Making IT pay

Making IT pay

Spinning off an IT organisation as a business can make sense. But be warned: The path to business glory is littered with the bones of impulsive chief information officers.

Call it the urge to unmerge. It’s a desire many IT directors feel. Sometimes the message comes from their managements and occasionally it comes from inside their own heads. It’s the call to spin off the IT organisation as a separate, though affiliated, company. To an accountant, spinning off the IT department can make great sense. In-house IT teams code their own applications all the time. The software’s intellectual property can seem like locked-up revenue.

Singapore-based logistics firm Accord Express has grabbed market share with its in-house warehouse management and vehicle tracking system, which serves customers like Samsung, Toshiba and Sony Ericsson.

Accord plans to spin off an IT business by 2006. “At the end of the day, people ask how IT is going to contribute towards the business,” chief executive officer Marcus Wan told a Singapore publication.

Switching roles

Engineers more at home with a network diagram than a profit-and-loss sheet can steer a private company into trouble at internet speed. So where are the hardheaded business brains going to come from?

Switching from a technical to a business role was “exciting” for Peter Franke, CEO of Lufthansa Systems, an IT offshoot of the German carrier that acts as a systems integrator for the international airline and aviation market.

But the former senior vice president of network management at Lufthansa recalls a key initial difficulty was finding business talent: “We had to build our marketing and sales team from scratch.”

Franke declines to discuss where he found his business people. One option for an entrepreneurial IT director, of course, is to raid the parent company for talent. Another is to plunder the IT vendors.

Take Kalido, a US-headquartered data warehousing software maker. When it broke away from Shell in 2001, it hired its marketing director from IBM, its sales head from Cognos, and its chief technology officer from Oracle.

An IT division that spins off into a business will likely do its first deal with the parent company. Simple enough. But then it has to compete with the big boys – the IT vendors – for orders from outside organisations. And that’s never going to be easy.

For instance, even though having mighty Lufthansa as its launch customer “helped to open some doors for us”, it was months before Lufthansa Systems landed its first deal with an outside company, admits Franke. The breakthrough came when Lufthansa Systems sold its crew-management system to LOT, the Polish airline, for US$6 million in 1995.

Develop a winning product

Competing in overseas markets may require capital injections. The trick here is to find the right backers.

Determined to go global, Kalido went to Atlas Venture and Benchmark Capital, two US venture capital firms that specialise in early-stage investments in IT companies, for a US$18 million shot in the arm last year. Both investors were impressed by Kalido’s client list, which includes Unilever and Philips.

It helps to have a killer product, especially if you are going into a market that’s crowded with powerful vendors.

Singapore-based intellectual property consulting firm Ella Cheong Spruson & Ferguson hopes to succeed in business intelligence software, a space dominated by giants like SAS Institute, Business Objects and Cognos.

Despite the daunting competition, the company believes its newly created IT subsidiary, i3 Research, has a potential winner in its proprietary Patent Intelligence Expert System. The software generates patent mapping reports to help companies, inventors and researchers monitor new patents and discontinued technology.

“The software is unique and will help the company desire better leverage past investments,” says Tralvex Yeap, Ella Cheong Spruson & Ferguson’s IT head.

Form strategic alliances

Sometimes non-IT firms buy into key suppliers of IT services. Through forming such a strategic alliance, the buyer obtains a closer relationship with the supplier and also taps into the vendor’s income stream.

In 2002, Philippines-based electronics manufacturer Fastech Synergy was looking to diversify its business after the technology slump hurt sales.

It bought a 50 per cent stake in local IT consulting firm Pentathlon IT Asia. Fastech also merged its 15-person IT division with Pentathlon, outsourcing all IT functions to the new entity. Pentathlon’s customers include Volvo, Nissan and Hyundai in the Philippines. The company has also developed and rolled out a financial, distribution, inventory and sales force automation system for Destileria Limtuaco, a wines and spirits producer.

John Payne, the president and CEO of Fastech Synergy, says the arrangement his company has with Pentathlon has helped it slash IT costs by up to 30 per cent.

He adds his internal users obtain better-managed services from “arms-length” relationships. Each job request, for instance, is closely monitored under a service level agreement.

It is clear there are many good arguments for turning entrepreneurial IT departments into businesses in their own right. Be warned, though. The path to spin-off business glory is littered with the bones of impulsive IT directors.

“You have to sit down and ask yourself: ‘Is there really a demand for this product or service I’m offering?’,” advises Allen Bacallan, IT director at General Milling, a Philippines-based integrated food company.

“And then, even if there is, do you have the funds, partnerships and skills to take your IT organisation to the skies?”

A super spin-off

In 1991, German airline Lufthansa was on the brink of bankruptcy after a decade of sliding financial performance and ballooning debt. CEO Jurgen Weber decided to turn the company around by cutting more than 8000 jobs and spinning off some departments as independent companies, starting with the airline’s in-flight catering subsidiary.

Lufthansa returned to the black in 1994. A year later, the carrier spun off its IT department, which took the name of Lufthansa Systems. The new company, led by CEO Peter Franke, saw an opportunity to market its software to other airlines that, like Lufthansa, needed to lower costs. This includes seat-reservation, pricing and revenue management, passenger check-in, baggage-handling, route-planning, network-scheduling and aircraft-maintenance systems.

Singapore Airlines (SIA) and Thai Airways International became Lufthansa Systems’ first Asian customers in 1999. Both carriers bought its business intelligence system, Market Information Data Tapes. SIA has also installed Lufthansa Systems’ route-planning and cargo-booking management systems.

In 2003, to penetrate the low-cost carrier market, Lufthansa Systems sliced its enterprise applications into smaller modules. Now manned by 4400 personnel, up from 1000 workers in 1995, Lufthansa Systems services about 100 airlines today. But the Lufthansa group remains the IT supplier’s largest single customer.

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