Betting the company Featured

7:00pm EDT February 28, 2007

For Lee Roberts, the biggest decision he’s had to make at FileNet Corp. was both one of easiest and one of the most difficult.

It was easy because it was apparent what the company needed to do to stay at the competitive vanguard of its industry. It was tough because the economic indicators were headed in the wrong direction.

Like lots of IT companies in 2001, FileNet was caught in a sluggish market. The choice was to either hunker down and wait out the soft market or come out swinging and prepare to seize the advantage before its competitors did.

“The company had been growing 6 percent, 7 percent, 8 percent a year, so we didn’t have exciting growth,” says Roberts, chairman and CEO. “We were operating in a world where these Internet companies were going crazy, and we as a company felt that if we weren’t careful, we were going to get blown off the road.”

The hard part for FileNet was the timing. By 2001, in the wake of a big runup in hardware and software purchases in anticipation of Y2K, and facing a soft economy, software purchases were not at the top of corporations’ shopping lists.

“We made a strategic decision to invest over $300 million to build P8, which is the flagship product we have today,” says Roberts. “That decision was made pretty much as a bet-the-company decision at a very difficult time. That was when the Internet bubble popped.

“Our software revenue dropped by 40 percent, the company was barely profitable, which was actually comparatively good. But at that moment in time, we recognized there was a need in the market and, collectively with the board, made a decision to make an investment.”

It was a hard decision because the enterprise content management software company would have to ramp up its research and development spending in a marketplace that was, to say the least, uncertain in the wake of the Internet bubble and the telecom crash. For the then-public company, that meant trading profits in the near term for research and development and convincing shareholders that it was the right decision. “It was just one of those situations where market conditions weren’t good, but we knew if we waited a year until times got better and then we would have invested in P8, that would have taken us out of being the market leader to a follower,” Roberts says. “We would have delivered P8 to the market behind somebody else instead of capturing and defining the market.”

In technology, being first often means grabbing the largest share of the market. Coming in second often relegates a company to also-ran status. “If you live in a world where product cycles are quick and where being the first guy to market usually means you’re going to win, you just don’t have the luxury of taking forever,” says Roberts.

The investment wouldn’t be simply in a new product. The vision FileNet and Roberts had was in a platform that would combine all of an organization’s enterprise content management under a single architecture that would work together smoothly and efficiently rather than in a patchwork of applications that didn’t always talk to each other all that well.

Even though market conditions weren’t ideal, the decision was not one that FileNet could afford to put off.

“I think we would have been eclipsed in the market and we would have been less relevant to our customers and probably potentially at some point seen the revenue of the company go negative,” Roberts says.

Roberts assembled a team of individuals from every part of the company to put together a plan for the development and launch of P8. Roberts says having a skilled team in place is critical in a large project. “You’ve got to build a team to get it done, whether you’re building P8 or an airplane or a new car,” says Roberts. “At the end of the day, the CEO doesn’t have all the skills to do that. CEOs are all Type A, everyone’s got an ego, everyone’s driven, and there are probably moments when you think you know it all. That’s when it’s dangerous. That’s when you’ve got to stand back and realize that you don’t know the answers and you’re going to make a lot of mistakes. “You’ve got to have the ability to change and adapt and recognize that you’re not perfect and try to surround yourself with people who aren’t clones of you but maybe are complementary to you.”

Customer buy-in
Roberts says FileNet evangelized for P8 at every level of the company, including senior management.

“Obviously, the evangelism was going out to customers over and over again and convincing them that rather than buying six different products that don’t communicate together and maybe solve one or two problems, why not buy an integrated solution through FileNet,” Roberts says. “A lot of it was done face-to-face between our salespeople and our customers. And it was also done at conferences that FileNet hosted.

“For example, every year we would bring all of our customers together in Europe or North America, usually 1,000 at a time, and we’d bring all of our executives — development, marketing, myself — and we’d talk about where the market was going and why customers should buy a P8 platform.”

Roberts took an active role in talking up P8 and pushing it out the door.

“The place where I spent most of my time was talking to senior executives,” says Roberts. “I would very frequently be calling on senior vice presidents. So I spent my time with customers talking conceptually about the products and what they could do.”

Roberts says FileNet took advantage of every opportunity it could to get the message out.

“We’d do it with Webcasts, we’d do it with one-on-ones, we’d do it with one-on-many, with the consultant community,” he says.

“I think we were very thoughtful about it. We kept customers in the loop about what we were building to make sure we were on target with what we were bringing to the market. Without a doubt, it was the single biggest development event in the history of the company.”

FileNet went beyond its customers and took the message to the group that its customers often go to for advice about technology trends and products, consultants such as the Gartner Group and Forrester Research. “These are the people who our customers go to and say, ‘Should I buy FileNet?’ Roberts says. “We also had to evangelize to the evangelizers, so it was very important to us to shape the opinions of the opinion leaders, which were the consultants.”

Facing investors
Roberts had to convince the investment community that a lag in profitability would be worth the ultimate long-term gain that P8 would provide. “The challenge for us was to go to the investors, the people who owned the company, and say, ‘Look, we’re going to make a deliberate decision to spend 22 percent to 24 percent of the revenue that comes into the company on product development for the next two-plus years instead of giving it back to you, the shareholders,’” says Roberts. “If you look at the average R&D costs for most companies, it’s about 15 percent of revenue. “We were spending somewhere between seven and 10 points more than other companies, so we had to go out to the investment community, the people that owned our stock, and explain the strategy, explain why we were doing it, and we got asked a lot of questions.”

Roberts knew that some investors wouldn’t have the patience to wait out the development cycle or gamble on a play that they perceived as too risky. On the other hand, there was a group of investors with longer-term horizons that would stick with the company, even though it would be putting a large share of its assets into R&D to come up with a breakthrough product.

Roberts spent plenty of time speaking to analysts and investors to explain to them where FileNet saw the market going and why P8 was going to transform enterprise content management. “It’s really not a matter of persuading, it’s more a matter of informing,” says Roberts. “Some are very short-term-oriented, but some of our investors have a long-term view. So when we articulated it in the context of ‘We’re going to make a long-term investment today, I think we’re going to get a great return in the future,’ and articulated it in a way they understood and made sense to them, most of them stayed with us.”

Taking the long view
FileNet posted a net loss in 2001 of $16.6 million on revenue of $335 million but posted gains every year after, through 2005, when it earned $40 million in net income on $422 million in revenue.

In 2006, the company was acquired by IBM Corp., something Roberts says was much less likely to occur had FileNet not been able to develop its new product and, as a result, beat IBM in the marketplace 70 percent of the time it faced the IT behemoth.

FileNet had to roll the dice to put itself in a position to be market leader, and that decision, to some degree, is up to the CEO, Roberts says. While there is tremendous pressure on CEOs to meet short-term financial goals, their real purpose and value are in looking much farther down the road and guiding their companies into the future.

Making the tough calls, such as leading the initiative to develop a new product in a slow market, is just part of the job.

“The CEO’s job is not just the here and now, are we going to make the numbers this quarter,” says Roberts. “The CEO’s job is, ‘Are we going to be viable five years from now, can we double and triple the size of the business.’”

Making such a vision work requires a team that is focused on the company’s future and the CEO’s ability to bring the team together to drive the business to success but not do it all himself.

Says Roberts: ‘The game may be won by the quarterback through a 90-yard pass in the last two seconds, but the team probably got there and won the game because the head coach and the coaching staff, together with all the players, worked to win it. You can’t mandate things to happen, so you’ve got to bring in great people that can help you get that done. “If you can bring everyone together and you can get everyone focused over the same common targets, everyone speaks the same language, everyone trusts and believes in each other as a team, people don’t get wrapped up in what their titles are but are really more focused around the success of the company, you’re going to be successful.”

HOW TO REACH: FileNet Corp., www.filenet.com