Yet another tech company is in hot water over its use of geo-location. This time, it’s Microsoft. Seattle-based law firm filed suit against the company alleging that the Camera application on the Windows Phone 7 sends out user information—even when the person has not given the app permission to do so. READ MORE
To some, Google and Facebook are a bit like cool, older brothers. You admire their laid-back, Gen X-style and the “Friends” vibe that everyone gets. But make no mistake, the two are also serious corporate entities with long political reach. In fact, Mashable’s Sarah Kessler reports that both companies have deep pockets when it comes to lobbyists. This quarter, Google spent $2.06 million, while Facebook spent $320,000 on Washington lobbyist—outpacing even Microsoft in that area. READ MORE
Whenever you surf the Web, websites use small bits of code called “cookies” to track your activity. Depending on your point of view, this practice is either an invasion of privacy or a beneficial practice that helps keep online content free, and makes browsing in general more interesting because you may see an ad for something you actually want. Newly proposed Do Not Track legislation is intended to make Internet surfing more private. READ MORE
Less is not more when it comes to software compliance. Most companies want to do right, but many are not in compliance and admit they don’t have the time or budget to get there. But if they realized that an initial investment in an automated IT asset management system could save them time and money down the line, more would probably sign up today. A recent survey by King Research revealed that 60 percent of IT executives and managers believe they have unlicensed software deployed and 73 percent of that same group responded that they are not prepared for a software audit. Diane Hagglund, senior analyst at King Research, who authored the survey, says that a lot of IT professionals are doing piecemeal work that’s not end-to-end. These piecemeal tools don’t roll up into a report which could show which computers and software are not in compliance. “This survey paints a picture that screams for automated solutions.” The survey was sponsored by KACE, a Mountain View, Calif. company that specializes in IT asset management software solutions through their flagship product, KBOX. Rob Meinhardt, KACE co-founder and CEO says a lot of companies think they’re compliant, but they still feel there’s software out in their system that they don’t know about. He adds that many of them have antiquated inventory protocols that track inventory on the way in, but few companies feel confident that their technology can identify everything. “We find what’s on those machines and give the ability to meter and monitor, so customers are more certain of what they don’t know,” Meinhardt says. Aids negotiating with software vendors With KBOX, IT managers at a press of a button can slice and dice reports to see which computers have what software program on them and which staff members have been running what specific software program. For example, you may have 75 licenses for Adobe, but a KBOX report shows only 20 people using Adobe at any given time. With this data, you can renegotiate with software vendors. Michael Heuer, technology solution services customer support manager of Portland Community College and longtime KACE user, knows his records are better than those of his software vendors. “They change hands through acquisitions, which changes the starting point, but we know what our licensing arrangements are,” he says. “We can be very candid when negotiating for software and we ask what extra services we can get without spending a lot of money. Also, we proactively do compliance with our software vendors and have a strong partnership with them.” IT asset management helps save time and money Of those companies that are in compliance, some may not know that they can even save more money through purchasing an automated IT asset management system. These systems can figure out usage, which do not appear in vendor audits, and can show the IT manager which software programs are not being used on a daily basis. With this information, the IT department can better negotiate with software vendors and prevent the overbuying of seat licenses. “Vendors don’t care if software is being used,” says Kris Barker, CEO of Express Metrix, a Seattle-based software vendor specializing in asset management solutions. “They just care that it’s installed. Usage doesn’t matter to the vendor, but usage to the company does matter since it affects costs.” Express Metrix’s Express Software Manager Professional program has a control application function that enables companies to follow the concurrent licensing model so they can save money on software licenses. For instance, they may have 150 concurrent licenses, but their vendor requirement states they must only have 50 users running it at same time to meet compliance. The program lets companies save money, says Bob Ritger, IT Director of Payette Associates, Inc. a Boston-based architectural firm that uses Express Metrix. The company can make sure all employees are using the same version of software, such as Internet Explorer version 7.0 versus 6.0, he says. “The savings are significant since we’ve cut back on licenses we don’t need,” Ritger says. Avoid software noncompliance audits Peter Beruk, a consultant in compliance marketing with the Business Software Alliance (BSA), a Washington, D.C.-based industry group, notes that IT asset management plans can help stave off an outside audit by software companies or watchdog groups, such as BSA. The easy part is taking the inventory and the hard part is figuring out what the company has done historically when purchasing software licenses, Beruk says. For instance, if the company tracks its assets through expense reports, it will have a harder time finding its software license records, than if it uses an asset management tool. The BSA offers a large number of free tools available from its website, and it has contracted with several vendors including Express Metrix that will scan new software installations at no charge to track unlicensed software. “Any business is one phone call away from being reported or having unauthorized software, so it’s really incumbent on the business to know its own compliance with the software it’s using,” Beruk says.” Barker agrees that successful IT asset management comes from using a tool along with their planning and processes. “Successful companies understand IT asset management in that it affects everyone across the company and they buy in that it will make a huge difference in a company’s bottom line,” Barker says.
To understand why small businesses should care about supply chain management software, you could read a bunch of analysts’ reports explaining the good that can come from automating the process of turning raw materials into finished goods and getting them to customers. Or you could just talk to people such as James Van Dyke and Taylor Gordon. Van Dyke is president of Electronics Assemblers Inc., a 60-person custom electronics manufacturer in Hood River, Ore., an hour’s drive east of Portland. Gordon is a supply chain analyst at Myers Container/CMS LLC, a 91-year-old Portland company that makes industrial steel drums and containers. Listen to either long enough and it’s clear how important it is for a small company to manage its supply chain in the most efficient, cost-effective and collaborative way possible. Big corporations have used supply chain management and enterprise resource planning (ERP) software, for years, as well as newer technologies such as radio frequency identification (RFID) chips. Not so small businesses, many of which still rely on paper and pencil or outdated software because upgrading would be too costly and time consuming. Supply chain management that works That’s changing, as more small businesses see the value in having a better window into their supply-chain process. In fact, according to a recent AMR Research survey of 336 U.S. and European companies, in 2008 mid-market companies will be “aggressive” in buying supply-chain management software, due to continued pressure to reduce manufacturing costs and to help customers reduce their own costs. Customers “expect their own suppliers, regardless of size, to comply with their demands, which more often than not require investment in supply chain technologies,” AMR Research analysts John Fontanella and Eric Klein write in the report. Van Dyke’s business, Electronic Assemblers Inc., makes electromechanical and cable subassemblies for HP and other local high-tech companies. According to Van Dyke, supply chain management technology can be as basic as using Microsoft Windows programs. EAI relies on four – Windows Explorer, Exchange, Internet Explorer and Excel – for everything from restricting access to proprietary customer documentation to handling purchase orders to scanning websites for deals on electronics components. “Without it we’d be nowhere,” he says. The other part of EAI’s supply-chain management process is a material requirements planning (MRP) system called Alliance Manufacturing from Exact Software Americas. It tracks purchase orders, work orders, inventory levels and all other aspects of a manufacturing job. The software is expensive and it takes time to train people to use it. But it’s been worth every penny, Van Dyke says. “Ultimately where you end up is with a tool that allows you to treat materials planning like you treat your toaster. You don’t need to know how it works, you just use it to toast your toast,” he says. Fixing what’s broken Without good supply chain management, a company may lack access to vital information and the deficit can stop production from being as fast or efficient as possible. That’s the current situation at Myers Container/CMS, which has been limping along on paper-based systems and ERP software purchased in 1999 that wasn’t ever completely implemented, according to Gordon. “It’s not good enough to have the technology. If nobody’s using it, it won’t work,” he says. When new owners acquired Myers in late 2007, they hired Gordon to bring the company’s supply chain into the 21st century. As part of that, Gordon is analyzing existing software to decide if it can be upgraded, or if the company would be better off going with something completely different. The hope is that by upgrading “it’s very likely we’ll see high cost savings,” Gordon says. To learn more about supply-chain technology, Gordon joined the supply-chain management special interest group of an Oregon manufacturers’ consortium. He’s learning about innovations by visiting fellow special-interest group members’ factories to see the problems they’re facing first hand and to help brainstorm solutions. SIDEBAR: Supply Chain Management Technology Resources Some additional resources for learning about small and mid-sized business supply-chain management technology and practices include: Supply-Chain Council — This Washington, D.C., international non-profit publishes supply-chain standards and benchmarks used by more than 1,000 member companies of various sizes and industries. Supply Chain Management Review — The online version of this industry trade magazine has articles, white papers, newsletter, blogs, webcasts, message boards and links to other resources. The Supply Chain Management Research Center — The website for this research center housed at the University of Alabama’s Sam M. Walton College of Business has industry news, white papers and links to other resources. The center also sponsors an annual supply-chain management research conference.
The crew at Karen Pierce Gonzalez’s public relations firm couldn’t function without telephone headsets. The staff of the three-person company near Santa Rosa, Calif., spends so much time on the phone during the workday that headsets are a must, and not just any will do. According to Pierce Gonzalez, cheap models aren’t worth the investment because static starts creeping into the earpieces about the time the warranty expires. Yes, over-the-head models muss their wearers’ hair every time they’re removed, and earpieces don’t always stay in place. But that’s a small price to pay for relieving the pain that comes with cradling a phone between your ear and shoulder all day. “Just thinking about it makes my neck hurt,” Pierce Gonzalez says. As Pierce Gonzalez’s experience shows, people take their headsets seriously. If recent trends are an indication, the day is coming when wearing a telephone headset for work will be almost as ordinary as, well, using the telephone. Not just for customer service reps anymore Wearing a headset used to peg someone as a receptionist or customer service agent. But the era of cell phones, Internet phones, iPods, and video games has erased any stigma associated with working while something’s stuck in your ear. Industry experts say headsets could become even more commonplace after California, Washington, and New Jersey later this year join the rank of states with laws banning people from talking on hand-held cell phones. When deciding what to buy, some things companies should consider: Wireless — Wireless headsets are the fastest growing segment of the business, thanks in part to lightweight batteries that last longer between charges than older models. “Once you cut the cord, there’s a lot you can do to unleash it to a lot more people in the building,” says Joe McGrogan, director of business-to-business marketing at Plantronics, a leading U.S. headset maker. Some new wireless headsets can be used with multiple phones, allowing the wearer to switch between a cell phone and office phone without switching headsets. Other models let the wearer answer or hang up a call by pushing a button on the headset, McGrogan says. Frequencies — Wireless headsets operate on multiple frequencies to transmit voice signals to and from a telephone base station, and the higher the frequency, the better the clarity and range. Today’s high-end headsets use a 1.9 GHz frequency, which the U.S. Federal Communications Commission opened up for voice-only communications in 2005. Other models use 900MHz, 2.4GHz and 5.8GHz. Bluetooth — This short range wireless technology developed by a consortium of major telecommunications players including Motorola, Nokia, Microsoft, and IBM allows someone using a Bluetooth wireless headset to connect to other Bluetooth enabled devices like cell phones, computers and printers. Wired — Although wireless gets all the hype, companies like Plantronics still sell as many corded headsets as they do cordless, McGrogan says. What can you expect to pay? Prices for corded headsets range from $25 to $100. New wireless models with all the bells and whistles cost from $200 to $400, according to McGrogan and other sources. SIDEBAR: Headset resources Telephone headsets aren’t hard to find. Small and mid-sized businesses will see a healthy selection at office supply stores such as Office Depot and Staples. Online specialty retailers such as Hello Direct and Headsets.com have a larger selection. Some small-business telecommunications vendors also carry the gear or can tell companies where to find it. For additional information on headsets suitable for office and mobile workers, check out the following online resources: An interactive selector on the website of Sennheiser Communications, a European telecommunications equipment reseller, lets people select their preferred use, style and brand and then spits out a list of equipment that matches their needs. Plantronics has a similar online tool customers can use to view the company’s products for office, mobile, and home phones. Amazon.com has a telephone headsets page with equipment from a variety of manufacturers and online stores searchable by brand, seller, or price. If you’re thinking of going wireless, read this white paper on choosing a wireless headset at Headsets.com
Cover Story Blue-collar communities are designing their own high-tech networks to attract business Tacoma, Wash. Stand on a street corner and you can feel it. Not the unstoppable rush that hits you when you emerge from a New York City subway station. Not the charged air hovering about MIT in Cambridge, Mass., or the relentless new-day vibe of a Silicon Valley morning. But there’s something brewing in Tacoma, this city on the south shore of Puget Sound. Young men and women on their lunch breaks dot the sidewalks. Men in hard hats pop in and out of boarded-up, abandoned warehouses and mills that they’re renovating into San Francisco-style loft offices. Cranes swing around the waterfront, where new buildings are going up. “I can’t say I’ve ever seen that before in 20 years,” says Rob Grenley, an area native who cofounded two companies in downtown Tacoma: Grenley Stewart Resources Inc. and ID Micro Inc. How is it that after decades of stagnation the city of Tacoma is sputtering back to life? For starters, it’s only about 30 miles south of Seattle, where the high-tech growth spurt has gobbled up almost all the available space and ratcheted up real estate prices to twice what they are in Tacoma. And there’s another ace up the smaller city’s plaid-flannel sleeve: a state-of-the- art, high-speed fiber-optic network that covers the city. Tacoma — rich with small-city business perks like a sane commute, ample parking, and a start-up-friendly permitting process — is now technologically equipped to play ball with the big kids. Two or three years ago, says commercial real estate broker Eric Cederstrand of Colliers International, corporate clients refused to even drive past Tacoma and look out the car window. Seattle was the city they wanted on their business cards. Now, he says, the Tacoma warehouses he’s renovating are filling up faster than he can sandblast the timbers and hang the reproduction windows. “It’s like Tacoma was put in a time capsule,” he says. “All of a sudden we’ve broken open the time capsule, and we are literally creating a brand-new city.” The new network in Tacoma represents another chance at economic viability — perhaps even boomtown success. As is true with many small cities, all this might not have happened if Tacomans had waited for the local cable or phone company to install the high-speed networks that businesses now demand. Frustrated with the inattention of big cable and phone companies, publicly owned utilities in tiny towns and small cities in states all over the country have taken matters into their own hands. They’ve dug up streets, laid fiber-optic cable, and connected residents and businesses to new high-speed lines. Service providers are rushing in to sell Internet access through the new infrastructure. (In some cities, the utilities are even selling the services themselves.) The introduction of choices has made life easier for the businesses already in place and made the cities more attractive to start-ups. For Tacoma, the new network is much more than a tangle of glass threads. It represents another chance at economic viability — perhaps even boomtown success. City of Destiny Nearly surrounded by water, with preposterously huge Mount Rainier looming in and out of the clouds to the southeast, Tacoma tends to hang back behind its sexier sister, Seattle, just up Interstate 5. In 1873 the Northern Pacific railroad chose Tacoma over Seattle for its western terminus, and ecstatic Tacomans tagged their town the “City of Destiny.” For many years paper mills choked the air with an acrid stench that came to be known as “Tacoma’s aroma.” In the 1960s a shopping mall was built in Tacoma. Almost immediately, the downtown retail district started to collapse. Buildings stood abandoned for decades. Crime rose; street gangs moved in. To business owners in those days Tacoma’s nickname must have sounded ironic. “We were the corner business on both corners,” says Steph Farber, whose family’s LeRoy custom-jewelry shop has occupied a storefront in the middle of a downtown block since 1942. For years buildings on both sides were blighted all the way to the end of the block. By the 1980s, Tacoma was standing still as Seattle flourished. Thousands of people from the Tacoma area clogged I-5 every morning on their way to jobs in Seattle and surrounding King County. When Rob Grenley left for college, Tacoma had “a postapocalyptic look,” he recalls. “You didn’t want to do business there unless you had to.” Grenley worked first on Wall Street and then in Seattle, but returned to Tacoma in 1990 to start a truck-fueling business with Greg Stewart, a childhood friend. Things were just beginning to turn around then. City officials were working hard to clean the place up. They threw all their resources at improving public safety. They ripped down offending buildings and put grassy parks in their place. And they clung tightly to Tacoma’s marquee business, the Frank Russell Co., a multimillion-dollar international investment-services firm that is headquartered on Tacoma’s waterfront. But in the early 1990s the city’s communications infrastructure was still stuck in a technological tar pit. “You’d get on the phone and it would be, ‘All circuits are busy,’ ” recalls Steve Klein, superintendent of Tacoma Power, the municipally owned electric utility. The cable service was equally poor. “They had a monopoly, with no incentive to improve the infrastructure,” Klein says. The Energy Policy Act of 1992 had deregulated the wholesale side of the power business. To stay competitive, Tacoma Power was planning a fancy digital network that would allow it to operate switches, read meters, and manage power loads from remote locations. Klein calls this type of service electricom, from electricity and telecom. “Microprocessors are in everything,” he says. “They need electricity to power them, and they need telecom to interact.” The SRI International consultants Klein hired to review the plan told him that while he was at it, it made sense to install a bit more fiber than was called for, to wire the city for high-speed Internet access and other applications. The city surely needed it; its franchise office had been negotiating with cable provider TCI Inc. for service upgrades, but TCI representatives were stonewalling. Klein approached TCI and phone company US West about teaming up to share the cost of the new network. “They told us to get lost,” he says. In 1997 the city council approved Tacoma Power’s plan to spend $100 million on a fiber-optic network. (The money came from the utility’s wholesale revenues; residential and business customers saw no rate increase. Tacoma Power customers have the second-lowest rates per kilowatt hour in the state, according to the company’s government and community-relations manager, Diane Lachel.) Construction of the network began in January 1998, and by July the power company had its first cable customer. Today the Click Network, as it is called, covers 180 square miles. Tacomans now have choices, which forces better customer service. The city’s marketing people claim that 100 start-up companies have located in Tacoma since Click went live; some have relocated from Seattle. Those businesses (and city residents) can choose from five different Internet service providers that the network supports. But the real surprise came along in the same month that Tacoma Power broke ground on Click. TCI suddenly announced a decision to invest $30 million to upgrade its own infrastructure. “When they finally woke up to the fact that we were a reality, they tried to stomp us,” Klein says. But, he adds, Tacoma residents and businesses now have choices, which forces better customer service. Tacomans also have seen hundreds more jobs, more venture capital, and better workforce training in their hometown. Dublin transplant Bill Towey runs a high-tech incubator through his private-investment firm Tacoma Venture Partners LLC. “A lot of these workers were already here,” he says. “They just don’t drive north to Seattle or Redmond anymore.” Towey plans to raise $15 million for his incubator. He and various local companies are involved in a technology boot camp for Tacoma high school teachers. Giddy with the first signs of success, and eager to tout its prospects, Tacoma has retained the New York City marketing firm Development Counsellors International for $127,000. Tacoma’s economic-development director, Juli Wilkerson, is touring the country, promoting “America’s #1 Wired City” to site-selection companies. City employees now have E-mail addresses that end in wiredcityusa.com. And broker Eric Cederstrand is hot on the idea of changing the names of Broadway and Commerce Street to Broadway.com and E-Commerce Street. “There’s a positive-multiplier effect,” Rob Grenley observes. “More people come, which means businesses will grow and flourish, as opposed to people not wanting to come here on a bet. It’s nice to be heading toward that in your hometown.” Naturally, AT&T, which bought TCI in March 1999, says the company had planned to modernize its services all along. “Regardless of whether Click Network was in place or not, TCI would have upgraded Tacoma because plans had always been in place to upgrade at that time,” says Steve Kipp, executive director of communications for AT&T Broadband’s Northwest division in Seattle. Yet the Tacoma experience with TCI was echoed in Cedar Falls, Iowa, and Boulder, Colo. In fact, some 65 municipalities have made end runs around their cable or phone monopolies to offer telecom services, says Martin Gidron, managing editor of UT Digest, a newsletter in Silver Spring, Md., that has chronicled the phenomenon. The trend will continue, Gidron says, since “the demand for telecom services seems to be insatiable.” Heart of the Commonwealth Some 3,000 miles east of Tacoma, nestled among seven green hills far less dramatic than Mount Rainier, lies the city of Worcester, Mass. Worcester — birthplace of Abbie Hoffman, the diner restaurant, the smiley face, and the Pill — has long been known as the Heart of the Commonwealth. The name fits: the city’s central location and highway and rail infrastructure make it a natural for commerce. Worcester has also been known as New England’s utility closet, because it was a manufacturing center for many years. Most of Worcester’s industrial powerhouses have moved on to cheaper pastures, leaving the city with an assortment of old, abandoned buildings, including a cold-storage warehouse that burned catastrophically last December, killing six firefighters. In the 1960s, Worcester replaced a massive piece of its core with a suburban-style mall. The shopping center never really caught on, but like the one in Tacoma, it sparked the collapse of the city’s formerly thriving downtown retail base. In the past few years Worcester officials have staked the downtown’s future on another huge, single-use project — a mammoth medical facility — and have restored the 90-year-old Union Station, a beaux arts train depot that had been left to rot for decades. (Tacoma also recently restored its own Union Station, which is being used as a courthouse.) Worcester residents have always suffered from a bit of an inferiority complex, partly because their town, like Tacoma, is within the shadow of a larger, more vibrant city (in this case, Boston). Even the restoration of Union Station, the pride of the city, came only after years of contentious intracity squabbling and institutional paralysis. Now, nearly a year after the project was completed, its beckoning retail space is almost entirely unoccupied. Like Tacomans, Worcester, Mass., residents have always suffered from a bit of an inferiority complex, partly due to their proximity to a larger, more vibrant city. Another part of the problem may be Worcester’s form of government. The chief executive is not the mayor but rather the city manager, who is appointed by the city council instead of being elected by residents. Worcester has had only three city managers since 1953 (when business leaders succeeded in instituting this “professionalized” municipal structure), and none of them has been directly accountable to voters in the way elected officials are. That can make it difficult to create real change. “Worcester has gotten a little bit behind the curve,” says Arthur Couture, an entrepreneur who eyed neighboring towns before choosing Worcester and its easy commute for his software and computer-services company, ICAL Systems. Now, Couture says, Worcester officials are being pressured to leapfrog ahead. A new fiber-optic network has been installed in the city, and local businesspeople are relying on it to lure new companies to their hometown. A marketing brochure only slightly less effusive in tone than Tacoma’s PR avalanche labels Worcester “America’s #1 Cyber City.” Worcester’s network differs from Tacoma’s in one fundamental way: a private-sector builder of fiber-optic networks called NEESCom, which was established as the telecom subsidiary of the electric utility formerly known as New England Electric System, installed it at no expense to the city. Gidron of UT Digest says that more than 150 private electric utilities have similarly entered the telecom market. Tom Wharton, a former bankruptcy-turnaround consultant, is the man who turned NEESCom’s head. In 1998, Wharton bought a bankrupt Internet service provider. Bell Atlantic was going to charge him $6,000 a month for connectivity in Worcester. So he drove 45 minutes to Providence, R.I., where he could colocate his servers with another provider for $250 a month. On the drive back to Worcester, he mused that it was unfortunate he couldn’t locate his business in the city where he lived. Why, he wondered, was Worcester’s technology infrastructure so far behind that of other New England cities? Wharton wrote a letter to the editor of the city’s daily newspaper. “The next thing I knew,” Wharton says, “I was heading a task force.” He began working with the Worcester Area Chamber of Commerce to bring the city’s technology infrastructure up to speed. Hearing about Wharton’s efforts, NEESCom figured that Worcester would make a great hub for its new regional fiber-optic network and offered to wire the city at its own expense. About half a dozen competitive telecom companies have since moved in and started selling services on the new network, and Wharton estimates that the influx of providers has drawn at least 10 start-ups to Worcester. That includes a new venture for native entrepreneur Steven Rothschild, who, after having run a family furniture business for 16 years, had started Furniture.com in Worcester. In 1997, Rothschild’s high-speed T1 line was costing him $1,800 a month. He was having trouble finding tech-savvy executives who were willing to work in Worcester, and venture capitalists weren’t breaking down the door to fund a company in the former mill town. All of that, combined with the tough time he was having in getting tax credits, prompted him to move the company to Framingham, halfway between Worcester and Boston. But earlier this year Rothschild launched an online lightbulb store, called Bulbs.com, in Worcester. High-speed Internet service costs him $168 a month — less than a tenth of what he was paying three years ago. He’s also having an easier time recruiting managers. And there’s even a new $15-million fund for early-stage Worcester businesses. “The technology infrastructure is taking out some of the roadblocks to staying in the city,” Rothschild says. Wharton’s task force — the Worcester InfoTech Project — has taken on the mantle of marketer for the city’s new high-tech offerings. But the NEESCom network hasn’t been a panacea. “This isn’t Field of Dreams — ‘If you build it, they will come,” says Couture, who hasn’t even been able to connect his business to the network yet. Another prominent local company, Tatnuck Bookseller, is situated just a few hundred feet away from one of the city’s three network rings, which cover the downtown business district, a biomedical park, and Worcester Polytechnic Institute. “We are betting our company’s future on giving our customers access to us and having access to them,” says Tatnuck owner Larry Abramoff. “Not being wired is hurting my business right now.” (Until the network reaches him, he’s making do with leased T1 lines and a wireless service.) Still, Worcester’s model — in which a private company, rather than a public utility, installs the network — may prevail in future business-community resurrections. Tacoma’s model has goosed some big privately owned phone companies. In Washington state, GTE Northwest sued the Douglas County Public Utility District to stop it from expanding its fiber-optic network (the suit was later withdrawn following changes in state law), and the Washington Independent Telephone Association took Pacific County Public Utility District to court to stop it from providing Internet service to customers. So far, Texas, Missouri, and Virginia have passed laws limiting publicly owned electric utilities from offering telecommunications services. AT&T’s Kipp views the public companies’ inroads in this area as a conflict of interest. “We’re beholden to our shareholders,” he says. “Then we have to go in and compete with the government, who’s also the regulator. That could have a chilling effect on competition.” Steve Klein of Tacoma Power doesn’t really care if Click loses residential customers to the new AT&T offerings; he built the network for the power company’s own purposes, and the Internet-access stuff is just gravy. The mayor’s office doesn’t mind if some Tacoma residents think “Wired City” sounds as if a bunch of caffeine addicts have staged a coup. Some of the new start-ups may not even survive. But 100% success is not the point. The point is to get things going. The more that entrepreneurs hear about Tacoma, the more seriously they will consider starting or relocating a business there. For the first time the people of Tacoma — and Worcester and other old-economy communities like them — are leveraging their technological assets to promote entrepreneurial businesses. They’re grabbing the reins and kissing destiny good-bye. Jill Hecht Maxwell is a reporter at Inc. Technology . Question Authority Small cities want their zip codes on your letterhead, and they’ll try their darnedest to convince you that their technology is state-of-the-art. Don’t believe the hype. Here are some key questions you should ask regarding tech infrastructure before you relocate: Can I connect to a fiber-optic network in your city? How much will it cost to plug in? How long will it take? Who’s competing to provide me with service? What are the rates? Is the network connected to major cities nearby? How many other companies are there? Do they use the network? Can residents connect to the high-speed network and telecommute? Are wireless services available? Up to Date in Kapolei Remember when every burg across the nation was billing itself as the next Silicon Whatever? Well, now several cities and at least one state want to be known for their wired wonders. Here’s a sampling of the claims: The Wired City Kapolei, Hawaii America’s Most Wired City Louisville, Ky. The Most Wired City in America Stillwater, Okla. America’s #1 Wired City Tacoma, Wash. America’s #1 Cyber City Worcester, Mass. The Internet Capital The state of Virginia Please e-mail your comments to editors@inc.com.
Not scared of losing your data to a corporate thief? You should be Bob McNeal sits down in a cubicle in his Alexandria, Va., office with his morning coffee. He turns on his computer and flips open his notebook to check out the specifics of today’s assignment. He clicks a couple of buttons on the screen and runs his usual scripted program, entering in a few numbers from those that are scribbled in his notebook. He types in some commands, following routine instructions from his database of tools. Then he patiently waits for the computer to process his programs and answer his questions — questions that could be worth thousands of dollars to his client. Two hours later, McNeal has completed his assignment. He has broken into the computer network of MBA Management Inc., located some 20 miles away in Fairfax, and verified that he can access every computer and every database in the company. And, McNeal tells his boss, he can read the user ID and password of every single employee. Is that enough, he asks, or should he continue? That’s hacking. Sorry to make it seem so banal. But it doesn’t take some wild-eyed rocket scientist with a supercomputer and nothing better to do but type ingenious code into the wee hours of the morning to perform it. Most of what hackers do is disarmingly simple. Often they use readily available vulnerability-seeking software programs, which some experts call “point, click, and attack tools.” And most of the time hackers are pretty successful — especially when they target small companies, which typically don’t spend either the time or the resources they need to protect themselves. The simplest tricks can do tremendous damage. (Witness the “I Love You” bug that was sent earlier this year in an E-mail attachment.) Most small companies that are hooked up to the Internet do what James Mugnolo, president of MBA Management, did: assume that their Internet service provider will furnish a secure connection. It took McNeal just one morning to reveal how faulty an assumption that was. Fortunately for MBA Management, a $5-million executive-search business, Bob McNeal works for the good guys: Para-Protect Services Inc., an E-commerce and network-security company. Mugnolo, who recently moved his company to Chantilly, Va., hired Para-Protect in October 1998 to find the holes in his company’s network and recommend ways to stitch them up. McNeal stopped his penetration test into the MBA Management network after those first two hours. Normally, such a job can take two days. “We stopped when we found we could get into everything,” says Chuck Downs, Para-Protect’s vice-president and director of operations. “There was no sense in beating that horse to death.” Close call: James Mugnolo’s company received a nasty virus that read, “Enclosed is my résumé.” Mugnolo had decided to test his company’s security and to spend some money upgrading it after a former employee was suspected of stealing customer data. Like most employers who have such suspicions, Mugnolo doesn’t like to discuss the details. Still, he clearly felt betrayed, and worse, the incident scared him. In its database the company keeps information on more than 50,000 workers throughout North America, as well as on an equal number of companies that are looking for employees. “Their whole business is that database,” says Downs. Though Mugnolo didn’t hire “white hat” hackers until the company had lost data, other small-business owners are rushing to secure their networks before disaster strikes. In some cases the critical or private nature of the company’s data pushes them to it; in other cases companies see security as a differentiator for their product or service. But many have just plain seen the writing on the wall — or more precisely, in the newspaper headlines, which have blared a stream of reports on security breaches. Though well-publicized stories about computer viruses have lately brought security into the public consciousness, it’s often other threats that are more dangerous to a company’s profits and reputation. Those can include attacks that shut down Web servers, for instance, or that replace Web sites with obscene or insulting graphics. Hackers can also get in and rummage through a company’s files. Sometimes data just disappear — consider the case earlier this year at the U.S. State Department, where Madeleine Albright ordered a crackdown after a classified laptop vanished, and at Los Alamos National Laboratory, where two hard drives containing classified nuclear-weapons data were missing for more than a month. Those sorts of events — from the annoying to the frightening — are often what it takes to make an entrepreneur recognize the need for computer security, says Terry Gudaitis of information-protection consultant Global Integrity Corp., based in Reston, Va. After all, you don’t want your company to be the next one in the headlines. Certainly, Mugnolo doesn’t. And he has thus far been successful. In March, Para -Protect Services ran an unscheduled penetration test of MBA Management’s systems, and this time the company passed with flying colors. Since it adopted its new security measures, “we haven’t had a single instance of systems penetration,” says David Denne, MBA Management’s vice-president of marketing. That has left the company free to concentrate on growth: this year’s second quarter was its best ever, and the business grew from 35 employees to almost 60 in the first six months of the year. In perhaps its closest call, the company escaped damage from a virus that was seemingly designed for a headhunting company: code disguised as a E-mail attachment on a résumé. That message, signed “Janet Simons,” read: “Attached is my résumé with a list of references contained within. Please feel free to call or E-mail me if you have any further questions regarding my experience. I am looking forward to hearing from you.” The attachment, however, carried a virus that could have methodically erased every single drive on MBA Management’s network. Needless to say, that particular virus could have been disastrous for the company, where résumés flow in regularly through the E-mail system. “It probably shut down several of our competitors,” says Denne. “Our system immediately scrubbed anything that came in through the firewall, flagged it, and kept it on a server outside the firewall.” Like Mugnolo, Denne believes that MBA Management has gained a competitive edge through its stepped-up security. “I find it comforting, and therefore I think my clients find it comforting,” Denne says. Hire a Hacker At Para-Protect Services, Chuck Downs was surprised but not shocked that McNeal was able to break into MBA Management’s systems in just two hours. Doing what Mugnolo did — relying on his ISP to configure his connection to the Net — meant by definition that it was an open connection, Downs says. But if Downs wasn’t appalled, Mugnolo certainly was. His business’s competitive edge — the reason companies go to him rather than to other headhunters — is his deep compilation of information on thousands of potential employees. Included in that data is sensitive information on job openings, including postings that haven’t been made public — perhaps because an employee doesn’t yet know that he or she is on the way out. Companies can unwittingly reveal a lot about their strategic plans, for example, by listing the specific skills required for various jobs. “The last thing in the world the client wants is for that information to get back to his staff or to a competitor,” says Denne. In particular, a company that’s developing a new product doesn’t want anyone to know the nature of its work. “A breach in a program could spell the end of the whole market for their idea,” Denne adds. Still, it’s not surprising that few people spend a lot of time worrying about Internet security. As the user looks out onto the superhighway of the Web, it’s easy to see it as a one-way street. But in fact, when you open a Web page or do virtually anything on the Internet, you send a request to the faraway computer on which that Web page is stored, and that computer sends you back information, which is opened by your browser or other software. That means your computer — and, in a company setting, the server — must be constantly open and able to receive data feeds from the outside. That openness is exactly where vulnerability lies. For a fee of about $10,000, Para-Protect restricted the openness of MBA Management’s systems in two ways. First, the company installed a simple firewall from Prism Servers Inc., in Allison Park, Pa., at a cost of less than $3,000. The firewall was configured according to a simple rule, Downs says: “Anything coming from the Internet that is not requested from the inside is denied.” It does that by using a Unix filter to distinguish between information — like a Web page — that is coming in at a user’s request and any unknown traffic that arrives unbidden. When someone inside the network requests something from outside the firewall, the firewall issues a tag number with the request. If incoming data packets don’t contain a matching tag, the firewall won’t let them in. There are two big exceptions. One is E-mail, which arrives unrequested. Downs put MBA Management’s E-mail system onto a separate server, which redirects incoming mail and scans it for viruses before users can access it. The other exception is the company’s own Web site, which anyone from the outside should be able to access. MBA Management disconnected the site from its corporate network and arranged to have it hosted off-site. Second, Downs made sure that each computer went on the internal network, which is invisible to outsiders. In a normal office network with Internet access, each workstation has a unique Internet Protocol (IP) address. It was those addresses that McNeal was able to identify and attack in the penetration test. Downs changed each workstation’s IP address to a nonroutable address — meaning that outsiders can only see the address of the firewall. The result: nobody from outside can discover the IP address of an internal computer and use it as a port into the network — a common hacking procedure. Downs says that the firewall’s logs reveal that hackers have frequently scanned MBA Management’s system looking for ports since Downs put the firewall in place. Although $3,000 is low-end for a commercial firewall, Downs says, it’s all that a small company needs. “The only thing you limit is the number of people you can service,” he says, since the small firewall has limited bandwidth capacity. The Prism product, he says, can easily handle 200 users. That should cover the short-term needs of MBA Management, which plans to double its number of networked users within a year. As the company has grown, it has periodically added servers behind the main firewall and is now running six of them. Now that Downs feels the company is secure from outside intruders, the next move is to provide greater internal security for the databases. Currently, MBA Management uses a proprietary database running on NT servers. It is about to split the database into several parts using software called Adapt, which will allow the company to use the operating system’s security-administration features to carefully control who can have access to different levels of data. Since installing the firewall, Para-Protect has conducted monthly tests as part of a routine security checkup. That is not to say that MBA Management’s security is 100% foolproof. But the company has put a pretty solid defense in place — solid enough to send hackers on to easier targets. And that’s a big part of what Internet security is about: making sure yours is not the easiest lock to pick. Virtual Privacy You could say that a kindergarten play cost entrepreneur Dana Dodds $120,000 a year, and you wouldn’t be that far off. One afternoon in 1996, Dodds, CEO of San Diego auto insurer Reliant General Insurance Services Inc., left work to watch his daughter perform in a school play. He was immediately struck by guilt. “I had a customer-service rep whose daughter was in that class, too, but she couldn’t be there, and it bugged me,” Dodds says. A virtual private network lets Dana Dodds’s employees work from home without sacrificing security. Soon, about 15 of Reliant General’s employees were working from home, with no time clock — just quotas for the number of applications they processed and standards for the quality of the work they did. Back then, the workers connected to the corporate network directly through a dial-in 800 number. The phone bills for those lines ran about $120,000 a year. Reliant General is a fast-growth company — it’s made the Inc. 500 twice, as #341 in 1998 and #417 in 1999. And Dodds is all for using the newest technology to keep his company growing at a rapid pace. So in 1997 he hired information-services director Cary White to help him do just that. When White, 32, joined the company, he took one look at the exorbitant phone bill and told Dodds that the company could eliminate most of it by letting the telecommuters connect over the Internet. Dodds liked the idea but knew there had to be a catch. “He’s a very sharp guy when it comes to technology,” White says with a laugh. “Almost too smart for his own good.” The catch, White responded, lay in the open nature of the Internet. Essentially, the Internet is a very large collection of routers that are wired to one another. When you send a packet of data into cyberspace, it wanders, asking at each router, “Have you seen this IP address?” If the answer is no, the packet moves on to the next router. However, nobody should trust that every router on the Internet will simply shoo data packets along. Hackers can put tools, called “sniffers,” on those routers and use them to peek inside every packet of data that comes along. If a packet’s contents or destination seems juicy enough, the sniffers can read everything inside. An extra layer of worry exists for Dodds and his colleagues working in California’s auto industry: 11 years ago actress Rebecca Schaeffer was murdered by a stalker who obtained her address from the state Department of Motor Vehicles. (Since then, California has tightened its DMV privacy laws.) Not surprisingly, Dodds is passionate about the need to protect his customers. “Information for us is a trust, and we can’t give it away, and we can’t let anybody get it,” he says. “We’re talking about where they live, what cars they drive, where they work, the children that drive in the household, their driving records, their claims history — it’s very similar to credit information. It’s very private.” For White, simply using the wide-open Internet was out. So he called in a local consultant, Paradise Technology, which built a virtual private network. At the time, VPNs were a fresh concept, and few companies of any size had tried them out. The VPN creates a tunnel of sorts between the Reliant General network and telecommuters’ computers, shielding its content from the view of the myriad routers along the way. Axent Technologies’ PowerVPN was one of the first of its kind on the market, so Paradise chose it for Reliant General. In addition, Reliant General purchased Axent’s Defender product to authenticate users on its dial-up lines. The system works this way: Telecommuters like Reliant policy underwriter Mike Lemieux connect to the Internet through a cable modem or a dial-up ISP. Lemieux, who works full-time from his home in El Cajon, Calif., clicks on an icon to start his session with Reliant General. Lemieux’s request then passes through several stages. First, the firewall lets it through only if it is a request for a VPN session on the Axent machine. Anyone — even an authorized user like Lemieux — who tries to bypass that machine and connect directly to the corporate server will be blocked by the firewall. Approved requests for VPN sessions make it to the next stage: authentication by the Defender hardware. Lemieux enters his user ID and, just as he would at an ATM machine, types in a personal identification number. But in addition, using that PIN and secret data stored on Lemieux’s hard drive, the system creates a onetime password that allows him to access it. This two-level authentication means that someone would have to know Lemieux’s password and use his computer in order to impersonate him and gain access to the corporate server. When Defender gives the go-ahead to Lemieux’s session, the PowerVPN establishes a secure tunnel that keeps all transmissions out of harm’s way. In addition, it encrypts the contents. Once the secure connection is established, Lemieux logs in to the corporate server — using yet another password — and begins working on applications just as if he were on the network in the office. So far the system has worked so well that Reliant General uses the VPN not just for its own telecommuters but also for approved outsiders, like insurance-claims reps. Installing the system for about 25 telecommuters cost Reliant General about $20,000. Given a yearly savings of $100,000 on the phone bill, “it was pretty clear-cut, pretty much a slam-dunk decision,” says chief financial officer Greg Goodrich. Instant reassurance: Joseph Rosmann guarantees that the children’s records are shielded from harm. According to Dodds, the phone-bill savings haven’t been the only gain. He says telecommuters’ productivity has increased sharply — a phenomenon supported by a new poll conducted by the International Telework Association & Council, which found that nearly half of the telecommuters surveyed felt they were more productive working at home, while less than 10% thought they were less productive. According to Dodds, underwriters who used to process about 70 applications a day in the office are now doing at least 100 a day working at home. And giving a staffer time off to attend a school play no longer costs the company a small fortune. Bedside Manner If you think that storing kids’ immunization records doesn’t sound like a business bonanza, then you haven’t been talking with Joseph Rosmann. Rosmann’s soft-spoken manner belies his passion about his Internet start-up, HealthRadius. The company — Rosmann’s obsession since he launched it in 1996 — will soon make many millions of dollars from its Web-based repository of children’s vaccination records, he explains in measured tones. Doctors, he says, have free access to the records. Public-health agencies pay a fee to access the records of children in their area. Health plans pay $1 a child for basic data and as much as $4 a child for more complete records. Individuals, through their employers or insurers, can access their own children’s records for a family subscription fee of $15 a year. Eventually, every time a doctor’s office wants to check on a new patient’s history or a parent wants to sign up a kid for summer camp, money will flow into HealthRadius. What companies like Healtheon/WebMD Corp. have become for the Web-based administrative side of health care, Rosmann’s company will be for the patient-records side of it, he says. Rosmann, 56, who formerly worked as a health-care consultant, has had to make his pitch many, many times, to venture capitalists, state health officials, doctors, and health-care administrators. Though they may expect the caricature of an Internet-start-up entrepreneur with plans as big as the sky — a young, brash, fast-talking braggadocio — what they get instead is the calm assurance of Joe Rosmann, with his mellifluous voice that never rises or rushes. Like a family doctor explaining your test results, he provides instant reassurance with his smile and bearing. Reassurance is an important element of Rosmann’s plan. To make it work, he must collect and distribute the type of information that everyone agrees should be held in utmost privacy: medical records. Without strict assurance of the data’s security, Rosmann says, his company could never meet the requirements of health-care privacy laws — newly tightened in the wake of consumer outrage over privacy violations. And just as important, without that security, Rosmann could never sell anyone on the idea. And these days it’s a Herculean task to ensure that Web-based transactions are private and secure. Still, for cost, speed, and simplicity, Rosmann wants to do it all — including data collection and access — over the Web. His approach seems to be working. HealthRadius, based in Bellevue, Wash., will expand its immunization-records service to four new states this fall and expects to have more than half a million physicians involved within two years. Although the company took in just $100,000 in revenues last year, venture capitalists value the company at about $20 million. Rosmann expects revenues of close to $5 million this year. Four years ago, when Rosmann launched HealthRadius, doctors and health-care administrators were just beginning to eye the potential of the Internet. Washington state health officials brought Rosmann in to study how to salvage a failed medical-records-exchange initiative, the Community Health Information Network. Their request, he says, was straightforward: “Get something simple started to prove that you can safely exchange medical-health records and automate the transactions between doctors, health plans, and hospitals.” Out of that effort came two companies: Rosmann’s and a payment-exchange provider called Pointshare. Rosmann’s response to the state’s request was to break into the potentially enormous health-care-records field through the single entry point of children’s immunization data. That category is a good testing ground for the broader health-records field, he believes. For one thing, parents must frequently provide immunization records to new schools, new summer camps, and new doctors. A child typically has seen three doctors and had 23 immunizations by age six, according to HealthRadius’s research. Who wouldn’t want to make managing and exchanging all that data easier? Rosmann believed it was a market waiting to be served. One of Rosmann’s key early contacts was information-law specialist John R. Christiansen of the Seattle office of law firm Stoel Rives LLP. Christiansen began consulting for HealthRadius in the fall of 1996. “There is no standard-setting organization out there” for electronic medical records, Christiansen says. “You can’t just go out there and say, ‘What are the steps I need to take?” He advised Rosmann to draft his contracts with clients in a way that holds HealthRadius to an unusually high level of liability for the privacy and security of the data it collects. Only by doing so could Rosmann hope to reassure the doctors, health insurers, and parents who were HealthRadius’s targeted customers. If you’re going to put your business on the line like that, you’d better make sure you can live up to your promises. So the first person Rosmann brought on board was not a health-care adviser, but information-security veteran Gene Shook, now vice-president of the company’s operations and development. Rosmann and Shook, working together in their quiet offices on the outskirts of Seattle, laid out a long list of steps they would take to keep medical data both secure and private. First, they needed to be able to verify the identity of any client trying to access their records over the Web. Then they had to encrypt the data sent to and from HealthRadius servers so that only people holding the keys to unscramble it could read it. In addition, since participating doctors’ offices would submit information directly to the HealthRadius database when they performed immunizations, the company had to guarantee an even greater level of security for those transactions. Different employees at doctors’ offices — even those using the same computer — would need to have varying levels of access; for instance, some workers would be able to read but not edit patient records. The first employee Rosmann brought on board was Gene Shook, who took charge of security. Shook will soon install a VPN, which will offer a high degree of security. In the meantime, he turned to the encryption built into standard versions of Netscape Navigator and Microsoft Internet Explorer (called Secure Socket Layer encryption) and other Microsoft tools. For authentication, Shook currently uses the access-control system built into the Microsoft Windows NT operating system as well as the company’s own custom-developed access-control system. To ensure that changes that are made to HealthRadius’s database are verifiable and legally valid, Shook decided to use a method that should soon become more widespread: digital signatures that use public key interchange (PKI). Those digital signatures, provided through an authorized third party, verify two parties to each another, like a secret handshake. Washington state has recently authorized a Utah company called Digital Signature Trust to act as the licensed certificate authority for supplying digital PKI signatures. Anyone in the state can sign up with Digital Signature Trust and receive the hardware or software to generate digital IDs. Two parties that are both using those digital IDs — for instance, HealthRadius and a physician’s office — can be certain that the information that was sent exactly matches what the other party receives. In Washington, such electronic documents can now legally take the place of paper. Shook is hoping that other states adopt compatible systems; if they don’t, HealthRadius may have to install a vast and confusing array of different digital-signature systems. (Without a common standard, Shook fears that HealthRadius may have to establish its own PKI service for its customers. That not only would be more costly and difficult — HealthRadius would have to license and distribute software to everyone who is authorized to access its data over the Web — but also would open HealthRadius up to liability for its digital-signature system.) So far HealthRadius has spent about $1 million on technology, including security. By the time it rolls out nationally during the next year or two, Rosmann expects he will have spent $2 million to $3 million on technology. But perhaps most important, the company has already subjected itself to an intensive security audit (in the spring of 1998) and will undergo another one early next year. It also requires periodic audits of the 50 clinics and hospitals that supply it with medical-records data, and a randomly selected 5% of clients’ sites will be audited each year. In such a review, an independent outside party rigorously examines the procedures and technology that a company is using to handle its data. In HealthRadius’s case, the auditors were interested in seeing whether the company could live up to the security standards of the Health Insurance Portability and Accountability Act of 1996. That legislation established ground rules for medical-records privacy — always a delicate subject and one made even more so in the Internet age. (DrKoop.com got into hot water recently when its advertising partner, DoubleClick, sold lists that included members’ health information. HealthRadius’s contract with its clients bars it from selling its information.) The audit, which takes about three weeks to complete, includes interviews and a systematic review of the technology itself. That may seem like a lot of effort to secure something as relatively uncontroversial as immunization records. But a market test in 1998 confirmed that the HealthRadius service had no chance of acceptance if people felt even a slight concern that someone could access its demographic information on the more than 2 million people in its system. “We needed to act as a bank — you have direct access and no one else has access,” says Shook. In addition, managing immunization records is just HealthRadius’s initial foray into the arena of electronic-medical-records exchange. In the not too distant future, Rosmann plans to start databases that will contain patients’ disease histories and other medical matters. At that point, he wants an unblemished security track record. The company’s biggest vote of confidence so far has come in black and white: a letter from the National Committee for Quality Assurance (NCQA), an independent nonprofit organization that evaluates the quality of managed-care organizations. The letter, dated January 1999, stated that NCQA considered HealthRadius’s registry of immunization records an allowable source of data for its own system, which is used almost universally by health plans. “NCQA gave its blessing because we had provided the privacy,” says Rosmann. “As soon as that letter was issued, about every health plan became a customer.” That’s not to say Rosmann is satisfied. “We still have a little sensitivity around the subject of security,” he says, still in that calm, careful voice. In fact, he has Shook shopping for three more security items. One, HackerShield from BindView Development, scans for known intrusion methods, similar to the way antivirus software checks for familiar computer viruses. A second, IPsec, is a computer-security standard that keeps unwanted data traffic from bothering a company’s servers. One benefit of that would be protection against denial-of-service attacks that can overload and disable a server. (Remember that disastrous day for Amazon.com and eBay last February?) The third product Rosmann and Shook want, WebTrends, monitors and analyzes firewall logs for unusual activity. That will help Shook manage the company’s defenses more actively and will also help the company prosecute any hackers who try to break in. Because catching a hacker would make the kind of headlines that Rosmann would like to be in. David S. Bernstein is a freelance writer in Watertown, Mass. What Are You Afraid Of? So what’s the worst that can happen? There are several types of hacker attacks, all of which have occurred in recent months. Denial of service. Much like protesters’ barring the entrance to a physical store, hackers can shut down your E-business by making sure no customers can get through to your site. Typically, they bombard the site with data traffic, rendering the Web server useless. That is the type of attack that brought down ZDNet, E*Trade, CNN.com, eBay, Buy.com, Amazon.com, and Yahoo, each for about three to five hours, all during a period of several days in February. Electronic theft. This scenario is just like a physical robbery: the hacker breaks into your system, finds something he wants, and downloads it to his own computer. In most cases you may retain your copy of the data, but now someone else has it as well. Is that so bad? Ask the folks at CD Universe, an Internet music retailer based in Wallingford, Conn. Last December someone describing himself as a 19-ye
Money Markets A slew of start-ups are storming the personal-finance industry by targeting populations that traditionally have been underserved What do women really want? Some start-ups think the answer is customized financial advice and business services. Those companies want to be the vehicle through which women do all their money-related tasks: paying bills, buying stocks, seeking loans, selecting insurance, and so on. They insist that women’s financial needs are different from men’s, especially because women tend to earn less than their male counterparts yet live longer lives. The thinking is that those two conditions have created a distinct marketing niche — a “niche,” mind you, that comprises 51% of the U.S. population. Do women truly need specialized financial attention? Predictably, the founders of the aforementioned start-ups believe they do. They cite the needs of the aging baby-boomer market — a megapopulation of educated women now entering their peak years of earning and spending. Those women, the first female generation to wear the proverbial pants of financial planning, will begin to look for advice on the Web and elsewhere. And the information that they’ll need will not only cover the basics but also emphasize “more relationship-oriented and life-stage topics than bottom-line transactions,” says Liz Davidson, founder and CEO of Financial Finesse, a company in San Francisco that’s dedicated to serving women’s investment needs. Such target marketing — be it to women or to any other population subgroup — dovetails nicely with the audiences that already exist on the Internet. “For some time, the Internet has been aggregating people in communities,” says Chris Musto, director of financial services and an analyst at Gomez Advisors Inc., a research firm in Lincoln, Mass., that focuses on Internet commerce. “So a start-up can work with sites that have already congregated certain groups.” Indeed, the Web — already home to such affinity sites as Women.com Networks, Gay.com, and AsianAvenue.com — lends itself to businesses hoping to attract a given demographic. Still, common sense suggests that all personal-finance customers — regardless of gender, ethnicity, or sexual orientation — would want the same commodity: trustworthy advice. Yet the specialization of personal-finance businesses, both on and off the Web, is well under way. Name a target market — teens, Hispanics, newlyweds, high-tech workers — and you’ll find a financial start-up whose raison d’être is serving it. Wrapping it up Lenda Washington first had the notion of putting a female spin on traditional investment products during her days at PaineWebber. As a thirtysomething junior broker learning the art of cold calling, she was taught to ask, “Is your husband home?” if a woman answered the phone. For Washington, those days of making cold calls inspired the idea for a business targeting female investors. Sure enough, Washington’s new start-up is now calling on women to buy its first product. The company, Allison Street Advisors, based in Washington, D.C., is selling an investment vehicle called a wrap account, which gives customers with $250,000 in assets access to big-name institutional money managers. (Normally, that kind of access requires $5 million. A wrap bundles smaller amounts into an aggregate that’s still worth a manager’s time.) For years, brokerages have sold wraps as an investment option. Allison Street’s wrap has a novel twist: the managing institutions are owned by women or minorities. Washington hopes her wrap fund will appeal to women, minorities, and institutional investors such as schools and pension funds — all of whom, she thinks, will appreciate the precept of investing through female- and minority-owned firms. The obvious issue is, Wouldn’t the potential return on investment matter more to an investor than conscientiousness about social causes? Washington, who’s African American, doesn’t disagree. But she stresses that study groups show that investors have an affinity for advisers of a similar gender or ethnic background — those “who ‘get them’ and share common experiences,” she says. Her concept is no different in principle from an environmentally aware mutual fund, for which performance is “the meat,” but “the social ticket is the gravy,” she says. Getting minority-owned money managers to sign on was the easy part. The hard part has been persuading the Merrill Lynches of the world to offer Allison Street’s wrap fund among their investment products. The sales challenge, besides navigating through bureaucratic straits, is convincing brokerage firms that customers will favor Allison Street’s wrap if they are deciding between it and an equally performing but less diversely managed fund. So far, the fund hasn’t been around long enough for its popularity to be compared with that of other wrap funds. At press time, the fund retailed only at five brokerages — including W.S. Griffith, in Hartford — and had less than $500,000 in assets under management after six months of active selling. But Washington believes the wrap could be a $50-million fund five years from now. Even if the fund isn’t a smash with women or minorities, she says, it’s sure to lure investors from large institutions. Which means it just might be a hit with anyone who has $250,000 to invest. “White males would also be interested in top managers,” she says. “We’re not excluding anyone.” Pride of ownership “You want two guys buying a one-bedroom condo to be comfortable,” says Brian Farley, founder of Pride Mortgage Inc., in Provincetown, Mass. “They don’t want a starchy banker asking, ‘Where’s he going to sleep?’ “ It’s hard to doubt Farley’s credentials on the subject. His $1.4-million business brokered $67 million in loans in 1999, and gay men and lesbians constitute a sizable portion of the business’s clientele. It’s a population that he classifies as very loyal to good service — and quick to bolt from bad, even when the bad service comes from a company that’s gay-and-lesbian-friendly. “If you don’t do a good job, it doesn’t matter if you’re called Rainbow Mortgage,” he says. Though he chose the name Pride in part because it connotes the gay and lesbian community, Farley says, “we don’t market solely to them,” and his efforts to target that community are no different from any other group marketing at Pride. In fact, the company’s eight other loan officers, some of whom head regional offices, have considerable leeway in how they promote Pride’s services. The Seattle office, for example, could market to that city’s large Asian population. As Farley sees it, the commission-earning officers’ motives are simple: to close as many loans as possible. If that means targeting a niche, many niches, or no niches at all, then so be it. At the same time, Farley’s pitch to the gay community is not some affinity-marketing facade. He’s well aware of how that community’s needs differ from those of conventional mortgage applicants. Besides facing the ever-lingering issue of potential discrimination, gays and lesbians face the possibility of being outed at their workplaces when a lender, seeking employment verification, sends paperwork to employers that lists the names of both applicants. There are also complications surrounding breakups of home-owning couples: an exiting partner will often neglect to notify the lender of the change in status and is still bound to a mortgage even if his or her name has been removed from the deed. Farley founded the company in 1998, and he generated $700,000 in revenues as Pride’s only loan officer for most of that year. By year’s end, he was ready to bring on more loan officers. Rather than expanding locally, Farley simply opened offices wherever prospective employees happened to live, which is why Pride’s non-New England locations are in the random states of Washington, Nevada, Florida, and California. Coordinating their efforts hasn’t been a problem, because loan officers don’t need much day-to-day management, and all loan applications are electronically sent and processed at the company’s operations center. Farley has a wait-and-see attitude about further plans to expand. “There’s no rock-solid business plan,” he says. One thing he knows for sure: niche marketing will continue. In fact, Farley is touring nationally to speak on the topic for Mortgage Originator magazine. “We’ve found,” he says, “that niche marketing is the best way for us to get into a city and do a good job.” The young and the eager Todd Romer’s initiation into the world of personal finance began at 15, when he watched his father use a magnifying glass to scan the small numbers of the newspaper stock listings. More curious about bulls and bears than birds and bees, Romer asked for a lesson in where to invest his lawn-mowing money. Now 32, Romer has started a magazine called Young Money, based in Loveland, Ohio. He’d had the idea since college, when — despite what he’d learned from his dad — he found the personal- finance magazines of the adult world both too difficult to understand and “too targeted to the married, working adult.” And so, after six years of building his own nest egg as a salesman for Syncor International Corp., a publicly traded pharmaceuticals company, Romer launched the magazine that he’d longed for since boyhood. With nine issues on the books and a barely profitable first year based on $275,000 in sales, Romer is pleased with the project so far. In typical new-economy fashion, he isn’t just trying to sell magazine ads; he’s hoping Young Money‘s Web site can become a popular destination for preadult investors. He’s struck a deal with Stein Roe to resell that company’s mutual funds at www.youngmoney.com and is transforming his site — now just an online face for the magazine — into a transaction-oriented one that he describes as “E*Trade for kids,” where they can do online trading with very little money. So far, Young Money‘s audience has been composed, in large part, of teenage boys. Romer didn’t plan it that way, but he believes he can parlay that following into ad sales because he can tell advertisers that he has “a young male readership that can’t be seen outside of Thrasher,” a skateboarding monthly. Romer doesn’t know why his readership is mostly male, but he guesses that it’s for the same reasons that business magazines have always had larger male audiences. These days, as more teenage boys ponder forgoing college for high-tech jobs or starting their own companies, his young male audience seems larger than ever. Because Young Money‘s audience is driven to succeed, Romer thinks he can convince advertisers that his readers are more than “just boys”; they’re the boys who’ll make a difference. “We can say that our readers are savvy, they take action, they want to get ahead,” he says. It’s not lost on him that potential investors would also have an interest in a Web site that attracts teenage boys, particularly those with a high-tech or entrepreneurial bent. Romer himself is wasting no time courting angels and venture funds. “We’re doing a full-court press on the investment community,” he says. Q&A Does Niche Marketing Make Sense? Personal finance is a hot topic. These days it seems that people everywhere are more conversant about money and investing than they were just a few years ago. That’s largely because the nation’s record prosperity has brought unprecedented wealth to many different groups, including women, minorities, and other demographic subsets. Hoping to reach those prospective investors, a bevy of start-ups are specifically targeting one group or another with their finance offerings. Will target marketing work? We asked Cheryl Russell, demographer, author, and editor-in-chief of New Strategist Publications Inc., in Ithaca, N.Y., to tell us. Inc.: For personal-finance start-ups, is simply targeting a niche enough to lure customers? Russell: Only if the start-up also provides products and services that are worthy of attention. Because women live longer and are often widowed, they will have different financial situations than the general market will. But whether those differences alone will attract women to these start-ups remains to be seen. Financial advisers worth their salt will customize a plan to suit the individual customer. So does the field require a Web site just for women? I have my doubts. Inc.: But the start-ups keep coming, and they keep attracting tons of funding. Why will they have such a tough time? Russell: It’ll be difficult for them to get people’s attention. The giants have the advantage already. The start-ups will have to offer something more than the financial advice you can get anywhere, or they somehow have to be perceived as cool or hip. Otherwise, they’ll get lost in the shuffle. On the Web, the cream is already out there, and it’s hard to get people to change their Web patterns. It’s like getting people to watch new TV shows: a daunting task. You almost have to use traditional forms of advertising, like TV and radio, which can get very expensive. Inc.: So where will all those personal-finance start-ups be five years from now? Russell: That’s anybody’s guess. It’s a huge pie. In just about any business area, you end up with two or three dominant players, and business on the Internet is no different. Women might emerge as one separate area, especially if the start-ups capture a lot of the baby boomers who are now in their mid-fifties and are financially peaking. But for other targeted groups, like the superwealthy or high-tech workers, we’re dealing with more myth than reality. For most of the country, having a lot of wealth doesn’t define your twenties and thirties. That’s the type of niche that sounds like marketers’ just trying to go after the latest thing. It’s the sort of fad that’s going to change as soon as the stock market crashes. Please e-mail your comments to editors@inc.com.
They needed it overnight. They wanted the best. In the race to build the first online hardware store, Peter Hunt and Rich Takata put their company in the hands of outright strangers The Company Name: CornerHardware.com Inc. Founded: Incorporated May 1999; Web site launched early 2000 Location: San Francisco Cofounders: Chairman and CEO Richard Takata; president and chief operating officer Peter A. Hunt Employees: 35 full-timers Mission: Creating an online home-improvement store, magazine, and community for do-it-yourselfers URL: www.cornerhardware.com The Developer Name: Xuma Founded: 1998 Location: San Francisco; with offices in New York, Los Angeles, and Las Vegas Cofounders: CEO Joe Cha; chief technology officer Jamie Lerner Employees: 250 Mission: Producing built-to-order Web sites for E-businesses URL: www.xuma.com In December 1998, Peter Hunt set out to tackle what should have been a simple, joyous task: building a tree house for his four-year-old son for Christmas. Hunt couldn’t wait to start the project. It wasn’t just that he welcomed the diversion from his high-powered job as an investment banker. It was more that, ever since he’d been a kid, Hunt had loved working with his hands: making model trains and airplanes, building furniture, fixing things around the house. As an adult he’d dreamed of buying a corner hardware store in some rural New England town, the kind of place with a bell over the door and shelves lined with hinges and screws and doorknobs, where he’d spend his days happily helping customers pick out the right paintbrush or handsaw. But with two kids and a top job at Montgomery Securities in San Francisco, the lanky, thoughtful Hunt didn’t even have time to stop into a local hardware shop, let alone wander through a giant home-improvement warehouse. He assumed he’d save time by buying everything he needed for the tree house — instructions, lumber, materials, and tools — online. So he went to the Web and looked for hardware sites. And looked. And looked. He found nothing except a loose network of like-minded tree-house enthusiasts, many similarly frustrated by their own fruitless online searches for supplies and information. From that experience, Peter Hunt, banker, suddenly figured out how to finally become Peter Hunt, hardware guy. Hunt’s thinking went like this: What if there were lots of little communities out there — tree-house builders and woodworkers and plumbers and fixer-uppers and even contractors — all hungry for online hardware and home-improvement advice? And what if somebody could provide it for them in one friendly, convenient location, sort of a virtual corner hardware store? In early 1999, Hunt, then 35, took a week off to write a business plan for just such a company. But he knew something was missing. He needed a business partner — a veteran hardware retailer, a real insider. When he asked around, he kept hearing the same name: Rich Takata. Richard T. Takata, then of Seattle, had been in the hardware business for 24 years. Takata, who’d most recently been president and CEO of Eagle Hardware & Garden Inc., had remained with the 41-store chain after North CarolinaÂbased Lowe’s Cos. had bought it for $1.4 billion. (In fact, Hunt’s firm had handled the sale.) Although reserved and soft-spoken, Takata, then 49, was hardly averse to risk; in his spare time he occasionally drove race cars. A lifelong do-it-yourselfer, Takata also knew his industry and its customers. Over the years he’d waited on thousands of people, even during store visits when he was the company’s CEO. And like Hunt, whose own company had been acquired by North CarolinaÂbased NationsBank, Takata was ready for a change. Xuma’s founders named their Web-development company after an ancient Chinese battle cry. In April 1999, at the urging of a mutual friend, Hunt and Takata met for dinner to talk about launching a big home-improvement E-commerce site. They discovered they had much in common. Both were quietly intense, articulate, committed. Both were customer-service evangelists, true believers in keeping promises and building long, loyal relationships. Both believed passionately in the Internet’s potential for business. And both had high — some might say almost impossible — standards for themselves, their companies, and those who worked for or with them. Of the two, Takata was more tactical and analytical, a manager with a keen recall of industry statistics and an almost instinctive understanding of business trends. Hunt, very much the money guy and deal maker, was also more sentimental. (He documents CornerHardware.com’s growth in a scrapbook filled with mementos like copies of the company’s incorporation papers and of its early bank deposits, and Polaroid photos of each newly hired employee.) From the start, the two men agreed they wanted to do more than lead the Web in sales of drill bits and deck stain. They wanted to re-create the old-fashioned corner hardware store of Hunt’s dreams and Takata’s experience: a place with well-stocked shelves, knowledgeable clerks, lots of how-to information, and most of all, a friendly, collegial, yes-you-can-do-it-yourself atmosphere. It would, of course, be called CornerHardware.com. They knew it was a big idea with hefty potential; pulling in even a small fraction of the $400-billion-a-year home-improvement business would yield a fortune. They were amazed that nobody had launched the kind of venture they envisioned, and they knew that before long somebody else certainly would. What they wanted to do — build a full-service online hardware store and community — would cost at least $2.5 million. Takata and Hunt knew they needed to move fast — and they did. Within three weeks of their first meeting, both men had quit their jobs; put up $250,000 each of their own money; raised about $500,000 more from angel investors, family, friends, and colleagues; and incorporated their business. But for all the partners knew they needed to do, there was still plenty they needed to learn. Chief among the lessons: just how tough it would be to build a big Web business in a matter of months — and how much tougher it would get when circumstances forced them to launch the site weeks earlier than planned. They didn’t know for sure whether a no-name newcomer like CornerHardware.com could compete with new and upcoming E-commerce arms from brick-and-mortar brands like Sears (which was already selling parts, tools, and appliances online), Home Depot (which plans to launch a full E-commerce site this summer), and Ace Hardware (which would begin selling merchandise online at OurHouse.com late in 1999). In addition, dot-com start-ups were also racing to market. Major projects included HomeWarehouse.com, then under development in nearby San Mateo, Calif., and Amazon.com‘s new tools and hardware store, which would also launch by year’s end. And it was entirely likely that some of those in the race would end up as roadkill. When it came to CornerHardware.com’s technology, Hunt and Takata knew they weren’t looking just for a speedy job. Sure, there was no time to waste — they wanted a beta site before year’s end, a quiet launch by March 2000, and a public launch shortly after that. But building their Web site would also be a big, complex, cutting-edge project. They needed transaction processing capability and complete descriptions and images of some 37,000 products, everything from penny nails to power saws to Phillips-head screwdrivers. They would shoot to double their inventory, which is distributed from a warehouse in Kansas, within their first six months online. True to their customer-service mission, Hunt and Takata also wanted, from day one, to offer how-to articles, visitor message boards, animated step-by-step project instructions, a massive glossary of hardware terms, a superb search engine, and live customer service, online and in real time. That last capability would become, in fact, the real cornerstone, so to speak, of CornerHardware.com. Using interactive windows, customers would be able to chat with service reps in real time — asking questions about products or about a bill, for instance. That kind of service, which the company would contract out to dedicated staffers at Boston-based eSupportNow, would be what Hunt and Takata believed would ultimately distinguish their company not just from other online hardware stores but from their brick-and-mortar brethren as well. As Takata pointed out later, there weren’t many home-improvement stores that were open 24 hours a day. Although Hunt and Takata knew what they wanted their site to do, they didn’t know much about the nuts and bolts required to make it happen. They needed professional help. And they needed it fast. The high-speed, high-stakes scenario isn’t unique to CornerHardware.com — or even to the online home-improvement industry. Today almost any new business-to-consumer Internet company must fight for a foothold in an already crowded market. (Witness the proliferation of online pet stores, drugstores, vitamin stores, and toy stores.) Being first online remains a competitive advantage. But there’s no point in being first without doing it well. As consumers on the Internet grow more sophisticated they’re less willing to tolerate sites that are slow, unreliable, boring, or tough to navigate. And they absolutely won’t return to sites that haven’t provided stellar customer service. E-commerce sites have grown increasingly complex in reaction to the industry’s ever higher standards and well-publicized successes and failures. In many cases, like CornerHardware.com’s, a business simply can’t hire its own team to build a site — even if it could find the right people, it probably couldn’t afford to pay them or retain them. So, like CornerHardware.com, the company opts to stake the future of its business on outside developers — people the company doesn’t know, people who must translate the entrepreneur’s dreams and plans into equipment and software and code. Xuma’s approach bridges the gap between standard and optional E-commerce components. As Takata and Hunt were setting up shop in rented space in San Francisco’s financial district, Joe Cha was building his own business just a few blocks away. About a year earlier Cha had been working at his third consulting job. A friend reintroduced him to Jamie Lerner, a consultant Cha had known slightly when both had worked at Andersen Consulting several years earlier. Like Hunt and Takata, Cha and Lerner found themselves thinking along the same lines. They wanted to try something new, and they didn’t want to create just another San Francisco Web-development company. Instead their thinking went like this: What if you could apply the same approach to building a Web site that Dell Computer applies to building a computer? What if you could create big, complex, flexible, reliable, customized E-commerce systems in record time simply by not reinventing the wheel for every single project? So Cha and Lerner founded Xuma. (The name, pronounced “zoo-ma,” is an ancient Chinese battle cry that the partners found perfect to describe their army of engineers charging into the E-commerce wars.) They adapted the Dell model: just as Dell combines standard and optional components to rapidly create computers, Xuma combines its standard and optional E-commerce components to quickly build Web sites. In the venture’s first year, the quiet, charming Cha (so charismatic that he was among 10 bachelors featured in a Women.com feature on “The Men of Silicon Valley”) sold Xuma’s services to customers ranging from health-and-beauty-products retailer More.com to home-furnishings site GoodHome.com. By its second anniversary, in April 2000, Xuma had launched more than 70 Web-based businesses nationwide and employed 250 people in four offices. But back in mid-1999, Xuma hadn’t yet tackled anything on the multimillion-dollar scale of CornerHardware.com. By the summer of 1999, Takata, CornerHardware.com’s CEO, and Hunt, its chief operating officer, had raised about $6 million in funding: close to $1 million from their own pockets and from family, friends, and angels; and the balance from the first round of venture funding. (A second round early in 2000 would yield an additional $21 million.) And the founders had begun building a staff. Their first hire: vice-president of engineering Steve Finer, who faced the daunting job of actually overseeing the Web site’s construction. (See “Chronicles from the Pit,” below.) Finer, then 33, was an enthusiastic, outspoken technologist who, in a previous life, had managed nightclubs in Boston. He knew something about risk: he’d cofounded an Internet start-up that later collapsed and eventually filed for bankruptcy. And he knew something about working hard; he was always either at the office or connected to it by beeper, cell phone, or computer. (Shortly before the CornerHardware.com launch, when Finer was working 12 to 15 hours a day, he came home one night to find that his lonely dog, Cassius, had disemboweled a sofa cushion.) After joining CornerHardware.com in August 1999, Finer faced his first and toughest task: getting his new bosses “to understand that you don’t build anything — whether it’s a car or a Web site — overnight.” Especially not something as complex as CornerHardware.com. And in Internet terms, what Hunt and Takata wanted was pretty close to overnight. So Finer immediately ruled out doing the job in-house. Given the tight market for top technology staffers, especially in San Francisco, he knew he couldn’t build the talented team he needed to even approach that timetable. Instead, at his recommendation, CornerHardware.com looked outside, holding what Cha describes as a “bake-off” for potential developers late in the summer of 1999. Xuma wasn’t the oldest or the biggest or the best-known contestant. But Hunt, Takata, and Finer liked what Xuma had cooked up. The decisive factor: speed. Cha, Xuma’s CEO, and Lerner, its chairman and chief technology officer, then both 29, promised to do the job faster than anybody else — within six months. They also promised to build systems and databases that would “scale,” or grow quickly without having to be replaced. That’s what CornerHardware.com needed — and that’s why Xuma walked away with a contract worth between $750,000 and $1 million. (Takata says the balance of CornerHardware.com’s launch budget went for interface design, software licensing, equipment, product photography, and related costs.) By Xuma’s standards today — less than a year later — the CornerHardware.com contract is a relatively small one. But at the time it was a huge coup, providing, if all went well, a link in the chain leading to bigger jobs. So Cha took the kind of risk that he would later say no developer should ever take: he went ahead without any built-in contingency plan — no plan B — in case of crisis. True to its own business model, Xuma would build the CornerHardware.com site using many preexisting components — a standard credit-card-processing system, for instance. Still, the Xuma team, headed by senior project manager Phil Lew, then 26, knew that building such a complex E-commerce site wouldn’t be easy. Xuma anticipated it would spend five to six months, beginning in October 1999, building, testing, debugging, and launching the site. The schedule, though ambitious, seemed entirely possible. That is, as long as nothing went wrong. Although CornerHardware.com and Xuma were both new, fast-growing San FranciscoÂbased start-ups, their cultures were entirely different. Sure, they both hired the best they could find: CornerHardware.com’s hiring coups included a Home Depot senior vice-president, a top producer from CNet, and several home-improvement authors and writers, while Xuma lured dozens of “rock-star engineers” away from other Web developers. But theirs were very different workplaces. At CornerHardware.com, a middle-aged artist or writer in a flannel shirt and jeans might sit in meetings with a college-age kid with a nose ring. It was rare for anybody to spend the whole night at work (with the possible exception of Finer, who worked around the clock in the countdown to the launch). In general, it was quiet, especially since most employees worked one or two days at home. (There wasn’t enough office space for everyone to be there at the same time.) In contrast to that relative calm, at Xuma nobody had a private office. Engineers racing to meet project deadlines spent days in the big war room known as “the pit,” living on trucked-in pizza or Thai food, working elbow to elbow at food-littered tables lined with computers. It was a noisy, messy, overwhelmingly youthful atmosphere. For Lew, it was exhausting, but it was also fun. His team bonded in a way that can come only from eating three meals a day together, working side by side until after midnight, then car-pooling home through unusually silent streets. And that bonding meant that together they felt they could do anything, Lew says. They would need to. In late fall, when Lew’s team was already spending most of its time in the pit simply trying to hit the original March launch date, something did go wrong. In mid-November, a CornerHardware.com competitor, HomeWarehouse.com, launched earlier than anybody had expected. About the same time, Amazon.com launched its home-improvement store, and Ace began putting OurHouse.com online. And funding was beginning to dry up for consumer dot-coms in favor of business-to-business ventures. Takata and Hunt decided they had no choice: they had to move the stealth launch from late March to January 15, and follow that with the public launch a few weeks later. They delivered the bad news to Finer, their liaison with Xuma. “They told me, ‘If we wait till March, we’re out of business,’ ” Finer recalls. “At that point I’m holding my stomach.” Finer reluctantly asked Xuma to shave close to six weeks off the initial launch date. Xuma agreed to try moving it up to January 15. “The trouble with being the vendor is that the customer is always right,” Cha says with a sigh. In this case, being right required heroics from Lew’s project team. “We had guys here that didn’t see their families, that were living here 24/7,” Cha says. (See Lew’s diary, below.) “We killed ourselves. But we got on-the-job training there. We learned.” What followed was a series of compromises made by both sides. Five days before the new launch date, the Xuma project team begged for an extension, saying they needed the extra testing time to make sure the site worked well. They asked for two more weeks. Takata and Hunt agreed to wait 10 more days. They knew they wouldn’t be doing themselves any favors by launching sooner if the site frustrated the very people they wanted to attract. Meanwhile, Lew was learning that both Hunt and Takata were demanding, detail-oriented, hands-on managers. “I used to say ‘Retail is detail,’ ” Takata says. “Now I say ‘E-tail is detail.’ ” Both Hunt and Takata closely tracked the site’s development, sometimes requesting changes that would take days of engineering time to complete. “Or they’d say, ‘We need 700 pages [of Web-site content before launch],’ ” Lew says. “We’d say, ‘We can do 200.’ “ Then there was the titanic tinkering on the day before the rescheduled launch. In the afternoon of January 24, Hunt decided the site needed another level of search hierarchy, or ways for customers to view products and information. While other team members frantically tested the site, one engineer spent six hours building in the new function, letting it go live around 8 p.m. After viewing the site that evening, Hunt changed his mind. Lew describes it this way: “Peter sees it. He doesn’t like it. I say, ‘It’s exactly what you guys asked for.’ He says, ‘I want it back like it was this morning.’ ” Lew asked Finer to intercede; Finer returned with this message from Hunt: “Sorry, but it has to happen. And you have to tell me when it’s done.” The same staffer spent the next three hours reversing his earlier work, finishing at about 1:30 a.m., just hours before the quiet launch. And yet Cha, ever the diplomat, doesn’t regard CornerHardware.com as particularly exacting. “All of our customers are very demanding,” he says. In fact, he adds, CornerHardware.com was a relatively easy client because, unlike many enthusiastic dot-com start-ups with ill-defined business plans, from the very beginning Hunt and Takata had clear ideas about what they wanted to accomplish. On January 25 at 3:30 a.m., Lew drove his entire team home from work, and, at 4:45 a.m., finally slept. CornerHardware.com had launched — without fanfare and without any major problems. It also launched without some of the things its founders had wanted. These were the trade-offs: CornerHardware.com had been photographing about 800 products a day, but even at that rate the company couldn’t shoot 37,000 products before the launch. Instead it posted a representative sampling from each category. (Says Hunt, “If you have 72 hammers on the site, do you really need pictures of all 72 from day one?”) It also launched with no way of issuing returns to customers’ credit-card bills. (Initially, refunds would be made by check.) And it launched with fewer products and less content than Hunt and Takata had wanted. But nothing crashed, and the products advertised were available, poised on the shelves in the Kansas City warehouse. Surprisingly, Takata rates the launch at about 95% of what he’d hoped for. “One of the lessons I have learned about the Internet space in general is that you can’t be a perfectionist,” he says. “The Internet is a game of weeks. If you can get your site up four weeks earlier and have a complete customer experience [even without some desired features], I’d say do it.” A month later the public launch went off without any major hitches. Since then, CornerHardware.com’s traffic has grown steadily, with Xuma continuing to run the site. Hunt and Takata won’t release figures except to say that they had more traffic in April than in the entire first quarter. As for the conversion rate — the percentage of people who actually buy something — “some days it’s 19% or 20%,” Hunt says. “And we have days where it’s 1%.” Meanwhile, the purchasing of big-ticket items has increased: in addition to batteries and lightbulbs, customers are buying bathroom vanities and power tools. These days the founders are still keeping an eye on the competition, especially that big orange company from Atlanta. “I’d be lying if I told you we don’t worry about Home Depot,” Hunt says. “But we don’t lose any sleep over it,” because, he says, he doesn’t believe the giant retailer will duplicate the CornerHardware.com business model or its real-time online customer service. As for that tree house, Hunt did build it much later. But he ended up creating it from a kit that he got from a brick-and-mortar retailer. Ironically, he got so busy starting up CornerHardware.com that he didn’t have time to build one from scratch. And in returning to that project, Hunt revisited one big lesson that he and Takata had discovered throughout the building of their business: it’s all about making compromises. Anne Stuart is a senior writer at Inc. Technology. Chronicles from the Pit Steve Finer, vice-president of engineering for CornerHardware.com, and Phil Lew, Xuma’s CornerHardware.com project team leader, each kept diaries for several weeks between the Web site’s “stealth launch,” in January, and its first major marketing pushes, in early March. Here are some excerpts: Steve Finer Thursday, February 17 At 3:45 a.m., we added another Sun Enterprise 4500 server with 16 CPUs. Serious horsepower! As I got off the elevator this morning my coworkers gave me a high five because the new server made the site so much faster. Wednesday, February 23 Two new applications went into alpha testing. One rotates products featured on the home page. The other is a media-tracking application [which tracks the effectiveness of promotional campaigns]. Unique visitors to the site have doubled since last week. Today the site was accessed from all over the world, including from Taiwan, Slovenia, Thailand, Malaysia, Israel, and Japan. Actually shaved for the first time in weeks. Wanted to be presentable for a taping we did today with Xuma and the Mark Bunting video crew [for a business video to be shown on United Airlines and TWA]. Thursday, February 24 Biggest challenge: preparing for the March marketing campaign [a newspaper and online ad campaign with coupons]. We need to be able to support the traffic. Friday, February 25 Added 6,000 new images. Finished quality-assurance process for media tracker and product-feature applications. Also [a New York Times] article gave us a nice boost in traffic and tripled the number of people who went to the customer-support line yesterday. Monday, February 28 We’re all really busy. The engineering team has a lot of projects that need to be completed, including the media tracker and the product-feature device. Tuesday, February 29 Public launch. It has been a difficult day. All departments are asking for additions to the site. It’s a challenge to satisfy all requests and prioritize them properly. Our lack of space [is a problem]. My job would be so much easier if we could hire people to supplement Xuma’s activities. Friday, March 3 We’re really focusing on driving traffic. We added a new disk drive to the development server and a new storage device to help manage all our images. We also added more than 40 new how-to articles. Don Johnson and Cheech Marin filmed their TV show, Nash Bridges, outside our office. We passed out CornerHardware.com hats to the crew, which they all wore during the filming. Saturday, March 4 Had one last meeting with Xuma and my staff to make sure we have the right staffing in place to support [Sunday's marketing campaign]. Monday, March 6 The marketing campaign went off without a hitch. We were able to support all the additional traffic. It blew my mind! Daily traffic today was more than double normal, and we had 10 times as many people buying products as we have on a typical day. Next week the campaign will branch out to a larger part of the country. Since everything today went so well, I’m not too worried. But it is still keeping me up at night. Phil Lew Thursday, February 24 Development seems to be going better than planned. [CornerHardware.com CIO Ken Hite] called me in the morning wanting to track an order number for an order where the money wasn’t captured. The problem was with the file from the third-party fulfillment house. Lesson learned: We need to build in more robust error checking. We cannot assume that the third-party fulfillment house will always give us the correct formatted file. The need to develop a robust process to keep the content and data fresh on the live site is giving me grief. [The process was so slow that when CornerHardware.com updated many items, it could take days for the updates to take effect.] We are working on another solution to load data but don’t know when that will be in place. The media-tracker application needs to be done by tomorrow (that is, in the hands of QA). Things are going great, but I’ve been down this road before. I need to keep the pressure on development to make sure that they follow through on our delivery dates. Friday, February 25 Had our first meeting with [new CornerHardware.com executive producer] Alice Hill. She had some fantastic ideas about the site direction. I look forward to working with her; she’s going to be able to streamline the decision-making process since we will not have to wait on [COO Peter Hunt and CEO Rich Takata] in the future for decisions about where the site is going to be heading. Sunday, February 27 What I’ll remember most about today: talking to Bill [Meehan, Xuma's lead engineer on the CornerHardware project] at midnight on a Sunday night about CornerHardware.com — again. We make this site go. Both of us take a lot of pride in that. We are both emotionally attached to this project and want CornerHardware.com to be the best it can be. That makes it easier to stay up late on Sunday nights to do things for CornerHardware.com. Monday, February 28 Everyone is very excited about the big day tomorrow [the official launch]. I think we have all done due diligence to get ready for this big day, but until the day comes you never know. Tuesday, February 29 Crazy, crazy day. In the afternoon, CornerHardware.com informed us that [there were] 40 additional content pages to be attached to a new front page. At 5 p.m., 6 p.m., 7 p.m., 8 p.m., this content had still not passed the QA check. The new front page will not be able to go up until tomorrow. Traffic was higher than usual. Two articles [about CornerHardware.com] came across my desk: one was from CNet and the other from ZDNet. Didn’t get much sleep, since we were at work until 5 a.m. Sunday, March 5 First thing I did when I woke up today was log on to the Internet via my DSL to check on the site [following that morning's newspaper coupon campaign]. I can see that the orders are already rolling in from Washington and Utah. By 10:30 a.m., we are already at 15 orders for the day. I called Steve Finer at home (I think I woke him up) and let him know the good news: people are hitting the site and buying things. Please e-mail your comments to editors@inc.com.
