Last year Smith and Furbershaw introduced a second internal initiative called Moonrocks. Says Furbershaw, "Its charter is to come up with ideas for products that we would develop." The nomenclature, Furbershaw stresses, was important. Moonrocks connotes something tangible, real, and unique.
To keep the initiative rigorous, Moonrocks is working with Cheskin Research, in Redwood Shores, Calif., specialists in the market segmentation, to ensure that ideas picked up by Lunar are aimed at sufficiently promising and well-defined markets. Karl Ulrich, professor of product development at the Wharton School, is another adviser on the project.
At present the project has "a bucket of 50 or 60 opportunities," says Ulrich. That number will be boiled down to the six most promising ideas. "From there we'll do design work on two, and then choose one to commercialization." That systemic process will be completed by this summer. Ulrich says that one important criterion of the selection process relates not to the design but to Lunar's ability to first identify a "channel partner" at the outset—a company with sufficient distribution power to move the product broadly into the market. Once that has happened, Lunar as the major equity holder will begin paying its development partners in stock, thereby controlling their own destiny, not just relying on clients.
Another Lunar initiative, begun in mid-1998, is Origin Group Inc., which helps develop speculative ideas spawned inside much larger companies. "It's a way to approach major corporations and do things for them that are out of their bounds of risk tolerance," Smith explains. Origin Group was founded by Dave Bayless, an investment banker and a part-time consultant to Lunar. Bayless, who specializes in later-stage private-equity placement, says, "Origin Group allows larger companies to utilize the advantages of being small and flexible in order to attack problems created by their bigness."
Smith helped Bayless launch Origin after realizing that Lunar works so closely with clients and prospective clients that it has a front-row view of some of their most innovative—and riskiest—work. "We are able to get into these companies and sniff around," he notes. Accordingly, Smith came to see Lunar as part of a virtual corporation comprising of Lunar customers and prospects whose annual sales approach $50 billion in the aggregate. He knew that buried within that hefty volume of sales were inspired ideas languishing for lack of a champion able to negotiate the bureaucracy endemic to large corporations. Origin is an agent of change on that front. Notes Gary Cantu: "We have talked to Fortune 100 companies that have discovered us, and they're blown away. It takes them three to five years to spec a product and get it into sales channels. It takes us a year to 18 months." Cantu adds that Lunar produces commensurate savings, both in time and in dollars, for these large companies. "They know we can become a product-development resource for them."
A Richer Mix
Jeff Smith's vision is a radical one when you consider how he foresees that venture design will reshape Lunar's business mix. He expects that five years from now venture design will account for 40% of the firm's revenues—and 60% of its profit. That means that its current fee-for-service work, which now accounts for about 98% of revenues, will drop to 60%. In terms of the bottom line, if the venture-design components of Lunar's business become bigger—and more profitable—than the fee-for-service work, it will more than make up for the revenues that Lunar passes up on more-routine assignments over time. Will Lunar have to give up a near-certain revenue stream in the short term in the hopes of changing the business model over time? Yes. But making the transition possible ultimately falls to Lunar's partners, Smith and Furbershaw, in two ways. First they must conservatively scale up the venture-design effort—and the increased risks associated with it—so it poses no undue risk to the firm. Second, they must continue to educate the design staff about the present risks—and the presumed larger future rewards—associated with venture design. If Smith and Furbershaw accomplish both tasks successfully, Lunar will be increasingly free to become involved in more exciting projects.
