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ENTERING NEW BUSINESSES

Chaos Theory

Justice Technology, the number one Inc. 500 company for 1998, achieved its staggering growth by branching out into new services--usually before determining whether or not it could fulfill them.
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The Fastest-Growing Private Company In America

Never mind playing by the rules. Justice Technology won't even commit to a particular game

David Glickman remembers having lunch with a veteran telecommunications executive three years ago and casually mentioning that his own long-distance phone company had a "hot cut" planned for the next day. That is, the company's customers' phone traffic would be rerouted from one electronic hub to a new one over a period of a few minutes, even while customers continued to make calls.

The executive burst into laughter. "I've never heard anyone utter the phrase hot cut so calmly," he said.

"Really? Why not?" asked Glickman, a trim, animated man who comes off like something of a cross between Mel Gibson and Richard Simmons.

The executive peered at Glickman strangely. "Don't you know how many phone companies have gone out of business because of hot cuts that ended up taking days?"

Well, no--Glickman didn't. He was almost entirely ignorant about hot cuts, even though he had bet his company's existence on one.

And that, insists Glickman, epitomizes one of Justice Technology Corp.'s keys to success. "We never knew enough to know what it was we weren't supposed to be able to do," he says. "We just went ahead and did it."

Tom Peters exhorted companies to embrace chaos, but even he probably didn't have this wild a ride in mind. Not only does Justice, the #1 company on this year's Inc. 500 list, refuse to play by the rules; it won't even commit to a particular game. To make sure it stays that way, Glickman, who is 33, has stocked his company with people in his own image: young, brash, and a little off-the-wall. It's as if the cast of Rent had moved to L.A. to take over the phone industry. The result is a restless organization that keeps redefining its products and even its core strategy and market, letting technological innovation and personality fill in the gaps.

Not surprisingly, all this tumult is a double-edged sword. There are any number of ways Justice could get burned, including unexpected changes in regulation, technological miscues, and a sudden urge on the part of big competitors to swat it aside. While most successful, growing companies occasionally flirt with failure, Justice has in a sense been at the brink of disaster since it was founded, and hasn't strayed that far from it along the way.

The upside? Growth. A lot of growth. Incorporated in 1993, Justice has since rocketed to revenues of $55 million, parlaying success in a teeny niche market to virtual domination of certain segments of the global phone business. If you call other countries, there's a good chance you've already done business with Justice. In the not-too-distant future, if current plans pan out, you may be using Justice to call next door. "In some ways we're starting to look like a real phone company," says Glickman, with mixed emotions.

To show you what the world is coming to, the fastest-growing company in America is one whose products can't be fully explained without a short course in telecommunications.

It started with a simple-enough service. Glickman, having earned a bachelor's degree in economics from the Wharton School and then a master's in psychology from UCLA, had decided to live in Argentina for a while as a change of pace. Though he was clearly not the world's most focused individual, American Express's Argentine office hired him as a management trainee and put him in charge of reducing overhead. Glickman, 27 at the time, quickly zeroed in on phone costs: like almost all countries other than the United States, Argentina had a state-run phone company that charged an arm and a leg for international calls, and Amex Argentina was running up a monthly bill of $25,000 in international calls. It was then that Glickman stumbled across an article that described a new type of U.S.-based phone offering known as a "callback" service.

Here's how callback works: You're based in a country that's not the United States, and you want to call another country. You start by dialing a number in the United States that's connected to a callback-service-operated "switch"--that is, a computerized version of the old-fashioned switchboards that telephone operators used to sit in front of, manually plugging one phone line into another to make a connection. You hang up while the phone is still ringing. Even though the switch hasn't answered the phone, it recognizes your phone number as that of a customer and calls you back. Your phone rings. You pick it up, and the switch connects you to a dial tone--a U.S. dial tone. Now you can dial your international party, and the switch will connect--or, in the parlance of the telecommunications industry, "terminate"--the call. When you're through, you owe your local, exorbitantly priced phone company nothing because your initial call to the United States was never terminated. You owe the callback service the cost of the switch's call from the United States to you, and the cost of your call from the United States to your party. Since international calls placed from the United States are dirt cheap compared with international calls from most other countries, the cost of the two U.S.-originated calls combined is far less--typically 50% to 75% less--than it costs to call your party directly. (Would this be a bad time to remind you that this is the simple part?)

Excited by the discovery, Glickman presented the idea of callback to his bosses, only to be told that Amex had no interest in risking irritating Argentina's only phone company; it essentially regarded its outrageous phone bills as insurance that its telephone service would remain at least semireliable. "I was amazed," he recalls. "I thought this service made so much sense that I decided I wanted to sell it to other companies." After obtaining his bosses' approval, Glickman wrote the callback-service provider to propose that it let him serve as what he called a "cocktail-party rep"--that is, someone who pitches the service to businesspeople at social gatherings.

Over the next month or so he managed to land a few customers. Then, shortly before he was to visit the United States for a month, a job seeker--a fellow young American in semidrift mode--landed in front of his desk. There were no openings at Amex, but Glickman could relate to him and made him an offer: while Glickman was out of the country, he could work from Glickman's apartment and try to sell the callback service.

Glickman didn't have high expectations. His hire was a 22-year-old Brown liberal-arts graduate with no experience in business; he had tried to support himself in Argentina as a waiter but couldn't get a restaurant to hire him. He spoke just about the worst Spanish Glickman had ever heard. The morning that Glickman was leaving, the guy showed up in shorts, a tank top, and sandals, with his one suit slung over his shoulder. Glickman wished him luck and took off.

When Glickman returned to Argentina, his man reported that he had signed more than 20 corporate customers, including a few large banks. Each one had paid from $250 to $700 as an up-front connection charge and was paying a $250 monthly fee for one line--in addition to the per-call charges, which averaged $2,000 a customer a month. Glickman was running a real business. Adios, American Express.

Glickman's new colleague, Leon Richter, continued to sell the service left and right. Apparently, his conservative suit and atrocious, heavily accented Spanish were taken as signs of legitimacy and often quickly landed him in the president's office of whatever company he cold-called. "Once he was there, the president would immediately beg him to stop speaking Spanish," explains Glickman. "It offended them to hear their language butchered." In English, Richter would give this simple pitch: The service would hack off roughly two-thirds of the company's international phone bill. And here were sample bills from other multinationals to prove it.

As customers signed on in a steady stream, Glickman got his first lesson in what would be a series of principles for success, Justice-style, in global telecommunications. That lesson: Pay attention to the vagaries of doing business in a foreign culture. It turned out, for example, that impressive as the savings detailed call by call on the bills were, some customers were horrified that the calls were detailed at all--a standard feature of U.S. phone bills but a novelty in Argentina. Nonplussed that customers would complain about having their calls broken out, Glickman learned that many Argentine businesspeople keep Swiss bank accounts that they'd just as soon not advertise to the government via phone bills that list calls to Switzerland. Others expressed concern about their wives' discovering multiple calls to certain numbers. And one oddly secretive company wasn't pleased to see its bills detailing the fact that 90% of its calls went to Iran and Nicaragua, two countries that had little in common other than that they were of great interest to the American intelligence community. "We could have made a lot of money charging people to not have call detail on their bills," says Glickman.

Money was pouring in from customers such as UPS, British Airways, and the Danish embassy, but Glickman was getting to keep only 25% of the line charge. The rest was going to the callback provider, for which Glickman was merely acting as an agent. Why not start his own service and outsource the actual phone switching? he thought. Glickman went back to the United States and visited every callback provider he could find, pumping each for more and more information. Finally, he was able to point his finger confidently at the outfit that seemed to offer the best service at the lowest cost--a company called IDB Worldcom. He begged for an appointment with the president and was finally told he could have an hour at the end of the day, at which point the president was flying out of town. Glickman flew into New York City for the meeting and made a case for why IDB should handle Glickman's switching business for a mere 50% of gross profits. The president was intrigued but had to leave to catch his flight. Glickman asked him where he was flying to. Washington, D.C., said the man. What a coincidence, said Glickman, piling into the limo with him. Glickman stuck by him all the way to Washington, by which time the president was sold on the idea. (The final agreement was that IDB Worldcom would keep 60% of gross profits.)

Now Glickman and Richter were bringing new customers into their own full-fledged callback company and began gradually converting all their old customers to IDB. They were less than a year into the business, and monthly revenues were climbing above $200,000. Sure, they had plenty of competition from other callback services, but the market was still wide-open, and--more important--no one could undercut them on price, thanks to the deal Glickman had wrangled out of IDB. Lesson number two: Being the lowest-cost provider covers a lot of sins.

Then one day, out of the blue, disaster seemed to strike: the service simply stopped working. When a customer got the U.S. dial tone and started dialing, the line would go dead. For every customer. Every time. Finally, Glickman and Richter realized that the state-run telephone company had programmed its switches to listen for the sound of touch-tone dialing on calls that had come into the country. When the tones were detected, the switch would automatically disconnect the call. The phone company was more or less within its rights; callback was technically illegal in Argentina at the time, as it was in many other countries, though it wasn't really prosecutable because the service's operations were in the United States.

Oh, said Richter. They want to play. Richter contacted an engineer and told him he wanted a device that could be attached to the customer's phone that would intercept the number being dialed, sending it out to the U.S. switch not as touch-tones but as computer data. The device worked perfectly, and Richter and Glickman were back in business. Then the phone company realized that all of Glickman's customers' calls went to the same area code and "exchange"--the three-digit number that leads off the seven-digit phone number. So the phone company simply blocked all calls from Argentina to that exchange. "What did they care if they occasionally blocked off a call to that exchange that wasn't even to our switch?" says Glickman.

Glickman thought of a scheme to make them care. He called Pacific Bell and bought all the phone numbers that had a certain area code and three-digit exchange and then distributed those new numbers to his customers. The phone company quickly moved to block all calls to the new exchange--and then promptly removed the blocking the next day. The exchange was the same one used by the Argentine consulate in L.A.

If Glickman and Richter had had any doubts about being in the right business before then, they didn't anymore. What could be more fun? They were renegades, locked in a game of cat and mouse with the hidebound, greedy establishment powers that be. And they were winning. Lesson number three: There is no problem in the phone business that can't be solved with technology and a little flair.

If the two were doing so well in Argentina, why couldn't they clean up in other countries? Glickman decided to head back to the United States to set the company up as a multinational business. But first, he and Richter needed a name. Ultimately, they agreed on Justice Technology. (See " The Game of the Name.") They didn't actually have much technology in their company at the time, but they might as well make it sound as if they did.

Back in the United States, Glickman rented an office above a liquor store in Santa Monica, hired a marketing manager, summoned Richter, and geared up to go global. There was just one question: now that they were shooting for the big time, how would they modify their renegade, freewheeling style to suit the buttoned-down telecommunications industry? Their conclusion: they wouldn't. They decided to modify the industry to suit their style.

You see that dent there? There? On the light? That's from basketballs hitting it." Matt Jarvis is explaining how a warehouse, until recently the post-liquor-store Justice headquarters, also doubled as a basketball court until the company's tsunamic growth forced it into new digs. Now Jarvis, in charge of retail services, along with Glickman and most of the rest of the company's 115 employees, works in a building in L.A.'s Culver City that's been gutted and remodeled to look something like a colorful, ultramodern version of...the company's old warehouse.

That's typical of Justice. Glickman and Richter have worked mightily to establish and maintain a countercultural culture, in the belief that it translates into outrageous performance. The company offers free dog care, will subsidize anyone who bicycles or skateboards to work, and treats the entire company to lunch the day before payday. Pranks are legend; a group of managers once hid high-powered speakers in the ceiling of one employee's exceptionally junk-strewn office and rigged his computer so that the arrival of E-mail was announced by an earsplitting, ultra-high-fidelity performance of the theme from Sanford & Son. At trade shows, when competitors showed up in spiffy matching golf shirts and hats, Justice's people marched in sporting matching mechanics' jumpsuits.

More important, the company tries to hire people who have an affinity for the offbeat challenge and then puts them straight to the test. Take Jarvis, the 27-year-old, California-surfer-handsome fellow who joined Justice two years ago. He was planning to leave his job as an account executive at Leo Burnett Advertising in Chicago to travel around the world, when his old friend from Brown, Leon Richter, got wind of the scheme and gave him a call. "What do you want to travel for?" asked Richter. "Adventure," replied Jarvis. "You want adventure?" said Richter. "Come to L.A. I'll give you adventure."

Jarvis visited the company and signed on, figuring Justice for a fun place. When he walked in at 8 a.m. on his first day, an employee was waiting for him at the door in a highly agitated state. "Thank God you're here," said the employee. "You've got a really important decision to make. Quick, follow me."

A disoriented Jarvis was pulled into a roomful of anxious faces and handed a sheaf of printed pages. It was copy for a new set of brochures that were being rushed out, he was told, written by Glickman and due at the printer within a few hours. Final approval was Jarvis's. Reeling, Jarvis hunkered down in a corner and started rewriting. "I did what I could," he recalls, shrugging. The pages were sent out. Two days later Glickman marched into Jarvis's office clutching the new brochures and demanding to know why he had changed a key line of copy. Jarvis, assuming he was toast, gave Glickman his reasoning. "Oh," said Glickman. "OK." And he walked out.

That's the essence of Glickman's management style. "I don't tell people what to do," he says. "I just want things to get done." Jarvis says that works for him. "As long as you can explain why you did what you did, he's OK," he says. "He just wants to make sure you're thinking." Many hires find the lack of structure disconcerting and leave within a few weeks.

Alan Sandler, the vice-president of sales Glickman hired when he opened Justice's first office in the United States, is one employee who thrives on the freedom. He had been selling real estate and then medical services when his girlfriend, Brooke Sklar--now his wife--answered an ad to share an apartment and became Glickman's roommate and then the head of Justice's MIS department. Intrigued by what he heard about the company, Sandler met with Glickman, who offered him a job. But Sandler wasn't sure. "Callback seemed pretty shady," he says. The next day, he happened to mention to his grandmother his indecision about this strange new opportunity. "Oh, go for it, sweetie," she told him.

He joined Justice and immediately embarked on an ambitious worldwide marketing campaign. Its approximate budget: zero dollars. All the company's profits were being invested in building its infrastructure, including its tracking and billing systems and its network capacity. Sandler, working on commission, would not see any cash for more than a year.

He went off to the library and scoured the U.S. Department of Commerce database of foreign companies for multinationals that had anything to do with phone systems and sent them each a letter soliciting them as customers and, more important, as agents for that country. "We wanted people on the ground who spoke the language and understood the customs," he explains. Each letter listed Sandler's title as the coordinator for the recipient's country, as if Justice had a massive multinational marketing department.

Of the 500 letters that went out, 50 generated responses. Callers would be put on hold by Glickman and then told they were being transferred to the coordinator for their country, who was always Sandler. Ten of the 50 respondents ultimately became agents. Sandler tapped friends in South Africa to help him locate agents there and even recruited three men as agents for other African countries when he happened to hear them speaking among themselves in another language in a Las Vegas hotel elevator.

Sandler offered agents commissions of 7% to 15% of net revenues collected, depending on how hard the agent negotiated. When the agents who signed on asked for agent agreements, customer contracts, service instructions, order-processing routines, and so forth, Sandler promised to fax the documents over straightaway. Then, since Justice didn't have any such documents, he'd write them, often staying up all night, since many of the agents were eight or more time zones away.

Sandler gradually built an in-house staff, which he refers to as his United Nations. There's Phillipe Lenoir, one of the men from the elevator, who is from the Congo and is part Belgian, and who speaks four languages fluently. There's Hans Ye, who is of Chinese descent and has lived in Germany. Altogether, 22 languages are spoken at Justice.

Almost all Justice's growth was bootstrapped. Glickman put in $80,000 of his own money over time and would occasionally make short-term loans to the company; later his father would end up lending the company $100,000, which was paid back in full, with interest, within a year. Other than that, Glickman borrowed nothing and took on no investors.

One reason Glickman was able to remain free of debt and investors was the commission policy he had instituted with agents from day one: commissions were to be paid only on collected revenues, which in effect enlisted agents as collectors. What's more, if a customer skipped out on its bills, 50% of the bad debt was charged against the agent's commissions. "The agents would say, 'Why? You're the one checking their credit histories," recalls Sandler. "We'd say, 'Yes, but you're the one looking this person in the eye. You should be able to tell if there's a problem." As a result, there was rarely a problem with accounts receivable, and cash flow remained healthy.

But every time it looked as if Justice was cruising, Glickman found a way to put the company in danger again. He seemed to suffer from a near-pathological need to take on new business opportunities that by all accounts, including those of his staff, Justice was incapable of handling. A large South American insurance agency wanted 100,000 prepaid international phone cards ready to give away as a promotion for the 1994 World Cup games in three months? Sure, no problem, said Glickman; send out the contract. Never mind that IDB doesn't do prepaid phone cards. We'll find a way. Customers are asking for international fax and paging service? Sign them up. We'll figure out how. And Justice always did. The lesson: It's better to scramble to deliver a product you've already sold than to struggle to sell a product you've spent money preparing to deliver. "I didn't feel comfortable unless I was bringing us out on a limb of a limb of a limb," Glickman says. "We'd have to turn the company upside down to make it happen, but that's when things get fun. It's what we all thrive on here."

Richter agrees--which is a good thing, because he ended up taking over product development and operations. Looking like a mischievous teddy bear, with sideburns that put Elvis to shame, Richter remains the number two person in the company, running day-to-day operations. When Justice has to race to fulfill some over-the-top promise of Glickman's, "it's hell at the time," Richter says, "but when it's over you feel great."

That sentiment was put to its ultimate test in 1994, when IDB Worldcom was acquired and the new owners gave Justice six weeks' notice of their intention to pull the plug on the switch that served as the physical hub of Justice's entire business. That wasn't nearly enough time to find another phone company that would provide as good a deal and then to get set up on its switch. No problem, said Glickman. Justice would get its own switch and program and operate it itself. It would become a full-fledged phone company. "If someone told me now that a small company with no experience or expertise had to find and set up its own switch on such short notice, I'd tell them it was impossible," he says. "Luckily, we didn't know that then."

Ninety days later, the hot cut--the one that had provoked astonishment from Glickman's lunch mate--somehow went off without a hitch. Justice Technology was actually a technology company.

Once the technological ice was broken, there was no stopping Glickman, Richter, and Sandler. Sandler would alert Glickman to a new opportunity, and Glickman would authorize him to seize it. Then, when the orders starting coming in, he'd tell Richter to find a way to deliver whatever Sandler had sold.

Many of the opportunities were still in callback, especially in countries where government regulation was still oppressive, such as most African and South American nations, as well as many Asian ones. Glickman wanted no niche left unfilled. Sandler discovered, for example, that European cell-phone users are naturals for callback services, because in most European locations you're not charged for airtime when you receive a call.

Still, the writing was on the wall for callback. Deregulation of the phone business was starting to sweep the world, which meant that traditional "direct dial" international phone service was dropping in price in many countries, eroding callback's advantage. That was no coincidence, points out Glickman. "Callback was one of the major catalysts for deregulation in other countries, because the state-run phone companies couldn't compete with us," he says.

To make sure Justice didn't sink along with callback, Glickman directed Richter and Sandler to bring the company into the direct-dial business. Justice now owns local switches in several countries and has even bought small local phone companies in Belgium and Argentina, allowing many of their customers to dial straight through without callback.

Meanwhile, to keep prices down, Glickman was constantly hitting up every international-phone-service provider he could get a hold of to try to lower what he paid for termination, which accounted for 70% of Justice's costs. Cheap termination was the name of the game; it was what allowed Justice to undercut competitors and protect its gross margins, which averaged around 40%. He promised providers long-term, exclusive deals if they would shave their lowest prices for Justice. "I told them they should be selling to me at a lot less than they sell to big phone companies, because we're exporting the capacity--we don't compete with them in their home market," he says. He was so intent on making his case that he once sneaked into an invitation-only communications conference with bogus press credentials so he could buttonhole bigwigs.

It worked. Other industry executives told Glickman they were stunned to hear how low he had driven his termination costs--he says that he was sometimes paying less than half what major carriers were paying for equivalent routes. To leverage the cost advantage, Richter learned how to monitor constantly fluctuating prices and reroute calls on the fly to chase the bargains, like a financial trader moving money from one currency or commodity into others in sync with the complex ebb and flow of the market. He had his staff spend two years and close to $2 million building a complex computer program called Pipeline, which tracks the cost of every second of every call so that he can find and stamp out any inefficiencies hiding in the traffic. The program also tells salespeople minute to minute how low they can cut their prices and still preserve a profit.

Then, about a year ago, it suddenly occurred to Glickman that he could make money off other phone companies' envy of his cheap termination. He'd sell it to them. That is, instead of buying termination cheaply just for use by Justice's customers, he could buy everything he could get his hands on at a great price and resell the extra capacity to other phone companies, wholesale. Though officially launched just last May, Justice's wholesale termination business, to which Sandler is now devoting all his time, has mushroomed to the point that it accounts for 60% of the company's revenues.

With revenues exploding, Glickman finally grudgingly admitted that it was time to act like a conventional business in at least one respect: managing finances. He needed a seasoned chief financial officer. Through a friend, he heard about a woman named Kate Greenberg, who had recently left a large company to seek a slot with a more entrepreneurial business. He contacted her, but Greenberg told him she was already mulling over offers from four terrific small companies. "The next thing I know," recalls Greenberg, "I'm getting swamped with these really sweet E-mails and calls. Finally, knowing that I was thinking of getting a dog, he sent me flowers with a note saying that Justice wanted me and my puppy to join them. I said yes. Wendy would come to Never-Never Land to help Peter and the boys clean up their rooms."

Although she expected the worst, Greenberg was still stunned by what she found: accounts payable kept in paper form in an employee's desk drawer; no lines of bank credit; routine loans from "the bank of Dave" to the company; no plans for raising capital. Then, upon asking Glickman if she had his OK to start developing relationships with banks, she was abruptly introduced to his management philosophy. "What are you asking me for?" he told her. "You're the CFO. A year from now I'll be reviewing you on how strong our credit access is. What do I care how you do it?" Having since set up lines of credit, Greenberg is now trying to set the stage for Justice's inevitable transition from a bootstrapped company to a well-capitalized one. That will probably mean either accepting a buyout offer or going public, she says. "Knowing David, I'm not sure his philosophies and style will be all that compatible with the restrictions on a publicly held company," she says. "But I want to make sure he'll have that option."

In the meantime Justice is jealously guarding its countercultural culture. If the sun and the waves are right, Richter and Jarvis still take their first meeting of the day on surfboards. And Glickman is adding a three-story phone, which will cost hundreds of thousands of dollars, to the front of the building. "It will be the world's largest working phone," he says, beaming. "There'll be a small booth at the bottom where anyone can make a free call to anywhere in the United States."

And despite the new emphasis on wholesale termination sales, Justice hasn't stopped jumping at new niches. It's aggressively developing a phone-via-the-Internet service and, Glickman says, recently helped set up U.S. TelePacific Corp. to go after--of all things--conventional local phone business. It's starting off focused on L.A., with the intention of growing along the California coast and then the Northwest coast. And from there, who knows?

As for Glickman's penchant for turning the company upside down to deliver on impossible promises, there are signs that, for better or worse, a certain pragmatism and even maturity may be setting in. Recently, a $30-million account came up for grabs, and Glickman told his team he wanted to go for it. As usual, everyone howled in protest, insisting that trying to service that large an account all at once would wreck the company. To everyone's amazement, Glickman backed down. "Not only was it the first time I listened to them about one of these deals," he says sheepishly, "but it was the first time I even asked them."

On the other hand, Glickman found out that the state of California had put its billion dollars' worth of business up for bid. "If I had known about it," he says, "I would have definitely gone for it, and I would have won it, no matter what anyone said, no matter what it took. If you're not willing to do that sort of thing, why stay in business?"

Apparently, the adventure continues.

David H. Freedman is a contributor to Inc.

Last updated: Oct 15, 1998

DAVID H. FREEDMAN: A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science.
@dhfreedman




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