Daniel Bates

Monday, 22 July 2002 09:52

Rebuilding Ben

Last year was a bad — some say sad — year for the Ben Franklin Technology Center of Western Pennsylvania, perhaps the worst. That’s when the state-funded program, designed to help companies develop new technologies and, ultimately, jobs, came crashing to an ugly halt, beset by mismanagement, extravagant spending and scandal.

The debacle attracted the attention of the U.S. Postal Service, the state attorney general’s office and others who continue to sort through the sordid mess left by its former executives. It’s a mess that very well could have destroyed the much-needed funding mechanism that was responsible for the development of many a new technology in the region over the past 14 years. But it didn’t.

A new board of directors this past February hired Douglas Goodall, a high-tech entrepreneur and early-stage venture consultant, to fill in as interim president and reconstruct the program. Then he was asked to stay, and he did.

What Goodall, now president, and the board have created is a whole new organization they are calling InnovationWorks. While signs of the old Ben Franklin program’s better qualities still show through, it has a much tighter focus both in scope and audience.

Goodall says the organization, which still is an affiliate of the statewide Ben Franklin Partnership program, is ready to begin investing its $5.7 million of new foundation and state funding in as many as 20 high-tech start-ups in the region this fall. And that’s just the beginning.

In this month’s One on One interview, Goodall shares his Ben Franklin Partnership philosophy in light of the scandal and where he plans to take the resurrected organization that ultimately is designed to help Pittsburgh entrepreneurs create new companies.

How did you wind up in this position?

It was really by chance, as a result of the management problems that erupted at the Ben Franklin Technology center more than a year ago. The fall of last year, the board of directors of that organization resigned and was replaced with a brand new board of directors.

The new board had one person who was a carryover from the prior board, by the name of Bill Hulley, from Adams Capital. I’ve known Bill for a number of years through being involved in the technology community.

I was continuing at that point of time with my consulting business, basically working with young technology companies, such as Vision Systems, to develop their business plans, define their marketing strategies or raise money. Also last summer, I had remarried after losing my first wife to cancer a few years ago.

Then I started looking at what I was going to do and thought this might be a good time to go back into the technology field running another company. I was toying with the idea of leaving the region, because there was an opportunity in San Diego that was chasing me, one in Boston and a couple in Washington, D.C.

Knowing all of that, I got a call in January from Bill Hulley shortly after he had been named chairman of the new InnovationWorks board of directors, which is the replacement for Ben Franklin. He said, “Doug, have you left town yet? Would you consider doing this?”

He said that for 90 days or so, they would like someone to come in, run the organization, work on the cleanup of all the audits and investigations, as well as help the new board write a new strategic plan so they could get the new organization funded.

I thought, that sounds kind of interesting. It’s got that soap opera piece, scandal. It’s got a side of the business I’ve never worked with before, which is government-based organizations, nonprofit funding.

But writing a new plan is what I do for a living, especially for technology companies. So this could be a fun consulting engagement.

What did you find when you got here?

One, the staff that was still here — 14 people who had to live through all the bad press, all of the scandal, and still do their jobs day to day. They were really committed, hard-working people who were just kind of seeing through all of that. But they hadn’t bailed out, they hadn’t caved in, they hadn’t given up. That was pretty impressive to me.

The second thing, which took awhile for me to understand and appreciate, was really a very noble mission. The Ben Franklin mission, which goes back to the early ’80s, when it was formed, was — and is — a good program. And perhaps it’s one that really offered a stepping stone to a new powerful regional economic impact organization. That was positive.

The third thing was this scandal. Indeed, it looked like there was mismanagement, but it wasn’t consuming the center. It was all-consuming in the press, but in reality, steps had been taken internally to address any of the management control problems that existed

There were a lot of — and there still are today — outside investigations going on, and what I discovered was we have no control over those. If the U.S. Postal Inspector or the U.S. attorney general wants to do an investigation, they’re going to do it.

Have they told you how long they think those will take?

No. As best we can gauge it, hopefully they’ll be done this fall. But they move slowly. They’re doing very, very detailed audits, most of which have been completed. But those took months and months because they literally had to go back and look at multiple years of history — every transaction, talk to every person.

In light of where you’re going with this organization and what you’re able to say at this point, what do you think went wrong?

I don’t know what went wrong. Clearly, without speaking in areas that I shouldn’t speak to, management controls in terms of what was done in managing projects that the federal and state governments wanted done appeared to be weak.

Money that was spent on projects probably shouldn’t have been spent or was not managed effectively. From that, it just kind of accumulated over time and kind of imploded on itself. I’ll never be able to figure out what would motivate someone to lose those controls, but it happened.

Define InnovationWorks.

InnovationWorks is still affiliated with the state Ben Franklin program. If you look at the Ben Franklin mandate and charter — you need to understand that to put InnovationWorks in the right context — Ben Franklin was formed by the Commonwealth of Pennsylvania to provide an economic stimulus to new job growth opportunity, specifically new technology companies.

In 1998, we had the management blow-up in the Pittsburgh center. One of the positive things that came out of that was that it gave a chance to the community to pause and say, “We’ve got to fix the management problem, and we could just close it down and be done with it. Or is this actually a chance to continue it, but since we paused, trying to reform it a little bit?”

First, there’s clearly a business need. In our region, my observation over the past few years is we have turned the corner, and there are more and more young, entrepreneurial-led technology companies being formed — software companies, robotics companies, biotech companies. Perhaps not anything close to what you’d expect in Austin, Boston or in the Silicon Valley, but definitely a lot more than we’ve seen in the region in the past.

The second thing is that, with those young companies, you start to look at how many of them make it and how many of them fail. Clearly there’s more failure than successes; that’s just nature regardless of the industry. On the other hand, there’s a chance to increase the success rate if those neonatal-state companies are given the appropriate support so they don’t have infant mortality.

Clearly one ingredient that was missing that would increase the success rate of these young companies is the availability of risk capital. The other things that impact a young technology company are, “Great, someone just gave me a little money so I can hire a couple of engineers to build this product, but if it’s successful, then I need to hire staff, I need a building, I may need a lab, I need production, I need a marketing strategy, I need lawyers because I need protection for the property,” on and on and on.

All of those business issues start to become a threat just because they have to be done, but they consume so much time and resources.

Maybe this was a great chance to form not a new organization, but take the existing Ben Franklin and twist it and turn it a little bit and focus it and make it the resource that provides those two things which we’ve now determined this ever-growing group of young start-up companies need to really survive.

Our mission won’t be to create young companies — that’s for the entrepreneurs to do. But we can go, on a very focused basis, and redefine the southwestern Pennsylvania mission for Ben Franklin, and as part of that, we ended up changing the name.

What we want to do is go forward doing one thing only, which is targeting early-stage technology-based companies and working with them to make sure they survive. We’ll let somebody else worry — and there’s some really good organizations out there doing that — about work force development. We’ll work with other organizations like SPIRC, whose mission is to make sure the deployment of technology takes place in small to medium-sized manufacturers.

What kinds of services will you provide as InnovationWorks?

There are only three programs under the new InnovationWorks. One is, we’re going to provide risk capital — but not the way we used to. The way we used to was we would give grants up to $100,000 to develop a specific technology project. When it was done, we were done. So they were very short term.

Also, they had royalty repayment programs tied into them, but rarely did we ever get royalties from them because it was too short term.

So we’ve changed that now and said, “We’re going to provide investments that are actually not going to be grants but true investments. You’re going to have to pay us back. But we’ll do it in three stages.” The first stage is to develop the technology, and we’ll invest $100,000. In fact, we’ll do it up to three times with a young organization if it takes that much time and money to develop ... starting from idea.

Once they get through that stage, they now have something where they can make a product and would like to go get their first customer and maybe complete a business plan. We’ll invest up to $300,000 for that stage. We call it the commercialization investment.

If they’re successful with that, although nature says that not all will be, the next level we could measure is they now have a product they’d like to take to market and need to be building the production capability or the support organization, the sales organization.

We call that the emerging company phase. We’ll invest on a very select basis up to $500,000 at that stage.

So if someone were to start with us with a good idea and survive through the whole process, it’s conceivable we could invest up to $1 million in a company over a long haul. It’s really different from before. Before, we gave relatively small awards for a project.

So really the model we have right now is focusing on very, very young companies and working with them until they are strong enough that they could, on their own go, out and qualify for traditional venture capital or bank financing.

The second program is what we call Enterprise Advocates. When we invest in a company, we’ll assign an enterprise advocate to them. The enterprise advocate’s job is not to manage their company for them.

But it’s to stay with that company for as long as we have an investment and to work with the management of that company to identify other things they need.

In a third program we’re developing [Innovation Network], we’re going to identify all of the business resources that exist in our region that could help a young company grow and help coordinate those services so the young companies have access to those resources.

Now for the money itself — what do people have to do to tap the Innovation Fund?

The plan we have is that all of our investments will be convertible. Basically what that means is that it will be a loan. We want them to be friendly loans, though, because our goal here isn’t to become a bank.

It’s to help the young companies grow, but also to make sure they view this is as an investment, that the entrepreneur realizes this is a very serious endeavor.

Any gains we realize out of that stock, we put back into the Innovation Fund so we can go out and reinvest it in the next young technology company.

If two out of 10 [start-ups] were surviving today and we could get that to three out of 10 or four or five by providing this early-stage capital and these business service support programs, then we will have accomplished our goal, which is, in time, those companies will create jobs.

If we focus our measurement on job creation only, then we’re missing the boat.

How to reach: InnovationWorks at (412) 681-1520

Dan Bates (dbates@sbnnet.com) is editor of SBN.

Monday, 22 July 2002 09:52

A match made in heaven?

They said it was a match made in heaven. That’s what the top executives of Extrel Corp. declared, word for word, to the world when they consummated a whirlwind merger with Boston-based Millipore a number of years ago.

The married parties hosted a press conference that seemed much like a celebratory wedding reception, but without the clinking glasses. Extrel’s executives gave warm speeches on how the deal benefited not only the shareholders, but the employees — and the executives.

Millipore officials offered their own media sound bites. And the local venture capitalists who, years before, had invested millions of dollars in Extrel, exhaled a collective sigh of relief. They would finally get their investment return after years of building up this maker of mass spectrometry equipment.

What I remember most about this beloved occasion and this glowing new couple isn’t the beauty of the deal or even the celebration that followed. Rather, it was the oh so short honeymoon.

I’ll never forget the night, only weeks after the marriage, when I ran into Extrel’s president at the annual Entrepreneur Of The Year awards. He swaggered up to me, smiling and laughing with a nervousness clearly influenced by a sip or two of spirits. Then I spoke to him.

“So, how is everything now that you’re part of Millipore?” I blurted.

“Well...,” he said.

“You did alright for yourself, didn’t you?” I asked. “You should still be celebrating.”

He stopped in his tracks, shook his head and looked at me.

“They fired me.”

They fired him. In fact, Millipore officials abruptly fired the top three executives of Extrel in a move that went virtually unexplained. So much for their marriage made in heaven.

As the folks at Extrel learned the hard way, merging companies can prove a lot more complicated than it may seem at first glance. Sure, you may be merging to gain new products for a given market or a more expansive distribution network. You may even gain new clients, new talent and additional working capital.

But how much should each side benefit? And how do you get two corporate cultures that have developed their own working identities and ways of doing things to adopt one synergistic culture?

Strategic compromise, from whose name goes on the company door and who takes over the top ranks, to whose benefit plan to adopt and whose vision to follow, requires strong but giving spirits that can see the growth potential without losing the compassion to deal with diverse of employees. That takes extensive due diligence on both sides. And patience.

Hallmark/Tassone, the advertising agency featured in this month’s cover story, has faced all of that and then some in its quest for size, breadth and reach. Certainly, its principals experienced their share of pain, discouragement and obstacles along the merger trail. But they learned a lot along the way, such as don’t marry for money; make sure the companies’ business philosophies mesh; and bring in outside help when necessary to smoothly merge corporate cultures in a way that keeps all employees’ interests at hand.

Among their most creative strategies: living together for a year to see how well they worked together before any official marriage. That alleviated undue surprises, and the two separate companies ultimately walked down the aisle together.

Was it a match made in heaven? The combined Hallmark/Tassone principals all still have their jobs and continue to press onward together, if that’s any indication.

That’s more than I can say for the unfortunate Extrel executive. He took his company stock and his damaged pride and moved to Texas. And so it goes.

Daniel Bates (dbates@sbnnet.com) is editor of SBN.

Monday, 22 July 2002 09:51

Pit bull politics

When Jere Glover strolls the halls of Washington politics, he may seem short, stout and good-’ole-boy charming with his laid-back Southern drawl. But don’t let appearances fool you. Ask him if he minds being called a pit bull in court, and he smiles.

“A pit bull on behalf of small business is a title that is thrown around and used, and the district court has actually referred to me as that,” says an almost sheepish Glover. “I’m not saying I dislike it, but you can’t be meek and be in this job.”

Meek he is not. Glover, 55, didn’t earn the venerable distinction of “Pit Bull” for being a legislative lap dog. Rather, he takes on Congress and federal regulatory agencies daily to make sure lawmakers enact laws and regulations that treat small business fairly.

When they don’t, he has the president of the United States’ authority to bare his teeth and take them to task. And he does.

Glover, a presidential appointee, is the U.S. Small Business Administration’s chief counsel and head of its Office of Advocacy, which serves as the independent voice for small business in any and all legislative matters. For the past five-plus years, Glover and his research staff have fought battles relating to everything from taxes and procurement to regulatory policy — all on behalf of business owners, who likely would have been short-shrifted without him.

In this exclusive One On One interview, Glover, who came to Pittsburgh recently to meet with local business and government leaders, offers his take on the relationship today between government and business and why we should be glad he’s fighting your fight in the thick of Washington politics.

SBN: Why should our readers care about what you do for them in Washington, D.C.?

Glover: What we do is basically represent small business before Congress and before federal agencies. And what we try and do is make sure the decision-makers in Washington make informed decisions.

When the office was created 25 years ago, Congress said, all too often we’re making decisions not knowing they’re going to be hurting small business. And we need information and statistics and analysis up front so that not only we but also federal agencies can make better decisions.

Do they accept the information?

Well, let’s say that in Congress, we have had varying degrees of success. Our track record is far better recently than it was historically. And that’s because we have the power — and small business has the power — to go into court and challenge the agencies, and that judicial review of agency actions is forcing the agencies to take us much more seriously.

In fact, they’re now coming to us saying, “We want to know early what we can do so we don’t end up in court. Before, it was, “We’ve done it; what can we say to make it look OK? What can we paste over this? Is there some magic word, or can we sprinkle some holy water over this so that we can do what we were planning to do anyhow?”

What we try to do, and what the agencies now do because of law changes, is get in early and try to help them to begin thinking about small business when they start their regulatory analysis process. But by time they propose it, it’s too late. They’ve already made up their mind.

Did you have to become an adversary of sorts to become an advocate of small business to get lawmakers to take you seriously?

Sure. Until I filed my first amicus brief, nobody thought we were a player. The first brief involved the Department of Interior. They were trying to regulate hard-rock mining. They had a carefully laid out scheme or strategy — strategy is probably the right word — to regulate all mining operations.

But what they forgot to consider was that if you expect 3M mining operations to do something and have an engineer evaluate it and an independent engineer certify what the compliance cost would be, that may be possible. Then you get a bond based on what that assessment is.

On the other hand, if you’ve got somebody with five acres in the middle of nowhere who is basically doing this with two or three employees, and you have that same requirement where you have your engineer do an analysis and get an independent analysis and then an evaluation as to what it will cost to reclaim the land when the mining is over and done with, the small firms simply couldn’t get the engineers.

And if they could, the engineers would always guess so high because, if it’s a small matter, it isn’t worth anything, where, with the big companies, they’ll say, “Well make our best guess and if we’re off a little bit, it won’t make any difference.”

It’s a long answer, but let me just say is that what we did is we went in to protect the small miners. As a result, the judge bought our reasoning and the rule was thrown out.

Did that really set the tone for what you do now?

Oh yeah. To keep us from filing a brief, there were a lot of meetings to try to talk us out of filing a brief. We said that was all well and good, but we were going to do it. Once we did it, there were three similar cases that we immediately got them to make concessions on for small business because they didn’t want us to file another brief.

Why not?

The courts presume the government agency has expertise in what it’s doing. And when you have two agencies, the presumption goes away. When we file an amicus brief against a government agency, the presumption that the agency is right goes away, so it’s more of a fair fight.

What is a fair presumption at this moment about government agencies?

I think the presumption that government agencies are right is probably still OK. But I think it should be easily rebuttable. What we’ve found in our regulatory work is that the agencies don’t understand small business. Therefore, they don’t factor it in properly in their analysis.

And to a large extent, small businesses don’t come in to talk to them, either. They don’t want to be involved in the process, so [the agencies] they can’t get good information. It’s a chicken and egg situation. In either case, the agency now is going out and being much more aggressive in finding out about small business and working closely with us.

What don’t they understand about small business?

We just worked on a small refinery case. The Environmental Protection Agency thought that $20-$50 million to convert a refinery was a reasonably acceptable number. They didn’t take into consideration that for smaller refineries, that would put them all out of business.

Smaller refineries also play a critical role in keeping competition in the marketplace. So it’s not just that smaller refineries are there, but that they exert down the pressure on oil prices. That competition aspect of it was lost on them. So we explained to them that their estimates of the impact were significantly understated.

Describe yourself in representing small business before Congress and the federal agencies.

First of all, I’m an entrepreneur. I was in the government for a number of years and then went out and started business. I had the unique experience of losing half a million dollars in one of my business ventures before working very hard for three years to turn things around and break even.

For a government official, it’s a unique experience. It’s now a little easier for me to understand what small business people are thinking about.

What I am is an advocate — I believe in small business. That’s why I’m doing what I’m doing. It requires a combination of being a pretty good lawyer, to understand what the agencies are trying to do, to being a pretty good economist, to understand the economic factors that go into the decisions, an d enough of an entrepreneur to understand what the impact is going to be on small businesses.

Washington is a town where you do what you say you’re going to do. You tell people you’re going to do it. Right now, the agencies understand that we’re going to back up what we say, that if they don’t listen to us, they’re likely to end up with us, one, trying to block their proposal to the White House.

If we lose at the White House, we’ll go into their regulatory proceedings and try to block it. And if we lose there, we’ll go into the courthouse.

How long do you think you’ll stay with this position?

I think we’re making a difference. The climate of the government is a very hard thing to change, and I think we’ve begun to change that. And I want to finish that process. I’ve got a few more years to go. When it ceases to be exciting, that’s when I’ll go back to running businesses, because that’s exciting and fun.

Daniel Bates (dbates@sbnnet.com) is editor of SBN.

Monday, 22 July 2002 09:49

Fear of flying

The day I got the call from an executive from Sharpsburg manufacturer Rock-Built, Coast Guard officials were still recovering what was left of the small plane that John F. Kennedy Jr. had crashed into the Atlantic off the coast of Martha’s Vineyard.

That probably wouldn’t have been a significant event to me if it weren’t for the fact that the executive called to tell me his boss, Rock Ferrone, had taken flying lessons and bought a small plane — and he wanted very much to take me flying.

Was he nuts? Didn’t he watch the countless news reports about the tragic crash and all of the reports on small plane problems and other crashes? Didn’t he get the message?

Crash aside, this is a man who frenetically charged in one business direction, then another, then still another, not quite sure where he would land at any given time. He is easily excitable, not one to sit still for long, and he is always thinking about the next problem he can solve with some new invention or innovation.

In many respects, he is a self-taught genius. But could he fly a plane? And even if he could, how on earth could this new interest of his fit into the scheme of things for a company that manufactures inline trimming and stacking equipment for the printing industry?

And then there was that crash. Rock wanted me to fly with him right as the world was learning of the tragic deaths of Kennedy and his passengers. I paused for a long moment, my stomach knotted, and I shook my head at the phone.

But then I said yes.

As I thought about it, it suddenly dawned on me that this flight wasn’t about near-death experiences or foolhardy whims by a man who could afford it. At that moment, I realized it was simply about taking chances. To me, it became entrepreneurship personified.

As this month’s cover story illustrates, this guy was willing to take chances. His gumption allowed him the freedom to jump from running a small printing operation to becoming publisher of a community newspaper. That same gumption allowed him the vision to create inline printing equipment and, ultimately, scrap the printing business to go after the big bucks with that new equipment.

The very same gumption gave him the foresight to look beyond his new love for aviation and see such great endeavors as his own airport and an industrial airpark where companies like his could prosper with help from general aviation.

Certainly, Rock is taking a chance as he soars over Pittsburgh to destinations east, west and south. Accidents do happen. But consider the benefits he receives for taking such risks. He saves time and money, and he makes a distinct impression on customers.

Had he not taken such chances, he never would have had the opportunity to buy and improve an airport, find a suitable new location for his manufacturing facility or establish a tax-free zone in a corner of Allegheny County where economic development is sorely needed. That’s what taking chances is all about.

I did take that chance as I soared through the clouds over Pittsburgh with Rock. It was my first single-engine plane flight, and I was scared. But Rock handled the plane as professionally as he handles every other business opportunity he seems to create. The ride proved smooth, exhilarating and eye-opening.

Are you taking chances? Do you willingly step out into unknown territory with the understanding that taking no chances will yield you no rewards? You could stay within a comfort zone and avoid risk. But that’s not what entrepreneurship is about.

Interestingly enough, I learned my greatest lesson about taking chances once Rock landed the plane and sent me on my way. I crept up the on-ramp to Route 28 and was almost hit by another car. The moral? Some of the biggest chances you will take are the ones in which you think you’re not taking any chances at all.

Is that a chance you want to take? Think about it.

Daniel Bates, editor of SBN magazine, wrote this column while flying from Pittsburgh to Martha’s Vineyard for a vacation. For him, the irony was not lost. Reach him at dbates@sbnnet.com.

Monday, 22 July 2002 09:49

eBay Dar-ling

For Larry and Carol Farley, the potential of a global market was made starkly apparent by the sale of a footstool.

The couple, owners of Dargate Galleries, sold a Georgian footstool several years ago, sight unseen, for $4,000 on the strength of a written description faxed to the buyer in Hong Kong.

That sale, along with Larry Farley’s experience in the early 1970s with an experiment in interactive TV in Orlando, Fla., while he was RCA’s vice president of planning, was pivotal in convincing the Farleys that auction sales could be closed with more than simply the banging of a gavel.

“We weren’t on the Internet at the time, but we saw how large the market is,” says Carol Farley.

The market may be larger than they ever imagined at the time. The prospect today, say the Farleys, is to build Dargate from auction sales of $3 million a year to $40 million within three years. That projection may sound highly optimistic, until you add the Internet into the equation. When one considers how the gallery is leveraging its relatively modest size and the potential of selling via online auctions, the numbers don’t sound quite so tall.

Internet analyst Keenan Vision estimates auction technology will be used to sell $129 billion in goods and services by 2002. Dargate is one of a select group of eight galleries that began showcasing some of its holdings — about 100 items to start — last month on eBay’s newly established Great Collections site, a presence that gives the Pittsburgh auction house exposure to eBay’s 5.6 million registered bidders. By comparison, Dargate, no newcomer to the online auction business, had accumulated 5,000 registered users.

“eBay probably has the busiest market in the world for antique items,” says Larry Farley.

A conventional start

The Farleys purchased Dargate Galleries in 1989 and ran it as a conventional antiques dealer, but grew bored with the glacial pace of the business.

In dealing in the antiques business, they found that a substantial chunk of the estate auction business in Pittsburgh was going to major national and international auction houses such as Sotheby’s and Christie’s. They saw an opportunity to keep some of that commerce in Pittsburgh and decided in the early 1990s to shuck retailing in favor of the auction gallery business.

The Farleys got involved with Web marketing six or seven years ago, starting with a modest site when e-commerce was in its infancy. Carol Farley says now that she wasn’t impressed with the site’s commercial potential, but the couple figured the $35 a month for maintaining the site was worth it, even if it didn’t generate much revenue.

As e-commerce grew, however, Carol began to investigate online auctions, and along the way, got the hang of digital photography, a skill that would prove handy once Dargate began to sell online. A local software developer proposed a solution, but told her it would be expensive and take about two years to develop.

Meanwhile, the Farleys came across OpenSite Technologies, a North Carolina company that produces online auction software.

“We bit the bullet and bought the package,” says Carol. With about 70 online clients, the Farleys spent $20,000 to buy the software and started out by offering about 50 inexpensive music boxes on their site to test the waters.

“We did a downtown job selling those boxes,” Carol says. A later sale of new Oriental rugs brought about $25,000 in sales. By then, they were convinced that the Internet was a viable distribution channel for them.

Calin Cazan, president of C&N Technology in Robinson Township, an e-commerce consultant that operates the Pittsburgh CyberMall, advises businesses new to Web-based marketing to start out modestly to test the waters.

Make the site simple,” suggests Cazan. “Don’t use sophisticated tools, at least not in the beginning.”

Dargate’s sales have been hovering around $3 million over the past four or five years, says Larry, so he and his wife were looking for a way to give business a boost. They had heard that prestigious auction house Butterfield & Butterfield was planning an initial public offering, so Larry contacted it early this year and asked if it might be interested in investing in Dargate.

As it turned out, Butterfield & Butterfield had scrapped the IPO scheme and sold out to eBay. Larry’s contact suggested that he might want to get in touch with eBay.


eBay was interested. In fact, Dargate fit neatly into its plans to launch an auction that would showcase items such as a $100,000-plus Louis XVI-style Steinway piano that Dargate has in its inventory.

But expansion takes capital. The Farleys figured they would need about $600,000 to purchase computer hardware and software and add personnel to accommodate the additional workload.

To get the word out, Dargate would need additional business development people to contact other galleries and dealers interested in listing items on the site, managers, photographers, professionals to evaluate and catalog merchandise and other clerical help.

But banks, they found, were reluctant to lend the necessary capital, because auction houses don’t hold title to their inventory. Venture capitalists viewed the investment as too small to bother with. That led the Farleys to seek out private investors, to whom they offered shares at $25,000 each.

By last month, nearly three-quarters of the offering had been completed, taken up by a group that included their own children and long-time customers.

Although the potential of selling over the Internet expands Dargate Galleries exposure exponentially, the Farleys recognize that some items are best offered in the environs of the live auction. In other cases, they might lend themselves to either method. This month, Dargate will take the auction process a step further when it begins broadcasting its floor auctions live via the Internet, which will allow online enthusiasts to watch and bid along with those present at the gallery.

The gallery will command, in effect, three venues to offer its wares; in person auctions in the gallery, the online marketplace, or a combination of the two. The method, they say, will be dictated by the nature of the merchandise, not simply by the glitter of a newfangled technology.

“We’re going to auction on behalf of our clients where they can get the best value,” says Larry Farley.

How to Reach: Dargate Galleries, (412) 362-3558 or www.dargate.com. Contact eBay online auctions at www.ebay.com. C&N Technology Ltd.. at (412) 494-4442 or www.pittsburghcybermall.com

Daniel Bates (dbates@sbnnet.com) is editor oft SBN.

Monday, 22 July 2002 09:46

A horse’s tale...

A dog barked, or so I thought, as I reclined in my Lazy-Boy and tried to watch the evening news. It barked again, but it didn’t sound like the deep bark of my Rottweiler, Rosie.

Suddenly Nicholas, my 4-year-old, trotted into the living room on all fours, wagging an imaginary tail and panting like his 128-pound canine friend. My son was leashed and following the directions of his 8-year-old sister, Megan, who paraded him around the house.

“I don’t want to be a dog anymore,” he finally said.

So they began to build an amusement park out of colored blocks. Then they played house. And school. And they built a tent between the chairs. Then, just as I was beginning to doze, I felt a tug on my arm.

“Daddy, would you be a horse?”

“A what?” I asked, annoyed that he woke me up.

“You know, a horse,” he persisted. “Would you crawl around and let us ride you?”

So I dragged my middle-aged frame out of the chair and crawled onto the floor.

“Giddyup,” he yelled as he swatted my butt.

As a horse, I admittedly felt more like a horse’s behind as I entered their world of make-believe. But I played along, bucking and trotting and neighing as I went. This whole play and imagination and dreaming thing proved awkward for me at first.

Then it dawned on me: Seeing our world from their level and with their sense of imagination offered me an entirely new perspective. From all fours, I could see where I missed a spot on my freshly painted wall. I found change I had dropped.

Looking up, I imagined how the living room must look to my kids or my dog. And I realized, when I banged my head on the corner of a table, how it must feel.

And yes, for a moment, I was that horse they rode fearlessly onto the plain that was my living room. Then I pulled myself back into my recliner and back to reality, while my kids just kept on dreaming.

The experience made me wonder — why can’t we seem to play and dream and imagine the way kids do? Why do so many business owners lie back in their proverbial recliners and watch the world go by from that one prone position?

This month’s cover story is all about getting out of your recliners and looking at the world from your knees. Or your back. Or the top of a tree. Anywhere except from where you’ve been viewing things.

Before the subjects of this month’s cover story finally did that, they set out on a quest for a new brochure, maybe even a new logo. But by the time marketing guru Dan Droz got finished with them, they realized they needed to dramatically change the way they did business. And they needed a brand.

Getting business owners to such a point is no easy task, however. Droz says he first has to convince his clients that a new brochure will only scratch the surface of what may be ailing their companies. Then somehow, he gets them to play, as he calls it.

He sits them in a creative environment and slowly prods them to drop their mature, adult-induced inhibitions and imagine what they could be. Getting them beyond the first myopic horizon typically becomes his biggest challenge.

Tony Gyke, owner of an all-too-seasonal motor boat repeller repair service for the middle-aged, for instance, envisioned selling mail-order repeller parts to Floridians. But by the time he was done “playing,” he had transformed his small business into Ultimate Edge, a company that sells snowboards, skateboards and wake boards, among other extreme sports paraphernalia, to kids with green hair and pierced lips. Who would ever have imagined it?

If you haven’t done so in a while, take the time to look at how you’re doing business and how others see you — but look from a totally different perspective than you usually do. Let down your guard. Use the imagination you gave up as a kid.

Oddly enough, it’s the same message I’ve tried to instill in my own kids with the following poem I once wrote when I was bored:


The wind paints shifting landscapes in the sky

With backgrounds blue as shallow island pools.

See one shape, then another — are we fools?

No, look — two mountains formed — look close, they fly.

Gaze long enough, a cotton mass takes shape.

Imagine, then, this mass — a trotting horse

With rider racing toward its westward course.

But winds blow hard and let the horse escape.

Glance upward once again, behold the gale

Has dabbed its canvas with some paint anew

To offer those below a changing view;

For now the horse — a boat has raised its sail.

Look skyward, friend, and you can surely see

The wind’s artistic flair with clouds so white,

The flowing, drifting canvasses so bright,

Take shape – your dreams, if you would set them free.

Without this keen desire to seek and find

The shapes imagination can reveal,

The wind, in all its magic, will conceal.

For dreams and vision cultivate the mind.

And, if you’ll let it, your business. Can you say “neigh?” Daniel Bates (dbates@sbnnet.com) is editor of SBN.

Monday, 22 July 2002 09:43

High-tech mecca?

Pittsburgh is getting two new stadiums, a much larger convention center, a serious makeover along Forbes and Fifth avenues and new buildings for corporate Pittsburgh.

But is that enough to push the Pittsburgh region into this high-technology-driven New Economy?

Not according to Richard Florida, H. John Heinz III professor of regional economic development at Carnegie Mellon University’s Heinz School of Public Policy and Management. He says most business, civic and government leaders are neglecting what he considers the most critical neighborhood of the city: Oakland.

Florida, who may be considered among the most influential academics in the country when it comes to studying the new, knowledge-based economy, cut his teeth regionally when he and another CMU professor, with direction from then-CMU President Robert Mehrabian, authored the almost-legendary White Paper on the region’s economy in the early 1990s. That document became the first of many in-depth studies that would drive the region toward a more high-tech-oriented, entrepreneurial economy.

But while most leaders continue to focus on downtown Pittsburgh, Florida, young and unabashedly opinionated, has emerged on the proverbial soapbox to become a virtual lone crusader in a quest to turn Oakland into the high-tech mecca he believes it should be. The region’s future, he stresses, depends on it.

SBN magazine recently caught up with this crusading professor to find out why he feels so strongly about Oakland and its place in propelling the region’s New Economy. Here’s what he had to say:

SBN magazine: Why is Oakland such an important area on which to focus?

Richard Florida: Oakland is really the major employment center of the region, with downtown. It’s the center for education, with several major universities. It’s the center for technology in the sense that virtually all of the federal research and development dollars that go into the region go through Oakland.

It’s the entrepreneurial engine, the center of innovation. It’s the place where many of the people who are starting businesses come from. And it’s strategically placed, as one of the hubs of the knowledge or digital triangle, from downtown to the Strip District, up the Allegheny and down across the Mon. You can see an expansion of the Golden Triangle into a knowledge triangle in which Oakland plays a strategic role.

Then what’s wrong with Oakland?

I’ll sum it up in a word, and I’ll quote the conversation I had with a waitress. This student was a young woman who had come back to Pittsburgh from the University of South Carolina in Charleston. She loved being at the University of Pittsburgh, she said, except for one thing: “Oakland is a hole,” quote, unquote. “I have to step over bums on my way to class.”

I think that was OK in an era where a university education was kind of a finishing school or capstone achievement on the way to working in a downtown corporate complex, or in a hospital or law firm in a downtown area. But the New Economy is all centered around university complexes or university districts, whether it’s Palo Alto, Calif., or Kendall Square at MIT or Harvard Square at Harvard.

So you don’t find Oakland quaint?

It doesn’t have the look and feel of a high-technology economy. We will know Pittsburgh has made it into the ranks of one of the nation’s premier high-technology districts when it has the look and feel — when Oakland has the look and feel of a high-technology center. That means it has to have the same kind of energy and buzz and hipness and excitement that infuses these dynamic high-tech companies and which infuses the areas around these major universities that are generating new high-technology companies.

Give me an example of the look and feel that you describe.

We have a real advantage. In the past, high-tech wasn’t quite suburban, but it was a more sanitized look and feel. Now the leading high-technology districts, the places where the innovative things are going on, are very industrial, very gritty, very funky. They’re going to old warehouse neighborhoods, they’re renovating loft buildings. It’s technology industrial chic.

Oakland has that in abundance. So Oakland doesn’t have to try to be like downtown Palo Alto or even the quaintness of Harvard Square. What Oakland has is the look and feel of a major university district, with a little bit of technology and industrial funkiness and grittiness. If anything, it’s quite a bit too gritty.

But it has all of the elements: being in a major industrial city, having wonderful historic buildings, historic places. Things like the PAA and the University Club are enormously important potential additions. Can you imagine a PAA which was the recreational center or health club center for a thriving technology complex? It’s just the kind of place technology people want to be. They no longer want to be in a generic place.

Given your description of Oakland, would you say it’s a far cry from where it needs to be, or that it’s being neglected?

If you think about Pittsburgh historically, we made a decision in the years following World War II to rebuild our downtown, not just because we wanted to rebuild downtown, but because we had a talent attraction problem. We couldn’t get management and technical talent to work in the big companies because downtown was smoke-filled and flooding and filthy dirty and had bad transportation. It had all of these old industrial buildings.

So we cleared all of that out, implemented these pioneering flood-control measures and created the point, starting to build this wonderful downtown. That’s all important, but we haven’t moved beyond that.

The New Economy is an economy of neighborhoods. It’s an economy which is no longer as centered around downtowns. The New Economy takes place in high-technology companies that might be in lofts in old industrial buildings that are certainly centered around universities. Pittsburgh has this enormous asset called Oakland. Oakland needs the attention that downtown has gotten in the past, but in a different way.

We need to get the small things right. We need what you might call an urban design strategy. We need to make sure Oakland is funky and hip and cool, that it has the kinds of restaurants and eating establishments and performance venues that people want to be at. We need to make sure it’s with the times — not locked in the ’70s. And it has a lot of that — Atwood Street in particular has a lot of that already going on.

We have to make sure Oakland is safe — as safe as or safer than any of the other neighborhoods. We have to make sure Oakland is connected to the rest of the city, that it isn’t just this isolated university neighborhood which is a throughway or parking lot for cars. Oakland desperately needs to be connected.

It has to be part of a transportation strategy. I think some of the major thoroughfares have to be closed to traffic. Look at the area around Harvard. Look how horrible it was. The Charles River was a muddy, sludgy little puddle, and it was filthy. And there was this old bus and train place where they just dumped the old buses and subway cars. What Cambridge and Boston did was decide to make it nice.

Not only did they create parks all along the Charles River, not only did they create bike trails, not only did they support many places where you could put in your sailboat or kayak and row in the morning and run along side it and picnic, they closed down Memorial Drive on the weekends. Now, Memorial Drive is a much more important traffic artery in Cambridge than Forbes and Fifth are in Pittsburgh. It is like the main traffic artery — there is no other one — and they see fit to close it on the weekends.

We in the city pride ourselves in the public safety of our citizens. The other thing we have to understand is our kids are getting hit by cars, knocked off their bikes, crashing into elderly people as they commute because they have no place to ride. We have to begin to think about a pedestrian-friendly, cycling-friendly, recreationally-friendly environment. We need to link the two universities seamlessly in a campus.

Oakland has to become a New Economy campus. It has to all be part of one claw. It all has to have that look and feel. That means closing down not only side streets but potentially closing off major traffic arteries and rerouting that traffic around Oakland.

There’s no excuse anymore. In the New Economy, people want to live and work in the same area. The people we want to attract do not want to have to be dependent on a car. The traffic problem in Oakland is a nightmare and it just has to be fixed — if we to be a technology center.

If all of this needs to be changed and Oakland is to become a major high-tech center, why do you think regional leaders continue to focus on redeveloping downtown rather than Oakland?

The city has, for years, focused on downtown as the economic center, and for years, it was. But it’s not anymore. It’s one of our economic centers. And this thing in Oakland has evolved, and it has evolved hidden away, squirreled away.

But none of these problems is new. It was the same way in the 1980s, so what has changed?

Oakland wasn’t a technology center then. You can ignore an educational center and you can say that kids can live in run-down housing and visit second-level restaurants and go to bars and get drunk. But times have changed in two ways. One, university areas have become centers for technology incubation. So Oakland has to be thought of not only as a university district, but as a technology incubator district.

And the other thing is, the students have changed. The people who participate in these technology-based industries are not as night-life-oriented as people in the past were. A 10-cent beer doesn’t cut it anymore. What they want is an interesting array of entertainment and lifestyle options, which revolve around interesting things to do and lots of outdoor activities.

Relative to the Pittsburgh Regional Alliance’s “Look Here” campaign on the bar coasters, were they sending the wrong message to those high-tech students?

Yes. I can tell you only that the students who participate in those industries believe those are the wrong messages. They also sense that a border guard is not the appropriate incentive — the fact that someone is stopping them when they want to leave. Pittsburgh has to realize that it has to attract. Oakland has to be attractive. Young people can’t go here to school and say, “It was a great place to go to school, but Oakland is really horrible.”

They have to want to stay here, and in order to make them want to stay here, it’s no longer a job. A job just doesn’t cut it. They have to say, “Man, this is a fun place to be, and man, it was great living in Oakland. And I can live here for a few more years until I move to the South Side or North Side or Shadyside or Squirrel Hill.”

But kids are running away. The universities have to realize that we can up the enrollment and the quality of our students if Oakland is a better, more interesting, more youth-friendly, more attractive, more outdoor-oriented place to live because more kids will come.

Monday, 22 July 2002 09:41

Why they say YES ... or no

You’ve got this great idea for a company, and you even have a well documented business plan to go with it. Now all you need is the money.

And it’s out there. In fact, local venture capital firms have hundreds of millions of dollars available, and a well-organized angel investor community has millions more to invest. As you likely will learn the hard way, none of that matters — even if you’re an Internet company — if your plan doesn’t meet a host of stringent criteria set forth by most private funding sources. So says Chester Fisher, a principal at Equity Catalyst LLC, a company that assists early-stage companies in preparing for their first round of outside financing.

Fisher, at a recent M.I.T. Enterprise Forum program for high-tech entrepreneurs, laid out his 10-point mandate for early-stage companies to follow. He says,companies had better score well on most of them if they want to raise enough capital to forge ahead with their ventures.

Ask the following questions:

1. Does your company offer a compelling value proposition? “Is there a component where customers have to buy it?” Fisher asks.

2. Have you differentiated your product enough? In other words, could the success of the technology prove very disruptive to your competitors? Says Fisher: “Discontinuity is important in your market.”

3. Can you “taste” a business that will grow to at least $50 million in the next 5 years?

4. Are there sales already to customers, and do the customers really care?

5. Who represents your management team, and how experienced are they?

6. Can your team sell? “If they can’t sell, then you don’t have a company,” he says.

7. Has someone already invested capital in your company, which might add credibility to the venture?

8. Has anyone on your team had past entrepreneurial successes? Has anyone successfully started a company and taken it to market?

9. Is there a clear exit strategy, such as being acquired or launching an initial public offering?

10. Do you have clear, simple communications strategies in place that allow investors to stay informed?

Get most of those right, Fisher says, and you’re in pretty good shape for angel investment. If not, these points at least provide a guidebook to change. Daniel Bates (dbates@sbnnet.com) is editor of SBN.

Monday, 22 July 2002 09:38

The big assessment

Like it or not, Allegheny County has embarked on its first property tax reassessment effort in 40 years.

As you read this, officials are working the streets to determine the fair market value of your building or property. Beginning in January 2001, you will have to pay a tax based on 100 percent of that determined value.

But what if it's wrong? What if the determined value proves inaccurate or overpriced, in your estimation? Then fight back now.

So says Alan Papernick, a principal at Pittsburgh law firm Papernick & Gefsky and one of the region's leading real estate attorneys. He predicts that valuations of many local commercial properties, at least, will fall far short of a fair and accurate assessment, which means the onus falls on owners and large tenants to turn that around.

"There's only one way the assessment is going to be accurate," Papernick says. "It's like pin the tail on the donkey. And once that assessment is set, it's very difficult to have it reduced unless there's a significant change in your property."

Not that Papernick is against the new assessment initiative; he's not.

"This undertaking is a good one," he says. "No one ever understood how to come up with a percentage of value" to determine how to tax property owners. "The fact that they're converting to 100 percent of value will be helpful."

But there's one caveat to his enthusiasm for the new system: "There's no piece of real estate that's the same."

And therein lies the problem, as far as he's concerned. At this moment, property assessors from SABRE Systems, the consulting firm hired by the county to conduct the reassessments, are going from commercial property to commercial property using what Papernick calls exterior inspection methods to determine fair market value. They also are talking with property owners when possible to gather other pertinent information, such as recent property purchase agreements, rental income and expenses.

Owners in the city of Pittsburgh will be receiving their reassessments within days, if they haven't already. Those in the South Hills will begin receiving them in early September, and by late September, those in the eastern suburbs and the Mon Valley should begin receiving theirs. By late October, the western suburbs, along with northwestern sections of the county, will receive theirs.

The final reassessment values go into effect in January 2001.

So what can you do to make sure your assessment is fair and accurate? Papernick suggests several options:

1. Protect your vital property information. Perhaps the biggest problem in the assessment process is that the assessors very easily could take any information they gather out of context, Papernick says.

For instance, you might buy a property for a price that's higher than the fair market value, for whatever reason. But you wouldn't want the assessor to take the number itself and work it into the assessment. The same goes for expenses. You might have few expenses this year on your building, but maybe that's because you're saving up for a new roof or other work in the following year.

Other considerations include the history of the building, the history of its management and even subsidies from rentals. So your best bet, he says, is to simply decline to release any additional information, which you're not obligated to release anyhow.

"It's not as if you're hiding something," Papernick says. "It's about presenting it in the light that's most favorable to the taxpayer."

2. Challenge the initial valuations. As you receive your assessments, you will have the opportunity to challenge them at informal hearings with SABRE officials. But you only have until December to do so.

3. File a formal appeal. Once SABRE Systems turns over its assessments to the county, the property assessments will be considered final -- unless you or your attorney file an appeal with the county. However, you only have until Feb. 28, 2001 to file. While you may have a shot at overturning the assessment on appeal, the drawback is this: The appeals process could take months, if not a year. All the while, you will still be required to pay the assigned tax at the time it's due. If you win the appeal, you'll be reimbursed for the extra taxes paid.

Papernick is quick to point out that this advice doesn't just apply to building and property owners. Large tenants in those properties have a lot at stake as well when it comes to larger property tax assessments. For that reason, he recommends that tenants leasing large amounts of floor space in a building should consider the appeals process also, when necessary. Whatever you do, act quickly, he says.

"Since countywide reassessment occurs so rarely, the tax implications of inaccurate property values are significant," he says. "Inaccurate assessments have the potential to result in tax hikes that will remain in place indefinitely." How to reach: Papernick & Gefsky, (412) 765-2212

Daniel Bates (dbates@sbnnet.com) is editor of SBN magazine.

Monday, 22 July 2002 09:37

Those exploding ASPs

Sometimes, even in the world of high-speed computing, the new becomes old and, well, the old becomes new again.

Not too terribly long ago, companies that needed to crunch lots of numbers and create lots of reports but couldn't afford their own mammoth mainframe computers could rent space on a computer at a local data center. Back then, they called it computer time-sharing.

The days of mainframe time-sharing may be all but gone, replaced by high-speed personal computer networks and the Internet. But the concept behind it has re-emerged, live and well with an Internet twist, re-establishing itself in what has become perhaps the hottest and most attractive growth sector in business today, application service providers, or ASPs.

In some respects, the concept remains simple: Companies that don't want to create their own information technology departments and staffs to develop and manage Web-based operational applications no longer have to. They can now "rent" space with an ASP, which rents its customized applications to customers, then manages them at the ASP site.

ASPs are cropping up everywhere, providing everything from industry-specific products and services to broad-based services that will convert almost any business software application into a password-protected, Web-based program accessible by any employee, customer or supplier any time or anywhere. Call it Internet time-share.

If you haven't considered moving some of your computer applications to an ASP, you more than likely will over the next couple of years, predicts Dataquest Inc., a subsidiary of Gartner Group Inc., a Stamford, Conn.-based high-technology research organization. According to a report released by the organization in August, at least 480 retail ASPs are competing in the emerging $3.6 billion industry. By 2004, the ASP market is expected to climb beyond $25 billion worldwide.

"The ASP market represents a major computing revolution with the power to dramatically redraw today's IT ecosystem based on the delivery of application services over a network," says Dataquest analyst Ben Pring in the report. "Software licensing models, application and networking architectures and vendor strategies will all be impacted greatly."

So it should come as no surprise that the likes of Stargate Industries, which dominates the local market as an Internet service provider, or ISP, would see a profitable future in the ASP market.

On one hand, says Drew Falcione, vice president of Stargate's application services group, the ISP market has become a low-priced, high-volume commodity game with limited room for aggressive growth locally. On the other hand, more and more ISP business customers have been asking Stargate to do everything from developing and hosting their Web sites to hosting their servers and, ultimately, many of their business applications.

"Clearly, our ISP business is a cash cow and still is a primary focus of our company," Falcione says. "But clearly, we also see the revenue contribution (from the ASP business) flip-flopping to 70 percent to 30 percent, in favor of ASPs."

The average size of one ASP contract, he says, runs about $8,500 a month in recurring revenue. It would take 425 customers paying $20 a month for Internet service to equal one ASP contract.

For business owners, ASPs are all about "outsourcing your technology infrastructure, which you don't have to maintain," according to Tim King, who owns a 19-franchise license in Southwestern Pennsylvania for Zland.com, an ASP company based in Southern California.

Zland offers a number of suites of semitemplated Internet solutions that range from e-mail and e-mail response forms to password-protected team rooms, where companies can post information and communicate regularly with project team members away from the main office.

Gary Lininger, director of sales and marketing at Zland, divides the company's business into three Internet-driven categories: e-marketing, which uses the Internet like a giant brochure for businesses; e-commerce, in which companies set up transactional, revenue-generating product exchanges; and e-operations, designed to run many of a company's operating systems. Within those categories, Zland offers at least 19 semicustomized application solutions.

"This is really cutting edge stuff and very exciting," Lininger says.

While companies such as Stargate and Zland take the more horizontal application approach, some experts believe the real future lies in companies that can provide vertical application solutions for specific industries or business functions. Case in point is the fast-growing eToll Inc., which focuses entirely on marketing applications for what its president and CEO Sergio Radovcic describes as the "best of breed" or the "brand elite."

The Green Tree-based eToll provides outsourced Internet-driven applications such as sweepstakes, promotions, loyalty programs, product sourcing, survey products and others to companies including American Express, Hewlett Packard, 3Com, Heinz and British Telecom.

Radovcic offers a word of caution about the more broad-based ASPs.

"In order for an ASP to be successful, it's going to be very hard to be an ASP for everything," he says.

He stresses that the more successful ASPs have to understand the business processes behind the applications they offer and how they adapt to particular industry sectors.

"ASPs are really evolutionary, not revolutionary, because businesses still have to acquire customers, make sales, develop lead sources and create products and services," Radovcic says. "If [an ASP application] is not going to make you money or save you money, then don't buy it."

Good advice, perhaps. But another Gartner report released in August paints an even more cautious picture for businesses that may consider turning over some of their IT functions to an ASP. Of the 480 ASPs doing business worldwide, the report predicts that as many as 60 percent will fail by next year because of bankruptcy, lack of venture capital, mergers and traditional competition.

It also predicts that only 20 of those 480 will survive as full-service retail ASPs, and fewer than 100 will offer successful point and product solutions. For businesses turning over many of their sensitive computer functions to an ASP, that could prove devastating.

"Today's dot-com collapses will pale in comparison to the effect that the pending ASP meltdown will have on organizations that use these ASPs," writes Audrey Apfel, vice president and research director at Gartner. "When dot-coms collapse, they implode and have little effect on their customers and other industries. The ASP consolidation will have a domino effect, affecting business systems like ERP and accounting systems for companies that have outsourced these functions to ASPs. Then, those failures can quickly spread the damage along supply chains."

Like Radovcic, Apfel cautions that the weaker ASPs will try to tackle too many applications and related services.

"Many of today's ASPs make the mistake of trying to do everything, including owning the data center," she writes. "We believe this is a critical mistake and not a sustainable strategy in most cases."

Where would that leave ASPs as a viable solution to the IT challenges of businesses? Apfel predicts, "There will be few viable vendors, the vendors will be different, the offerings will be different, and then we fully expect that the term ASP will no longer be used to describe these vendors."

Is Stargate worried? And should you be? Stargate is considered one of the region's fastest-growing companies, although Falcione acknowledges the predicted consolidation. Furthermore, the firm's ASP division is fully supported by software platforms created by Oracle, Sun, Compaq, EMC, Microsoft and Cisco.

"It's a market right now that is poised to go through a significant shakeout," he says of the ASP sector. "But our business model is somewhat conservative, with controlled steady growth."

And the ASP model has proven successful in an earlier technological era. As Falcione says, "What's old is new again." How to reach: Stargate, www.stargate.net; Zland, (412) 788-1120; eToll, (412)921-2900; Gartner Group, www.gartner.com

Daniel Bates (dbates@sbnnet.com) is editor of SBN magazine.