Sep 13 2007

Spin Control

SMBs that develop software for their own needs know potential markets from the inside, but there's more to consider for a successful spin-off.

Photo: Tamara Reynolds

For almost a year, Owen Barrett and Craig Robertson searched to no avail for an affordable software tool to help manage and integrate the business processes of their small company. With 85 employees, 10-year-old Clyde Valley Drilling had become Scotland’s leading drilling contractor, but the growing business was struggling to maintain accurate records of quotes and jobs, and was losing track of high-priced equipment, says Barrett, CVD’s managing director.

The two men finally gave up their search in frustration two years ago. Instead, Robertson, a technology contractor for CVD, developed the software in-house with the support of a consultant and some contract programmers. The digital whiteboard application worked so well that CVD saved an estimated $400,000 in its first year of use.

The savings led Barrett and Robertson to conclude that there might be a market for the software, which they dubbed iQ. In June, they launched Quarterback Systems to sell the product. Robertson took on a lead role as a director.

“We felt as though we had an opening because any other product out there wasn’t developed by a contractor; it was developed by somebody whose business is business information systems,” says Barrett. “We’ll be looking for anyone with field-based operations — traffic management or landscaping companies, for example — because we understand what they need.”

John W. Ellis
Photo: Stephen Travarca
Cleveland Clinic taps the expertise of its medical practitioners when it creates spin-off businesses or markets technologies it creates, says Chris Coburn, Executive Director of Cleveland Clinic Innovations.

That’s a good place to start a spin-off project, say veterans and longtime observers of the process. Small players such as CVD can’t provide the resources and support that flow from large corporations, research labs and government agencies to the products and companies they spawn, but SMBs trying to commercialize software developed for in-house needs have at least as much access to market knowledge, which industry experts say is crucial.

Knowing the Market Inside Out

“The most successful efforts at commercializing in-house applications I see come from people who understand the business they’re in and have converted that into the product,” says Robert Chalfin, president of the Chalfin Group in Metuchen, N.J. “They know their own problems, their competitors’ problems, their suppliers’ problems and their customers’ problems, and they put the new venture in that context.”

The perspective of the potential end user is also essential for a large-scale technology incubator, says Chris Coburn, executive director of Cleveland Clinic Innovations, the medical center’s technology development and commercialization arm. Cleveland Clinic has spun off 18 companies based on technology developed in-house, with four more ventures on the launch pad, says Coburn. Two of the pending spin-offs are based on innovative software.

Besides creating separate companies, the clinic also licenses technology developed by its scientists and practitioners to other companies. Central to the method his organization uses to bring technology to market is “an enduring bridge” between the physicians using the products and the companies developing them, Coburn says.

“We use practitioners in any way we can to get them to share their insights,” he says, noting that Cleveland Clinic buys billions of dollars’ worth of equipment each year from many companies, including those it has created. “Our model is that of a very large group practice with the aim to improve medicine for individual patients and medicine in general. Evaluating technology is part of the process of making medicine better.”

Always Needed: More Time, More Money

Large companies have time that a small one might not have, says Andrew Allemann, president of Fluid Innovation Group.

“It’s easier to take technology out of big companies. They understand the time involved, and they’re willing to spend from $3 million to $300 million on the process,” says Allemann, who usually works with Fortune 1000 firms. “The extraction process is more challenging for SMBs.”

And the challenges don’t leave much wiggle room for small companies. It’s not as though small businesses are unwilling to sink more time and money into a spin-off; they usually just don’t have them. And their estimates of the cost of a commercialization project are typically too optimistic, says Tracy Gray, director of the National Center for Technology Innovation in Washington.

“You are going to spend more money than you originally intended,” she says. “And you’re going to need more time for development, for research, for testing and revision — guaranteed.”

Barrett learned that lesson while launching Quarterback Systems. The experience brought home the need for patience and a “deeper focus,” the ability to look beyond immediate problems to the long-range strategy, says Barrett.

“Allow yourself time and double your budget,” he says. “They’re important, but it’s not going to work if you panic about schedules and money. Time scales get longer in the areas that will bring the most benefit to the business.”

Have you ever worked at a non-IT company that
decided to sell an internally developed application?

83% No
16% Yes
1% Don’t know

Of those readers who have:

30% The spin-off application unit became a profit center.
26% The unit was never profitable.
24% The unit merely recovered build costs.

Source: CDW poll of 318 BizTech readers

Ready to Meet the Market?

A critical prelaunch task at Quarterback was to overhaul the software’s user interface for external customers.

“We were used to it in-house, but we realized we had to make some adjustments — give it an easier and friendlier front end,” says Robertson.

That’s the kind of step that’s often missed by companies trying to spin off software. “It’s no big deal if there’s a bug in the system when you use it, and it’s not even a big deal if there’s a bug in the system when your buddy uses it,” Chalfin says. “You’ll see what a big deal it is when a bug crashes the system for a prospective customer.”

Michael Cusumano, professor at the Massachusetts Institute of Technology’s Sloan School of Management, recommends outside testing to gauge a product’s strengths and weaknesses. A company’s development team “may not be representative of general users,” he says. “That’s harder to see from the inside.”

Aliens at the Table

Another hurdle is that the software marketplace is often “totally alien” to a small company’s original business and what its owners know best, says IDC analyst Ray Boggs. Relatively few small or medium-size businesses try to commercialize applications themselves. SMBs that develop promising software typically team up with a channel partner — a systems integrator or value-added reseller — through a marketing or licensing agreement, says Boggs.

“If I’ve been manufacturing dry cleaning equipment for a few years but have an urge to go into the software business, I might see this as an opportunity,” he says. “But if I’m not that interested in the software business, licensing to a partner might give me a closer fit to my core mission in life.”

The complexity of the spin-off process can be daunting, and no business of any size should go into it without weighing the options and doing plenty of research. But there’s no reason to be afraid of such ventures either, Chalfin says. “I think they’re less risky than other startups,” he says. “You already have a business, cash flow and knowledge. If you think it’s a really good product, you can take the chance.”