May 5, 2005
ByDuff Mcdonald
Growing up is hard to do. That's especially true if you're the IT department of a young company that's seen its revenues double or triple every year for the past several years. Beyond the obvious challenges of adding enough processing or storage capacity to handle the increasedbusiness, the larger a company gets, the more complicated—and vulnerable to potential disaster—its technology systems and processes become.
Perhaps the most challenging aspect of handling the changing IT needs of a fast-growing company is the fact that improvements and adaptations need to take place on the fly: No one gets to shut the company down and make changes in a relaxed, low-risk environment. Crash the system and you can crash the company in the process. If there is an unsung hero in any story of rampant growth, it is the IT department itself—the people who make sure growth can continue apace and who tend to get noticed more when there are problems than when things are running smoothly.
To understand the hurdles faced by the CIO of a rapidly growing company, CIO Insight found threecompanies in three different industries that have been experiencing the kind of growth that has derailed many a former highflier. ADVERTISEMENT
One of the three, chipmaker Silicon Laboratories Inc., is a global company with suppliers and customers around the world. Another, Overstock.com Inc., exists mainly in cyberspace and has been doubling its revenues year after year, even while operating in the shadow of Internet powerhouses Amazon.com Inc. and eBay Inc.
- Kodak Refocuses to Keep Up With Customers
- Growing Up Fast
- Lender Faces Merger Problems, Without the Merger
- Overstock.com Overcomes Overloads
- Growth Forces Chipmaker to Digitize Along With Customers
All three of the companies we looked at have faced both their own unique information technology challenges, as well as those faced by any enterprise that suddenly finds itself with hundreds of millions of dollars and thousands of people depending on it.
In other words, it's important stuff. Indeed, Stephen Tryon, a vice president at Overstock.com, likens the tasks facing his IT department to the building—on an annual basis—of Noah's Ark.
While clearly resorting to hyperbole, his suggestion does raise an interesting notion. Unless that ark is built with the right materials, even the most high-flying of growing companies will find itself going the way of the unicorn.
Growth Forces Chipmaker to Digitize Along With Customers
May 5, 2005
ByDuff Mcdonald
Few industries are more sensitive to the ebbs and flows of the global economy than the semiconductor business. That's because few industries source their inputs and sell their products in more places around the world. Austin, Texas-based Silicon Laboratories Inc., a maker of analog-intensive, mixed-signal integrated circuits, is no exception.
The company, which sells to such international clients as Samsung, Sony and Motorola, outsources its chip manufacturing to Taiwan Semiconductor Manufacturing Co. Ltd. And it's been adding customers at an astonishing rate: Since 2001, revenues have grown at a compound annual rate of 83 percent, hitting $456 million last year, bringing in $77 million in net income.
Even as the world goes digital, the need for Silicon Labs' chips—which interact with real-world inputs such as sound and temperature—continues to be substantial, and the company's strong design and low-cost production methods have made it a standout in a crowded field.
From its founding in 1996 by a talented group of semiconductor industry veterans, to its current state as a half-billion-dollar-a-year company, Silicon Laboratories has stuck to two guiding IT principles, says Umesh Manathkar, the company's chief information officer.
The first is that the company wants to manage its growth through productivity enhancements and not merely by adding headcount. The second is that IT systems must be engineered to last. "We plan to be around for 50 years or more," says Manathkar.
Shortly after Silicon Laboratories passed the $200 million sales threshold, management decided that 24-hour-a-day global operations required a robust disaster recovery capability. In late 2003, the company invested approximately $1 million to consolidate several small data centers into a single location with on-site redundant power and Internet connectivity. The consolidation took just four weeks.
"Some of our simulations for new chips can take six days," says Chairman and Interim CEO Nav Sooch. "We can't allow for the possibility that we lose power on day five and lose everything." The result: 99.99 percent up-time on all the equipment in the data center.
The company also established an off-site data center that will allow it to get back to business in as little as 24 hours after a catastrophe. The new location is about 20 miles from company headquarters. "The key for us was to have the disaster site operated by someone other than the crew that manages our own data center," says Manathkar.
Efficiency Expert
One clear aspect of the strategy to grow the company without a commensurate increase in headcount was Silicon Laboratories' decision, in 2003, to implement a business-to-business program using RosettaNet and electronic data interchange linking the company with its customers, distributors and suppliers.
"We made a decision that we couldn't grow at a manual pace," says Manathkar. And they aren't: The company already processes 9 percent of its routine business transactions—some 10 percent of revenues—using the B2B program, with a goal of 50 percent by the end of 2005, and 80 percent over the next four years. The cost: a relatively minor $300,000 in software, hardware, and man-hours.
Silicon Laboratories also realized that the larger it gets, the larger the potential effects of any mistakes in long-range planning. As a result, the company decided to move from a product-forecasting and scheduling process that involved multiple disparate Excel spreadsheets into a more sophisticated advance-planning system from Adexa Inc., a provider of enterprise business planning software. The goal: to track demand fluctuations in the market, thereby improving the company's responsiveness and reducing manufacturing and supply-chain costs.
The development of the system—which also plays a part in the company's goal of fulfilling 80 percent of orders with what it calls "hands-free processing"—took place in 2003 and 2004 but continues evolving to this day.
"It addresses both day-to-day decisions as well as capacity and order commitments over the next six-to-nine months," says Manathkar. "We've consolidated forecasts, inventory, capacity, materials and work-in-progress information into one system."
Manathkar says the company will use both its B2B initiatives and the planning and scheduling program to go after the 100 or so processes it has identified as candidates for automation, from order entry to shipping to forecasting and supply-chain management. If their success so far is any indication, those 100 processes should start looking for a new company in which they can slow things down.
Overstock.com Overcomes Overloads
May 5, 2005
ByDuff Mcdonald
Overstock.com calls itself the earth's greatest discounter. And the company, which sells an Amazon.com-like potpourri of excess inventory that it has taken off the hands of flat-footed manufacturers, distributors and retailers, isn't kidding around: It has actually copyrighted the phrase.
If its sales performance is to be believed, it might actually be right: The company's 2004 revenues of $495 million were up more than five-fold from 2002 levels, and gross profits have nearly quadrupled, climbing from $18.3 million to $65.8 million.
Although the company has yet to make an annual profit, it has been narrowing its losses fairly consistently, and did make it into the black in the fourth quarter of 2004, earning $2.5 million.
Company execs say they've succeeded by operating on a shoestring budget, passing all savings on to their customers. While that's good news for customers, it's hardly music to an IT department's ears—especially one that's been told to plan for a doubling of business each and every year.
The business continues to double, says Stephen Tryon, a vice president at the Salt Lake City-based discounter, because of a simple business plan: Overstock.com offers a low-price guarantee; the company takes slow-moving merchandise off other retailers' hands and squeezes out its own profits by handling product more efficiently than anyone else.
Tryon says the company's original technology investments got it through the first four years of its growth, up to the end of 2003.
Then the IT team realized that if things continued along their current trajectory, sales in the fourth quarter of 2004 would approach $250 million.
That meant the company's IT infrastructure had to be the equivalent of that of a $1 billion company. And yes, they had to build it on the cheap.
That was the job offered to Shawn Schwegman, vice president of technology at Overstock.com, when he joined the company in 2000.
As Overstock.com looks back on its best holiday season yet—one that brought in some $221 million in sales and went off without an IT hitch—it's clear Schwegman has done what he was asked.
Like many companies whose livelihood depends on 24/7 availability of electronic data and transaction capabilities, Overstock.com decided in 2004 that it would build a colocation facility to house the company's vital customer and transaction information, in addition to a "fail over" facility already in a second location. Until last year, says Tryon, "all the company's information eggs were in one basket."
To wit: In the past, when the volume of traffic put stresses on the infrastructure, the company actually resorted to shutting down internal applications, such as a desktop "executive dashboard" that showed real-time sales, in order to protect the customer's Web site experience. But with the scary projections for 2004, the IT team decided it was time for redundancy.
Overstock.com purchased two networked storage systems from EMC Corp. to ensure the Web site's availability and continuity.
Keeping up With Growth
After many all-nighters with the EMC team testing the new system at a colocation facility, the company moved its production database over to the new facility at the end of the third quarter.
"We talk about building the Ark during the first three quarters of every year," says Tryon. "And last year was the first year we weren't still hammering boards onto the side as the rain started to come down."
At the same time as Overstock's IT people were building redundancy into the system, they were also enhancing the company's database storage architecture to stay in front of customer demand.
The company built a storage area network to handle the expected increase in customer data, while also moving to a database clustering technology to provide fault tolerance and increase scalability.
The company went with an Oracle 9i database for its online storefront, and ultimately Oracle 10g for a new auction business, aimed squarely at eBay customers, that the company launched in September 2004.
By this time, Overstock.com execs realized they had so many customers that a vigorous analysis of data could open up myriad new selling opportunities.
So they built a data warehouse to capture, mine and analyze those terabytes of customer data—a task for which it recently partnered with data warehousing industry leader Teradata.
"We'd like to perform more sophisticated analysis on our customer base than we're currently capable of doing," says Tryon, who thinks Overstock.com will ultimately be able to use that analysis to ensure it doesn't lose its best customers. Beyond a deeper understanding of pricing, he sees any number of ways to put the information to use, including e-mail promotions and enhanced customer service. "We'll use it as a customer retention tool," he says.
Just as important as the company's data safety and analysis, says Tryon, is managing the growth of the human element.
The number of Overstock.com employees has more than doubled, to 427, since the end of 2002, and IT personnel now number 49, up from just 13 two years ago.
"We have to plan on some installation time for people as well as hardware and software," Tryon says. By pairing new employees up with veterans, everyone gets a leg up from day one. And while incentives such as cash bonuses are handy motivators, Overstock tries to make sure it hires people who are motivated by the challenge of the job itself.
The latest example: In mid-November, the company came across the opportunity to add a design-your-own-jewelry component to the site. But to make the effort worthwhile, they needed it ready for Valentine's Day. That left the IT department just three months to add the feature to the site.
The employee responsible for shouldering most of the burden spent several nights sleeping in the office to make sure it happened on time. He was unavailable to comment about his experience at press time, as he was in the middle of a two-week vacation he had earned for his efforts.
Lender Faces Merger Problems, Without the Merger
May 5, 2005
ByDuff Mcdonald
Unless you had your head under a rock for the past ten years, you've heard more than once about the nation's seemingly endless housing boom. Kansas City, Mo.-based NovaStar Financial is one of the many companies that enjoyed a substantial increase in business thanks to the low-interest-rate environment that spurred it.
The company, which originates and securitizes sub-prime mortgages, pulled in net interest income in 2004 of $171 million, capping a three-year period of 97 percent annual top-line growth. Net income grew from $32.3 million in 2001 to $112 million in 2003, though it fell slightly in 2004, to $109.1 million, thanks primarily to the rise in short-term interest rates.
As of the end of 2004, NovaStar managed a portfolio of $12.2 billion in loans, up 69 percent from just a year earlier.
The company essentially does business in two different directions. On the front end, its retail arm, NovaStar Home Mortgage and NovaStar Mortgage, generates 25 percent of the company's mortgage business, with the other 65 percent coming through a wholesale network of independent mortgage brokers.
On the back end, NovaStar packages those mortgages and sells them in the financial markets.
To date, the different sides of the operation have had vastly different information technology requirements, and the IT team has focused primarily on isolated tasks, such as the quick introduction of Web-based customer-facing loan approval applications that provide a competitive edge, and singular process improvements that speed up the decision of whether, and at what terms, the company will provide loans.
Such decisions allowed the company to continue gaining market share in the first seven years of its existence. But in 2004 management realized that to continue its growth without coming apart at the seams, NovaStar's IT strategy needed to incorporate a more holistic view of the entire business, rather than merely focusing on the speedy growth of its separate lines of business.
Lynn Ryan was hired as the company's new chief information officer in September 2004 to do just that. And she's approaching that task by focusing on three primary components of the company's information processes: the data itself, the transport of that data, and the applications that make use of it.
Ryan's primary goal is to rethink the company's multiple repositories of data, from its business and customer pipeline to the costs of doing business, daily changes in the pricing of mortgage securities on the financial markets, and even regulatory reporting information. "We are struggling with the ability to look at point-in-time critical information easily," she says. "We need to be able to go across multiple databases, extract data from each, and build reporting results that enable us to be more effective."
If interest rates make a sharp move in one direction or the other, for example, one of Ryan's goals is to speed up the company's ability to decide whether to keep certain loans in the company's portfolio, or to securitize them and sell them into the secondary market. It's a decision the company has long been making on a day-to-day basis, but by tying together its data infrastructure, NovaStar hopes to make such decisions much more quickly.
To do that, she thinks NovaStar will need to create a warehouse information model that would give executives a comprehensive understanding of how the company's component parts interact. Add to that the ability to measure employee performance—how quickly the company can process and approve a loan, how salespeople perform relative to particular products or in particular markets—and it's easy to see how one moving part can affect the entire company.
Paper Chase
The second rethinking of the company's IT strategy involves the transportation of that data, in particular an effort to drive the loan-approval decision closer to the point of entry—in other words, in the individual mortgage broker's office—and farther from the point of internal review.
That would eliminate as much paper as possible. The company is exploring the use of electronic signatures and electronic documentary evidence, including such simple ideas as a tool set that allows brokers to simply scan your paycheck or tax return and deliver it to headquarters electronically.
"A substantial amount of our operational costs come during the verification process," says Ryan. If NovaStar can speed up the process, it will not only be able to eliminate part of the cost component, but it should ultimately close more business. Ryan and her team are targeting a minimum of 20 percent operational improvement through such initiatives.
That would translate to a $41 million annual reduction in operating expenses in NovaStar's wholesale mortgage origination business.
The third aspect of Ryan's overhaul of NovaStar's IT strategy will be focused on its most visible part: the mortgage application software itself. Almost all of the company's broker applications have been developed in-house, and were designed with three primary objectives—efficiency, speed and quality.
While the company is proud of those applications—NovaStar was one of the first to offer an instantaneous automated approval process for sub-prime loans—it has also identified 5 of its 15 core applications for overhaul or complete replacement. "The key will be to make sure we don't blow up the business in the process," says Ryan.
Ask Lance Anderson, president and cofounder of NovaStar, what separates the company from the competition, and he will readily admit that it's not the company's products themselves. It's that in mortgages, operational efficiency wins the day.
"As a lender, the lower we can keep our own costs, the lower the rates we can offer our customers," he explains. "With the right IT strategy, we can not only keep our back-office costs down, but we can give brokers quicker turn times as well. That's how you stand out from the competition."
Duff Mcdonald is a freelance writer living in New York.
Copyright (c) 2005 Ziff Davis Media Inc. All Rights Reserved.