Start-ups Target Old Bosses as New Customers
BY Jerry Useem
More and more employees are leaving large corporations and starting businesses with their old employers as customers.
Something funny happened to Jeff Dinardo when his huge corporate employer, Houghton Mifflin Co., put him in charge of farming out design work to outside studios. He got jealous.
Those independent businesses, he realized, were making enviable sums off Houghton's outsourced work and were "having a lot more fun than I was in-house." Perhaps it was inevitable, then, that he decided to join their ranks, resigning from the Boston-based publisher in 1992 to set up Dinardo Design, in Carlisle, Mass. Today one-third of his business comes from...Houghton Mifflin.
In having seen his employer as a potential customer, Dinardo isn't all that unusual. "It's going on all over the place," says Zenas Block, a professor at New York University's Stern School of Business. People are leaving corporations to start new ventures, only to turn right around and sell back to their former bosses. Call it corporate diaspora.
Block cites the case of McGraw-Hill, which, after shuttering its market-research department, hired back some castaway employees who had started their own market-research firm--at a higher hourly rate. (The publishing giant still saved money, of course, by converting all its fixed costs into variable ones.) "The typical multiple is, if you're making $50,000 working for an organization, you can make anywhere from 20% to 50% more by selling the same services to that organization as an outside contractor," says Frank Casale, executive director of the Outsourcing Institute, in New York City.
Not that all such arrangements are 100% voluntary. Downsizing, or just the threat of it, often plays a coercive role. "We knew that as Digital continually restructured, it could be death by a thousand cuts for our department," recalls Bill Dahl, the former manager of Digital Equipment Corp.'s broadcast-media-productions group. In 1991 he and several colleagues got permission to launch the unit as a separate company. They brought 70 Digital employees on board their life raft, which became Quantic Communications, in Andover, Mass. You'll never guess who the company's first customer was.
When Houghton Mifflin book designer Ron Kosciak became a casualty of downsizing in 1991, the company had this parting message: just because we're canning you doesn't mean we don't want to employ you anymore. On the contrary: Houghton Mifflin gave Kosciak as much freelance work as he could handle, and it still accounts for roughly one-third of his business. "Doing business with Houghton Mifflin has been great," says Kosciak. "At points, I find myself educating its new employees, teaching them how the company works."
Indeed, many in Kosciak's position claim that their quasi-insider status gives them a distinct selling advantage. "You understand the nuances of the company," says James McGowan, another Digital refugee, whose Infinite Technology Group, based in Mineola, N.Y., derives 70% of its revenues from his former employer. "You can work your way through the political issues and red tape that sometimes surround doing business with large corporations."
Adds Dinardo, "I think Houghton Mifflin uses us because we already know how they need things done, almost as if we're a little satellite office of theirs."
It took a while for Dinardo's former colleagues to take his upstart studio seriously. "For a long time, they thought of me as Jeff-who-left-the-company, not as a viable outside studio," he says. "It took a few years before I started getting work from my old division." And just about everyone acknowledges the danger of putting too many eggs in one corporate basket.
But even cast-off employees like Kosciak are sanguine about their involuntary opportunity. "I was devastated when it happened," he says, "but I'm happy it did."
ZENAS BLOCK, Stern School of Business, Management Education Center, 44 W. Fourth St., New York, NY 10012; 212-998-0070; email@example.com 21
DINARDO DESIGN, Jeff Dinardo, 64 Palmer Way, Carlisle, MA 01741; 508-371-0111 21
INFINITE TECHNOLOGY GROUP, James McGowan, 77 Jericho Turnpike, Mineola, NY 11501; 516-877-1605; firstname.lastname@example.org 21
OUTSOURCING INSTITUTE, Frank Casale, 45 Rockefeller Plaza, Suite 2000, New York, NY 10111; 800-421-6767; email@example.com 21
QUANTIC COMMUNICATIONS, Bill Dahl, 3 Riverside Dr., Andover, MA 01810; 508-681-1500 21