Hands On

A Security Blanket for Your Web Site

Do you need insurance to protect your E-business against risks like viruses, hackers, and overloaded servers?

By Ilan Mochari

Thomas Shipley likes to play it safe. He pays about $14,000 a year for a policy to insure the Web branch of his $10-million company, T. Shipley, a seller of business accessories based in Altamonte Springs, Fla. Though he has yet to make a claim, Shipley cherishes the policy. It spares him, just a bit, from worrying about the impact that a virus or other threat might have on his site (which handles 30% of his total sales).

It's one thing to be cautious like Shipley. But is Web insurance a must for anyone with Net sales? Historically speaking, the answer is no. Internet policies have been available only since late 1998. So what did E-giants such as Amazon.com and Dell do before that time? "I couldn't say for sure, but my suspicion is that they were going uncovered," says Robert Hartwig, chief economist of the Insurance Information Institute, in New York City.

Both Amazon and Dell declined to discuss their insurance histories with Inc. But if it seems far-fetched to think that such prominent online sellers would forgo Internet insurance, consider the case of Cameraworld.com, in Portland, Oreg., whose Web sales total about $50 million annually. According to chief financial officer Curt Scheel, the company doesn't have an Internet insurance policy, although it is exploring the issue with a local risk-management firm. That fits with what experts say: Internet policies have yet to take root. "There's lots of interest at this point, but actual buying is not there yet," reports Don Urbanciz, CEO of InsuranceNoodle, a Chicago-based online insurance broker.

Insurance lawyers, however, think it won't be long before Internet policies gain acceptance as an extension of traditional policies. "The language of standard policies clearly doesn't cover many of the potential liabilities of an Internet scenario," says William Shelley, a partner at the Philadephia-based law firm Cozen and O'Connor. Tamara Wolfson, a partner at Palmer & Dodge, in Boston, agrees, stressing that "in general, traditional coverages apply only to physical damages, not to intangible things like the loss of electronic data."

Small-business Internet policies range in price from $2,500 to $100,000 a year. Still, the question remains: Is another policy really necessary? There are a few holdout lawyers who think Internet damages can be covered by standard property insurance. If you choose to believe them, remember this: it's far cheaper to buy a policy than to fund a lawsuit in defense of one.

Is an Internet Policy Right for You?

Like any insurance choice, the decision to buy Internet coverage depends on two factors: the risk tolerance of the buyer and the balance between the cost of the policy versus the cost of a catastrophe. Here's a checklist of factors to consider when researching policies:

See what a risk analysis tells you. Most insurers offer some kind of risk assessment to prospective customers. You'll learn where your site is vulnerable to hackers and viruses. You'll also get a sense of what your premiums would be.

Compare brokers carefully. This is important in a new area like Internet coverage, where norms and standards have yet to be established. For example, some policies claim they'll replace any revenues you lose during a site crash. Others claim they'll replace only your lost net income.

Scrutinize your other policies. There are several types of Internet insurance policies. Some pertain to Web-specific circumstances, such as a "business interruption from a virus." But other categories, such as "advertising injury," might overlap with your existing third-party coverage.

Ask vendors for indemnification. It can lower your risk and save you a bundle on premiums. --I.M.

Hot Tips

Ever worry that your employees may be struggling with non-work-related problems but are unable to talk to someone about them? Take a cue from Ipswitch Inc. in Lexington, Mass. The Inc. 500 company pays a measly $8,000 (or $65 an employee) annually to provide a 24-hour employee-assistance program. The program, which connects employees and their families to live, certified counselors by means of a national hot line, provides aid that is free and confidential. The company monitors the volume of usage, which, according to human resources vice-president Betty Lang-Holmes, is a real plus. "If the report says that a lot of people are struggling with work-family issues, then we can put more programs in place to help," she says. --Anne Marie Borrego

It pays to be nice to your neighbors. When Darren Gardner moved into new office space to start his equipment-leasing company, Alliance Capital, in Los Angeles, he wandered around the building introducing himself to his neighbors. As it turned out, one of them needed a new phone system, some computers, and office furniture. That $25,000 deal was his company's first. And when Alliance Capital moved into a new building last year, it got at least one new customer using the same method. "There's something to be said for working with a company down the hall," Gardner says. "It lends some credibility." The method is cost-effective, too, he notes. "It doesn't even cost a stamp." --Kate O'Sullivan

The End of Stealth Mode for Patents

It will become harder for companies with new inventions to remain in "stealth mode," thanks to a major change in patent law that was scheduled to take effect last month. Under Subtitle E of the American Inventors Protection Act of 1999, the contents of patent applications will be published 18 months after their effective filing date if the applicant wants to "foreign file" with a patent office in another country. That's a sea change. Since the 1950s, applications have been held in strict confidence at the U.S. Patent and Trademark Office (USPTO).

The new law means that the mere fact that you've applied for a patent will become public record -- and quickly. Sensitive information -- for example, that a patent request was rejected as being too broad -- will be released to prying eyes. Regardless of whether you ultimately receive a patent, your application will be displayed on the USPTO Web site ( www.uspto.gov) in 18 months. And, oh yeah, that service will cost you $300 per application.

The fee was the final insult for some businesspeople who opposed the 18-month publication rule. Under the public-comment section of the USPTO Web site, one person wrote, "The 18-month rule is for the benefit of the bullies and the rip-off artists."

Of course, you can always opt not to publish; however, in most cases you then lose your right to "foreign file." That's a major price to pay. (You have 45 days to let the USPTO know that you've decided to foreign file; the office will then publish your application.) The USPTO also intends to publish the patent applications of overseas-based companies in 18 months -- in English. That has to sound good to anyone who's ever attempted to translate patent papers written in Japanese or German.

In fact, the new law aims to level the international playing field. Most developed countries have an 18-month publication rule, says USPTO director Q. Todd Dickinson. The U.S. rule "allows the rest of the world to know what's state-of-the-art a little earlier," he says. "You know which way the technologies are headed."

Life surely won't be the same for legions of venture-backed E-commerce start-ups; until now, they've been able to file for patents while cruising out of range of the radar. Dickinson counters the opposition by pointing out that you can now begin seeking protection even before a patent is granted. That's a real advantage, he claims, "if you're in a fast-moving technology, and you can't wait two years for us to finish" the patent-approval process. The new rule "can trigger enforcement rights sooner," he says.

For more information about the changes, contact the USPTO at 703-308-6906. --Susan Greco

For Every Sales Rep, a P&L

What is the opposite of the sound ka-ching? Because that would be what Ron Farmer, CEO of US Signs in Houston, was hearing a few years ago. The company was growing, going from $4.5 million to $7.1 million in sales from 1997 to 1998. But at the end of the 1998 fiscal year, the salespeople had made money, but the shareholders -- Farmer included -- had not.

Farmer paid his salespeople by commission, which is usually good for motivation. But for US Signs, that may have formed a great big sinkhole. "It didn't matter how much the salespeople spent on overhead or selling expenses," Farmer says. "They could spend the entire profit of a job making sure it got done right, and the company would have no net profit at the end of the year."

The problem, the CEO says, wasn't the seven-person sales force. "When people do a good job, and it doesn't turn out the way you planned, it's because of the system, not the people," he says. So he changed the system. He reorganized the company into seven divisions with seven budgets and seven profit-and-loss statements -- one each for each salesperson. In addition, he put the salespeople on salary plus a profitability bonus. Then for each division he designated at least one internal support person.

The flaw in Farmer's logic was that he projected that the company would continue its breakneck pace of growth. Anticipating a proliferation of internal processing people, he hired business managers for each of his four offices. "The more of their own processing the salesmen did, the less selling they were going to do," Farmer says. "I had read a long time ago that IBM had three support people for every one salesman, and that's the way I wanted to do it." But growth leveled off, and the higher-paid managers ended up doing the processing themselves. In June, Farmer had to lay off the business managers.

Farmer now feels his new divisional accounting system is working. US Signs' salespeople each pull in an average of $1.5 million to $2 million a year, as opposed to the industry average of $750,000. --Jill Hecht Maxwell

Dick Sabot: My Biggest Mistake

Dick Sabot
Cofounder and chairman of the board of eZiba.com and Tripod, and a director of Lycos Inc.

Tripod was one of the very first dot-coms and became one of the top 10 sites in terms of traffic. In 1997 we started to get inquiries about being acquired.

We were courted with the most ardor by Lycos, and in September 1997 we were about to sign a term sheet. But then Yahoo and Excite and AOL all expressed a strong interest in acquiring us.

Ultimately, AOL put the highest bid on the table. Although we were uneasy about breaking our engagement to Lycos, we signed a term sheet with AOL. By November, AOL was in the midst of acquiring CompuServe, and its people said they needed more time from us. There was one excuse after another. In late December we got a call from someone quite senior at AOL who said that we couldn't complete the deal for another six months and that we should form a strategic relationship instead. That was a blow.

We went back to the people at Lycos and were horrified to learn that they felt betrayed. They thought we were responsible for shopping the deal around. We gave them our word that we had not done so. Our bankers may have played a role, but I don't know if that was so.

Lycos finally decided to renegotiate under the condition that once we started, we would all be locked in a room until we finished. On December 30 we worked through the night, and in February 1998 we got married.

The mistake I made with AOL was costly. We got a higher dollar price from Lycos the second time, but we ended up with a smaller share of the company. I would say that postponing the deal ended up costing Tripod shareholders between $40 million and $50 million. Working with AOL was a major distraction. The moral of the story is, As in personal relationships, so in business. Marrying solely for money is not a good idea. --Written with Mike Hofman

The Quotable Entrepreneur

"Growing by acquisition is like giving birth to one baby after another, but the babies arrive at your doorstep fully grown -- warts and all."

--Marguerite Sallee, cochairman and founder of Bright Horizons Family Solutions and chairman and CEO of Frontline Group, a corporate-training start-up in Nashville

Travel Trouble

Weather delays, flights that are overbooked, and seemingly endless lines mark typical days at most airlines' ticket counters. And it's only going to get worse. Too bad for business travelers who have to get to their destinations on time for make-or-break meetings, only to find that the ticket they paid for is rendered practically useless when a flight is delayed or -- worse yet -- canceled.

Is it really so bad out there? Hardly, says Stephen Colwell, coauthor of Trouble-Free Travel...And What to Do When Things Go Wrong. In fact, the informed business traveler usually is equipped with an arsenal of options that come with the ticket. His main advice: "Know your rights before you travel."

So what can you do if you're stuck? First, calm down. As Colwell explains, making the counter agent your ally is key. "Be assertive, but do it in such a way that you're not alienating the person who may want to help you," he says.

If your flight is canceled because of airline folly, Colwell suggests asking the ticket agent to sign your ticket over to another carrier. "People aren't going to suggest this," he adds, but it is legal. Tell the agent how much money your company spends with the airline and mention your own personal frequent-flier status. The cost of your ticket may also help. These days, in overbooking situations, "the person with the highest-priced ticket gets the highest level of service," Colwell says.

If that doesn't help, ask to see the Conditions of Carriage. The Federal Aviation Administration mandates that all commercial air carriers present the contract to customers when requested. At that point, Colwell says, the agent will recognize that you're an informed customer and will want to send you on your way.

But what happens if you're stuck in San Francisco en route to Boston, and you're fogged in? Offer to switch airports, Colwell suggests. Driving to the Oakland or San Jose airport may be a bit of a pain, but it sure beats sleeping in an airport lounge. The same holds true for connecting flights. If you're on a coast-to-coast flight connecting in Chicago, and the windy city is getting socked with a blizzard, offer to connect in the Dallas-Fort Worth airport instead.

It all sounds good, but does any of it really work? It sure does, says Colwell. "I was trying to meet my wife in Paris," he recalls. "The only way to get there in time was to fly out of Montreal on an evening flight, but it was oversold. I got them to transfer me to another airline at a nearby airport." --A.M.B.

In a Former Life: Melvin J. Gordon

Present life: CEO and chairman of the board of Tootsie Roll Industries, a $397-million, 104-year-old candy company headquartered in Chicago

Former life: Gordon headed a hosiery company in Manchester, N.H.

Lessons learned: "In the early 1950s my company was making women's hosiery. When I was walking through a supermarket one day, I saw some nonfood items. I thought, 'Why shouldn't they be selling hosiery?' " Gordon says.

"We were the first in the industry to go into the supermarkets. Hanes and the others didn't come in until the 1960s. It was an instant success for us. We sold to more than 5,000 stores, including some of the leading chains.

"When I came to Tootsie Roll, in 1962, sales were about $22 million. The company was doing very limited business in supermarkets, but supermarkets were growing in size and popularity. I knew that display was very important. If you stand up your packages and show more candy, you do better than by laying your packages down. Off-shelf displays are the best, though. If you had hosiery standing up in racks, you sold much more than if it was lying on the shelves. We did that with candy, too. Using the techniques I learned in hosiery, we were able to quadruple our supermarket sales in two years.

"When I was in hosiery and then went into candy, everyone said, 'Why don't you fill stockings up with candy and sell them?' This got so prevalent that I was going to sock the next guy who mentioned it, and then I started thinking about it. In Mexico we tried out a plastic sock filled with candy. It turned out to be an important part of our success there, and later we did Christmas stockings, which became a growing part of our U.S. sales. Sometimes people say something as a joke, but when you think about it for a while, there may be a practical application for your business." --J.H.M.

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