Editor's Note: For this special issue, we asked our columnists to cover a variety of e-business topics. Their insightful commentary provides a well- rounded outlook as to the benefits and challenges of the e-world. Regular column format will return next month.
The times, they are e- changin'. And so are the companies we need to deal with and buy tools from. The e-stablished companies are still there, but now we need to also e-xamine e- merging companies, e-specially dot-coms. Dot-coms are e-verywhere! How we e- valuate dot-coms can be e-xacting, but it is e-ssential that we modify the criteria against which we measure them. Here's the skinny on e-valuating dot- coms. (E-nough of the e words, already!)
We used to look for certain qualities in a vendor or company we wanted to do business with. First, we looked at their financial stability. Were they financially sound, with sustained earnings growth? Was the business a going concern, with a good name and reputation in the industry? Now, dot-coms are springing up seemingly overnight. In many cases, no one has heard of them, and they definitely don't have a track record in the industry. The vast majority of dot-coms don't make a profit. Now it may be that recent stock market trends will force many of them to more traditional revenue models, which will give us the ability to pick and choose among them. However, lack of profits does not mean we shouldn't do business with dot-coms. An evaluation of a dot-com's business model should include how realistic it is that they will achieve the revenues and expenses they estimate, along with an evaluation of whether the company will survive based on the appreciation of its stock value. Many dot-coms continue to be going concerns, despite negative profitability. We also need to look at the strength of the management team, which weighs heavily in the analysis of a dot- com's viability.
Another criterion we used to measure traditional tool vendors was whether the technology was established and if it resulted in that vendor having a significant share of the overall market. We looked for regular release schedules and conformance to the advertised timing of the releases. Did they meet the schedules they set for themselves? With dot-coms, however, we look not at whether the technology is established, per se, but rather if it is unique and can potentially provide us competitive advantage because of this uniqueness. Dot-coms usually have new products, without release track records or significant market share. But we can review the technology architecture that is used for openness and object orientation. Can the product plug and play in an open infrastructure, even to the point of being completely switched out down the road?
One factor I remember well that used to weigh heavily in an analysis of a classical tool provider was whether they had a sophisticated service infrastructure. How reliable was the service provided (usually based on references)? Were there escalation procedures, and how timely was the response? Needless to say, most dot-coms have not yet figured out the service angle. It's too early in their product life cycle for them to have thought about the service infrastructure required to support their product. Instead of service infrastructure, we should evaluate dot-coms on their willingness to partner with us and our ability to impact their future product development direction.
And what about pricing? With the established company, pricing discounts were available and sought after. The companies knew what their costs were and what their margins had to be to make a profit (and, of course, the specific salesperson's commission!). Dot-com companies are usually still trying out their pricing models. We can look at alternatives to traditional product pricing with dot-coms, including taking warrants for an equity position in the company based on performance volumes.
Many traditional companies are large, with an extensive customer base. This made our transaction with them just one among many, without the attention to detail we might have liked to receive based on the price we were paying. Newer dot-coms have only a few customers to start, looking on each of them as strategic partnerships. They consider the customer's success in using their product paramount to their own continued success. As a customer, this is a wonderful place to be!
Yes, indeed, the rules have changed. It isn't that the old way was bad and the new way good. Nor was the old way good, and the new way bad. They are just different. So the skinny on how to deal with dot-coms is to look at them differently from established companies in terms of financial stability, technology, service, pricing and relationship. The e-business companies can e- xhibit e-xtraordinary value for your company if you can think outside of the box when you e-valuate them. Keeping an open mind is e-ssential!
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