The Dot-com Lean Years
03/15/01- The Globe and Mail

Marketing and advertising expenses can be crippling to high-tech startups, as shown by the dot-com carnage of the past year.These days, firms are being forced to slash such costs or risk extinction.

And they're finding creative ways to cut corners. Sharing has become the new watchword for tech upstarts. "If they can lean on each other, steal from each other, plagiarize [from] each other for marketing and sales ideas . . . they can cut the cash outlay," says Stan Peck, an analyst with International Data Corp. (Canada) Ltd. in Toronto.

Mr. Peck doesn't mean steal or plagiarize in a literal sense, but rather in the sense of borrowing, the way members of a team hand each other the ball to achieve a common goal.

Platooning -- which refers to a group of people working, travelling, or assembled together -- has been adopted by startups and dot-coms as a way to save much-needed cash.

Roman Bodnarchuk, chief executive officer of N5R.com, says the on-line contest company has probably cut costs by 20 per cent since it started platooning with fellow Toronto-based dot-com Eloqua Corp. Mark Organ, Eloqua's CEO, estimates his tech startup has slashed almost one-third of its costs the same way.

N5R shares its client list with Elquoa and vice-versa. Eloqua, which makes software that helps companies attract customers through the Internet, takes N5R into deals to show a potential client how it can drive customers to a Web site. This reduces sales and marketing costs for both firms.

Mr. Peck says more and more small companies may have to adopt this type of corporate strategy in the future in order to grow effectively, calling it a permanent "life-cycle stage" for the early lean years rather than merely a trend or fad among startups.

"Early in the life cycle, [dot-coms] are penny pinching and will make the compromises necessary to save that kind of money," Mr. Peck says.

"As they start to get more established, they start to think on their own and they want to do their own [thing] . . . and they're more willing to pay to do that."

The concept is similar to a strategic alliance -- a common resource-sharing arrangement among businesses -- but according to Mr. Bodnarchuk it has "deeper" implications for the companies involved.

He says many companies refer to even the most tenuous associations as partnerships, whereas platooning teammates are joined in a very dependent way. "We are going into our clients hand-in-hand and working on projects together. I think it's much different than just referring a client to somebody else. I think we're taking responsibility for the other partner's work -- and that's huge."

According to Greg Kyle, president of New York-based Internet research firm Pegasus Research International, "branding is the most expensive cost" for dot-com startups. Mr. Kyle says he's seen some companies with branding costs that added up to anywhere from 60 to 200 times their quarterly revenue, a huge sum compared with many other industries. And that's why he says platooning "just makes sense."

When companies platoon they don't have to spend as much on advertising and other costs associated with getting their names and products out to clients.

Right now, Eloqua doesn't see itself breaking from the platoon in the near future. In fact, it is involved in two other pacts: one with New York-based e-commerce company Future Now Inc. and another with fellow software firm Entelx Inc. of Cambridge, Ont.

"When I look at our prospect list, it's not just 'Who can I sell to today?' but it's 'Who can my friends sell to today?' and 'Can my friends sell to this person better than I can? If so, I will give my friend the lead and let him sell more effectively,' " Mr. Organ says. The advantage to handing over a prospective client is that the favour may be returned. "I know that turnabout is going to happen as well."

Eloqua and N5R made their connection through a venture-capital firm, while Eloqua found another partner through an on-line industry magazine.

And if the client referrals start to snowball, Eloqua could benefit substantially because N5R.com services numerous Fortune 100 companies, including Procter & Gamble Co., Sears Roebuck and Co. and Ford Motor Co.

"If we're going to put together a marketing document, that costs a lot of time and money. Why not share that with another startup and put both our products on the same piece of marketing and share our development?" Mr. Organ explains.

"It's kind of neat," he adds. "It creates a virtual company that comes together overnight and can combine and desegregate according to customer demand."

Paul Dodd, president of Toronto-based recruiting firm He@d2Head.com Inc., has been platooning with fellow on-line recruiting firm Brainhunter.com Ltd. since December, but says he can't estimate the amount of money it has saved because the agreement is so new.

He says platooning is more common in Britain than in Canada because too many companies have "picket fences up around their business" here.

Brainhunter CEO Raj Singh describes his pact as "a logical relationship, because we can train their recruiters on the Brainhunter system and when these recruiters go into companies, they're already familiar with one of the state-of-the-art e-cruiting systems on the market."

The companies are keeping track of the referrals they do for each other and at the end of the year will tally how much business has been generated. Then they will compare that with the cost of the software. "If we don't see that this relationship has value, then [we'll approach He@d2head and say] there is the cost in real dollars for the software."

Mr. Singh says the platoon has already contributed a number of client leads for his company, including possible contracts with consulting firm Accenture and computer-services firm EDS Corp.