the understanding that the client and the outsourcer will pursue additional IT revenue opportunities together.


Karen Furtado, vice president for consulting services at CGI Group Inc., Ontario Power's outsourcing provider, says that increasingly, outsourcing deals are being structured so that clients share the gains in any intellectual property that is jointly created. CGI developed a brokerage system with a U.S. client, for example, that both CGI and the client now market. Such deals can produce either a revenue stream for the client or a discount on services, depending on the extent of the client's involvement.


But not all companies are looking to do spin-offs on the cheap. In February, Shell Services International spun off Kalido Ltd., a London-based company charged with selling an internally developed data warehouse product to large enterprises around the world. Andy Hayler, Kalido's CEO, says that one reason many spin-offs fail is that "companies don't realize it costs 10 times as much to commercialize a product as it does to develop it for internal use alone."


Shell decided to make that investment in 1998, he says, when it saw that its product not only met its internal needs, but also seemed superior to what the market had to offer. Once the company made that decision, it immediately began to hire people from the software business. "We hired people from IBM, Oracle, Cognos, and other companies," says Hayler, "and we created a different compensation plan for them." Of 50 employees, only 5 came from Shell.


Many analysts remain dubious of the spin-off strategy. "I haven't been a big fan," says Pascal Matzke of Giga Information Group. "The competition is fierce, and without a proven business case and strong focus, you can't succeed." He says firms with a vertical industry focus or a focus on the midmarket stand the best chance.


Aretech Information Services Inc. hopes that proves true, since it has both. The company was spun out from Semco Energy Inc. last year when, curiously, the natural-gas company decided its IT department was in trouble. It hired Rudy D. Cifolelli to advise it. After taking a close look, Cifolelli offered two options: hire an outsourcer or become one.


Semco opted for the latter, and Aretech was born. The spin-off not only supplies Semco with its IT needs, but also has landed external contracts. Rudy R. Cifolelli, the company's vice president of sales and marketing (and Rudy D.'s son), says that the number of midsize industrial firms in the Midwest is large enough to keep Aretech busy for years to come. He agrees with Hayler that capital investment is key, but also says that "the real barrier to entry is leadership and experience, not money." His father led a similar effort several years ago, when MCN Energy Group Inc. spun off Genix Corp. MCN sold Genix to another service provider in 1996, saying it wanted to focus on its core energy business — and proving that even successful spin-offs face uncertain futures.

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