David and Goliath Do a Deal
Instead of fighting your larger competitors, how about working with them?
Let's rewrite history -- the Bible's I Samuel 17:42-51, to be exact. It's high noon on that fateful day, and David of Bethlehem is about to square off with the Philistine's Goliath of Gath.
You remember the scene. It begins with Goliath, all nine feet-plus of him, taunting David for being armed with only a slingshot.
Goliath: "Am I a dog that you come against me with sticks?"
David (unfazed): "I will kill you and cut your head off and leave your carcass and the carcasses of the Philistines to the birds and the wild beasts."
With that, David loads his slingshot and fires, hitting Goliath's forehead. The giant topples over, mortally wounded. The Philistines turn tail and run back to Ekron.
That's the way it was.
But suppose instead of the taunting and the rock fight, David walked up to the giant and said, "Hey, Golie baby, let's do a deal."
That's a pretty good description of what's going on in New York State. In our rewrite, David is Barrister Information Systems Corp., a Buffalo-based computer firm, and Goliath is, well, Goliath. IBM of Armonk. But this time, instead of fighting, they're forming a partnership, one that should be of interest to any small company trying to take on a far larger competitor with a marketing budget that consists of little more than David's five smooth stones.
Some background will help. The company's goal since it started in 1972 has been to become the largest computer firm dedicated to serving lawyers. Since personal computers were an unknown quantity back then, and there was no clearly defined standard for the developing industry, Barrister decided not only to create proprietary software (things like billing systems and fill-in-the-blanks trust forms), but also to manufacture the hardware to run it. The idea was to offer law firms one-stop shopping when it came time to automate their offices.
The strategy worked -- for a while. Then IBM entered the PC market in 1982, establishing an industry standard, and its shadow almost obliterated Barrister. Barrister's proprietary machines weren't IBM compatible and couldn't easily be adapted.
The problem was obvious. Law office managers thinking of automating are predisposed to look at IBM machines. Who, as they say, ever got fired for going with IBM? And even some of Barrister's existing clients started to have doubts. Suppose we buy another law firm or are bought? As we expand, are we really going to be better off staying with a proprietary system, one that won't work with IBM machines? Barrister has done a wonderful job for us, but suppose IBM blows it out of the water? What will we do then?
These doubts took a toll on Barrister's financials. In 1986 the company earned $1.6 million on sales of $29.3 million. In 1989, on revenues that grew just 9% in three years, Barrister lost $6.6 million.
To try to hedge its bets, Barrister last year bought most of Legal Eagle Software Systems Inc. That allows Barrister to offer software that runs on IBM machines.
But whatever sense of relief Barrister felt was short-lived. Just as Barrister was closing the deal, IBM started reexamining its markets and confirmed something Barrister had known for 17 years. Lawyers use a lot of computers. So many, in fact, that they are one of IBM's fastest-growing markets. Goliath decided to court those brief-wielding folk who are expected to be spending $1.6 billion a year on automation products by 1992.
So the stage was set for a showdown out of Samuel. Instead of rocks, charges and countercharges about the value of Barrister versus IBM products would have been hurled. Price cutting would follow, and so, too, a long, drawn-out fight.
But it never happened.
Why? A quick peek inside Barrister's waiting room provides the answer. On one wall, you'll see plaques from civic groups. The opposite wall is empty, except for a tiny wooden square that says Barrister is an "authorized IBM business partner." Those four words say it all. David and Goliath have done a deal, and to hear both sides talk, it's the way God intended it.
"When we were thinking about expanding in the legal market, we looked for someone that offered good solutions and had a good reputation," says Thomas E. Anderson, manager of legal marketing for IBM. "Barrister has tremendous loyalty among its customers." Here's Jim Hammond, Barrister's national sales manager: "We wanted to get on the IBM bandwagon. We had to, the market wasn't giving us any choice. But we've done it in such a way that we have leveraged our sales force fivefold. Our 35 people now work together with about 175 IBM people serving the legal market." Instead of battling over the top 500 law firms, Barrister's primary market, the 200-plus salespeople are now courting them together.
Why would this arrangement work? Primarily because there is no head-on competition. Remember, IBM is much more interested in selling computers than the stuff that runs on them, and by offering what it believes is the best software package on the market -- Barrister's -- it has a better chance of moving boxes.
"Could we have come in and taken over the market?" asks Anderson. "That kind of thinking is an ego thing. It's very expensive and often fruitless to muscle a solution onto a market. Rather than reinvent the wheel, we decided to build on Barrister's reputation in the marketplace."
Here's how the building is constructed. When IBM legal market specialists go to see potential clients, they mention the partnership with Barrister when the customer asks about software. And they have the option of calling in Barrister salespeople to explain all the technical details.
Barrister's software does not have to be part of the sale, and there is nothing in the partnership agreement that stops the law firm from picking any of the other legal software packages out there. But Barrister's is the one the IBM salesperson is likely to recommend. That endorsement, says Hammond, is like getting the Good Housekeeping seal of approval.
Conversely, when Barrister salespeople make calls, they explain they still have their proprietary machines -- there is nothing in the partnership agreement that precludes Barrister from selling its own machines -- but they can add, "and of course, as an IBM authorized reseller, we can make you an all-IBM shop." If the customer wants to go that route, Barrister buys computers from IBM, adds its software that runs on IBM machines, and hands over the bill. (While Barrister resells the IBM AS/400 minicomputers it buys from IBM at a profit of about 30%, that markup is standard in the industry. That eliminates the temptation of the law firm to buy the machines itself.)
So both sides win. IBM gets to move more machines, and Barrister increases its chances of making a sale. Instead of offering just its proprietary machines, it now has an alternative -- IBM.
But while the arrangement is clever, you'll notice it's not a joint venture. There's no joint board of directors, no joint marketing decisions, no exchange of equity.
"That's the way it should be," says Bruce Peterson, executive vice-president of SEI Corp., a Wayne, Pa.-based financial-services company that sells trust software to banks and is in its second year of a partnership with IBM. "They are a wonderful ally. It's far easier to close a sale when you mention IBM hardware is part of the deal. But we have a good reputation and value our independence. Right now, I don't see the need to take the arrangement any further." Hammond agrees: "We are the market leaders, and IBM gets to benefit from our 17 years of experience. Actually, it's a better deal from IBM's perspective."
Despite the salesman's bluster, it is clear the deal is a wonderful one for Barrister. Since last July, when the partnership went into effect, Barrister has sold 12 IBM-based systems and 2 of its own to new customers. Says Hammond: "Without IBM, we would have probably just sold 4 of our systems."
That's good news, of course, but the arrangement isn't perfect. For one thing, Barrister is making less money on each sale. When a law firm buys a Barrister-only system, it typically pays $125,000, $75,000 of which is gross profit. Although the cost of a comparable IBM-based system is more -- about $175,000 -- the profit is less, since Barrister doesn't make the hardware that is part of the deal. "But we didn't have a lot of choice," says Hammond. "Besides, once the system is installed, we get to do the maintenance work and the training."
Another potential problem is the partnership closely ties Barrister's image to IBM. While nothing keeps Barrister from changing hardware vendors, a switch would blur the company's image in the marketplace.
True, says Hammond. But, "if you are going to ride somebody's coattails, whose are better than IBM's? I have no reservations about this deal. We held out and just sold our own equipment for a long time, and we kept losing money. This is better."
If partnership sounds like a good idea, here's what to keep in mind
There are two nice things about dealing with giants. First, they have deep pockets. Second, if you are friendly with them, there is less of a chance that they'll squash you like a bug.
If the idea of working out a partnership with a company far larger than your own sounds appealing, here are a few things to keep in mind.
* Deal only with Goliath. If you are going to enter a partnership, do it with the industry leader. By teaming up with a lesser ally, you run the risk of Goliath running roughshod over you both.
* Go slowly. Sure, a partnership arrangement could lead to Goliath investing in your stock -- IBM now owns 8% of Metaphor Computer Systems Inc., a Mountain View, Calif.-based hardware and software house with which it entered into a partnership a couple of years back -- or even a merger. But that's long term. Short term, make sure you're compatible. Build in guaranteed review points, maybe once a year, to double-check the arrangement is still working.
* Make sure you're not forgotten. Spend a lot of time writing Goliath memos about what new programs you have and what's in development. Goliath will have a much larger sales force than you do. If you want them to include you in their presentations, they'll have to remember that you're there.
* Be separate but equal. Say it over and over to yourself: "This is not a joint venture. This is not a joint venture. This is. . . " If it were, odds are you -- as the far smaller company -- would not have an equal say in calling the shots. Think long and hard before you decide to make the partnership anything more formal.