A Survey of the New Economy

The New Economy

Headlines:
I talked to various new economy players and skeptics in September 2000 to survey the landscape for Real Business. This was my first paid feature article and the first major thing I wrote after leaving Intelligent Games. Looking back, I am please that I wasn't completely suckered by the dotcom thing. P.S. Buy.com was bought by John Lewis and Simon Palethorpe is now MD of their online and direct business unit.

I’ve been a full-time entrepreneur for nearly ten years. I founded IG, a computer games business, when I left university in 1991. When I left in June, following a management buy-out, it was a substantial business with over 65 employees.

I learned an enormous amount in the last ten years but it feels like the business world has been turned on its head in the last couple of years by the so-called “new economy.” What is it all about? Sure, I had some kind of insight because I ran a high technology business but I didn’t have the whole picture. How do you inspire people to work for you? What about venture capital? How do you integrate technology into the fabric of the business and not just in a web shop front? Is there such a thing as a ‘new bottom line’ or do you still have to manage costs and turn a profit? I had a lot of questions and a lot of preconceptions.

I decided to find out more. I wanted to know just what “the new economy” really means for me and other people running a fast-growing business. So I bullied the secretaries and offices of some of the leading lights of the new economy and forced myself into their diaries. Here’s what I found.

The E-Business Consultant

Charlie Blackburn, European VP, Scient

Charlie Blackburn is the epitome of the mid-Atlantic consultant. Young, casually dressed in designer dress-down clothes, he is eloquent and persuasive. Like so many of his peers in the new economy he has a background in management consulting. His company, Scient, is a fast-growing systems innovation company which means that it implements Internet-based projects, such as building a new e-commerce site, for start-ups and more established firms looking to move onto the web.

First of all, he reshaped my idea of the ‘first mover advantage’ (the idea that the first person to offer a service on the Internet stakes the strongest claim). I had thought that this was part of the hype of the new economy: it seemed that all you had to do was grab a domain name, issue a press release, raise some money at a First Tuesday meeting and no-one could touch you. The reality turns out to be quite different. 80% of Scient’s work is for old economy companies, Goliaths rather than David’s. When asked if all the low-hanging fruit has already been picked he replied: “there are still many opportunities for new organisations, but they need to be pretty well funded, pretty well connected and be resourced with pretty deep talent.” In essence, the David’s need to become a bit more Goliath-like and vice-versa and the media hype version of the new economy doesn’t really exist any more, if it ever did.

The rest of my working hypothesis was that the new economy was primarily to do with commerce on the Internet plus new ways of managing people which is what I already knew about from IG. Talking to Blackburn, it quickly became clear that there was more to it than that. He gave me the blueprints for a new economy company:

New kinds of relationships with customers, employees, investors and suppliers.
Assetising knowledge which is consultant jargon meaning putting a value on, cultivating and sharing information that does not typically get measured on a balance sheet. Examples include business processes, customer data, or brand identity.
A culture of sharing information and transparency within a business. This is the opposite of the mushroom theory of management (“keep ‘em in the dark and feed them on muck.”)
Flat management hierarchies and a strong emotional and financial alignment between staff, managers and owners.
Keeping close to the market.
Flexibility in a rapidly changing business climate.
Providing accelerated opportunities for staff growth, promotion and self-development because good people are the most important ingredient.
Oh, and doing stuff on the Internet.

These themes were to recur in almost every interview I subsequently did. I like to think of them as a set of tools. Every business needs to have them in its tool kit and know how to use them but also to apply them in the right way and at the right time. I know I was using some of them, unwittingly, at IG but I hadn’t ever had time to step back and really think about it.

I asked him how do new economy companies measure these things, since they are all a bit woolly. Scient has trademarked the phrase ‘the new bottom line’ which accounts for otherwise intangible items like the costs and rate of customer acquisition in the new economy. Blackburn listed some of the elements of the new bottom line such as market capitalisation, product cycle times or market share. For a while it seemed like these were the only things that mattered in the new economy. Blackburn seemed a little pragmatic in the light of the recent market slump. The new reality means “there are two different numbers … the things we want to measure to make sure we are being successful and the other is the value that Wall St. is going to give for those measures.” Nevertheless, it challenged a lot of my assumptions about running a business. It may be that by concentrating on revenue and profit growth at IG and not measuring other, less tangible factors I missed out on opportunities to grow the business in a more dynamic way and with greater subsequent value. On the other hand, I clung to the basic idea that making a profit was still pretty important.

The .com celebrity

Brent Hoberman, CEO and co-founder, Lastminute.com

Lastminute.com is now the 2nd most visited retail website in Europe and founders, Brent Hoberman and Martha Lane-Fox, are the poster children of the .com revolution. Despite a smart location near Buckingham Palace, their office wasn’t very shiny. It even had a trick lift that didn’t take you where you wanted to go – the receptionist advised me to take the stairs. I did like the fact that one meeting room had a table tennis table in it and another had a collection of table football games. I also rather approved the way that their offices didn’t look like the lair of a Bond villain (which is what I expected) – I hope it shows that investors money is being spent where it can produce a return and not on fancy office interiors.

From talking to Scient, I had a feeling that one key feature of the new economy was very rapid change, so I asked Hoberman about this. He replied that the new economy is almost Darwinian – businesses can “get through more stages of evolution quicker”. The recent market shakeout is providing the natural selection process as “people are being weeded out and winners and losers are emerging.” I was used to constant change in technology at IG – PCs doubled in power every year and there was a new console game fad every two or three years – but the business model remained the same throughout. In the new economy, new businesses can be built up in months, tested in the market place and, if successful, build a dominant position. I think the lesson for any business is that someone, somewhere is figuring out a new, better way to give your customers what they want. Having lost several good staff in the last year to Internet start-ups, it is my experience that someone, somewhere is also ready to poach your best staff as well. Competition today requires constant improvement.

Changes in investor confidence across the new economy sector probably explains Hoberman’s concentration on Lastminute.com’s strengths. His key point is that they have the customers - “generating the demand is one of the most expensive elements of building a new business.” However, I am uncomfortable with the idea of treating customers as cattle that can be rounded up and penned in because it seems so contrary to my own experience as a customer. The level of sales still seems to be the best measure of customers’ loyalty and profit the best measure of efficiency. I ran IG on this basis, and although it grew rapidly and was consistently profitable, I do wonder whether I should have traded some profitability for more growth or whether I should have traded some ownership for venture capital. So my next port of call was at a VC firm to see what they had to say.

The venture capitalist

Thomas Høegh, Managing Director, Arts Alliance

Thomas Høegh is the managing director of venture capital firm Arts Alliance. Of all the people I interviewed he has the most unusual background combining a dramatic arts degree from Norway with an MBA from Harvard and combining a Scandinavian sensibility for “social profit” with capitalism in its most naked form. Among their portfolio are Lastminute.com and Douglas Adam’s H2G2 (short for Hitchhikers’ Guide to the Galaxy).

For Høegh, the new economy means “the introduction of technology into people’s lives: in work, learning, home, entertainment, social lives and personal management.” He foresees that the Internet revolution isn’t over. Høegh has a vision of the user-friendly Internet as a collaborative medium: “there is actually a value in the input of many to solve problems.” The long-term, profound consequence is that the Internet will make the market more intelligent by more efficiently matching people’s wants to company’s offerings and vice versa. I think the best examples today are moviecritic.com which recommends movies to you based on a clever collaborative rating system or the customer reviews on Amazon.co.uk. When I mentioned these Høegh, he agreed but said that they were just the first steps.

His recipe for success requires more than large cash investments. He looks for “great ambitions, even if they’re completely blue sky – we don’t fund small ideas.” Second, naturally for a risk investor he looks for a great return on his investments. But the third piece is more grounded and conventional – his requirement for a “a stellar management team with solid operational experience in traditional, but high-pressure, businesses like oil production.”

He had some great advice for people trying to learn from the new economy. If I were to start another business, I think I would pin this up on the wall of my office.

“Map out the whole picture of the company, all the supply chains, all the customer touch points and ask ‘where in this universe does information flow’ and ‘what are the critical elements’ and then go and visit all the areas you don’t know – customers, suppliers, and get the real picture of what’s going on”
“If you have kids, let them educate you about how the Internet works and spend the whole day with them at EasyEverything.”
“Find the brightest and youngest members of the company and make them advisors to your board and let them tell you how the business should be run. Not that you should listen to them as to how to run your company but take seriously what they say.”

I rather liked Høegh and I was in something of a thoughtful reverie when I left with the consequence that I walked bang into a glass partition and bashed my big toe.

The identity gurus

Robert Jones, Head of Consultancy & Charles Wright, Managing Director, Wolff Olins

Robert Jones, sitting in Wolff Olins’s funky canal-side offices, characterises the new economy in two words: “why not?” For him, it is less to do with the Internet, for its own sake, than “an emotional climate” in which “categories and boundaries are irrelevant and what you do is less important than what you stand for.” His view of a new economy company is a very open “community of customers, investors, employees, and suppliers.” His conclusion: “the Internet is a symptom of the new economy not what it is about”.

It is easy to dismiss this as overly-academic – “what does this mean in the real world?”. For me, Jones’s ideas are abstract, but useful ways of thinking about some of the more practical things that new economy practitioners at Lastminute.com and Scient told me. More importantly, I left the interview thinking “I wish I had known this ten years ago.” I think that the most powerful insight he gave me was that a new economy company, indeed any company, has two interdependent parts. On the one hand, there is the business model – a rational, changeable, intellectual piece. On the other, there is the identity, brand or “the Big Idea” as Jones puts it in his new book of the same name. He cites Virgin as the role model: “without meaning to, Richard Branson invented the new economy thirty years ago.”

It is not surprising that he would play up the importance of the emotional side – after all he works for a company that specialises in identifying, evolving and drawing out the soul of organisations. Jones believes that a strong brand identity is the only sustainable competitive advantage a business can have in the long term – in his words “nobody can copy Virgin now.” One of the reasons it works so well is because “it means that employees feel more like owners.” This is most effective when reinforced by share options (which is common to every business I visited for this interview). As Jones said “emotional ownership is more important than share ownership” and while the stock options may or may not become valuable, they are most useful as tangible evidence of this “emotional ownership.” I would certainly start any new business by making sure that my staff had stock options and, if I could, I would build a culture with a strong sense of self-identity. Jones’s advice to me was simple and powerful: “think (and feel) very hard about how you want to change the world … so you can be sure about what you stand for is bigger than the thing you do.”

Then I talked to Wright about the importance of creative employees - “making unexpected connections and zigging when others zag” – and what managers can do to encourage them. Drawing on his own experience at Wolff Olins, Wright summarised a long conversation by saying “all we can do is create the conditions to enable teams to do their best work” and this certainly echoes my experience. I agreed with this completely and I found it very useful during my next interview where they faced similar issues. The “main reason people stay or leave is to do with the work that people are doing.” At IG, the most important thing was recruiting and retaining the best people and motivating (more accurately liberating) them to do their best work. IG, like Wolff Olins, was a people business, but any business that wants to evolve in the new economy needs creative, motivated people and so, to some extent, faces the same issues as Wolff Olins or my next guru, Graham Seabrook.

The Internet engineer

Graham Seabrook, Managing Director, Ridgeway Systems

Ridgeway’s is not an e-commerce business but a technology and applications firm. I met their managing director, Graham Seabrook, at his offices in a Reading technology park. What they do is whizzy combination of software and hardware that greatly simplifies video-conferencing and data sharing over the Internet. It is as hard to describe as explaining a telephone to an ancient Egyptian but once you’ve used it, it seems very obvious and natural. Instead of selling a service to the consumer they sell boxes and software to Internet service providers and telephone companies.

As a result of this, there are two key elements to their approach that were new to me. Firstly, he had something of an obsession with standards. In most cases, companies spend a lot of effort trying to erect barriers to entry while Ridgeway is struggling to lower them. This is because of the network effect – the more people that can connect using their system the more systems they will sell. Secondly, they need alliances. They spent a lot of time and effort courting their former employer: “the big company endorsement is worth the time spent courting it – win BT and the world is your oyster."

Ridgeway made its first product commercial available in June. I asked him if the transition to a more commercial model and away from a primarily R&D function would change this culture. He felt that “it will increase excitement about what we’re doing – as it becomes real – but as we get bigger the family atmosphere will become harder to maintain.” Nevertheless, they do a number of things that I thought would go a long way to maintaining it (and which I wish I had thought of at IG). The best of these was a sort of ‘house’ system whereby there were small social groups that cut across functional boundaries and which were led or mentored by a different director. Each person in the company belongs to one or another group and each quarter they get a budget to lay on some kind of social event.

The Supply Chain Guru

Simon Palethorpe, VP Business Development, Buy.com

Simon, who is an old friend from University, is someone who has actually worked at the coalface of business and this seems to be a relative rarity in the .com world. I met him in Buy.com’s UK offices in Chelsea. Despite having over 80 staff, they are still operating in the offices of an ‘incubator’ company. This gives them a feeling of being a thirty-year old who hasn’t left home yet. His parent company in the US is the number two Internet retail site in the US after Amazon.com with anticipated revenues this year of around $800m. He gave up a high-powered job at Levi Strauss because he wanted to build a business and be ‘part of a defining culture,’ echoing Wolff Olins’s “Big Idea” theory.

Buy.com is the quintessence of a business-to-consumer site. They aim to be “an internet superstore” selling everything to everyone at the lowest possible price (indeed Palethorpe points to price as Buy.com’s unique selling proposition). Consequently, the focus at Buy.com is clearly commercial and pragmatic. Simon talks about margins, gross profitability, cost base and the cost of customer acquisition. The strategy is to get the company to a critical mass of revenue and a sufficient customer base.

Buy.com is a “virtual business” which means that they subcontract significant functions such as warehousing, distribution and technical support. The objective is a “low cost supply chain.” In addition, this virtualisation gives them “lower costs by sharing fixed assets, flexibility and risk.” Interestingly, Buy.com appears as something of a saviour to the distributors they work with who are generally in fear of being disintermediated by the Internet. Simon describes the relationship with their partner companies as very close – “there needs to be a cultural fit – to some extent they need to be willing to co-venture with us.”

I think companies like Buy.com and Lastminute.com show that the new economy is more than a stock market bubble. They demonstrate a new way of doing business. They offer greater choice to the consumer by aggregating many different suppliers through one site and making searches easy and quick. More than that, they reduce the cost of meeting the customers’ needs through the use of technology both in the sales process but also in the supply chain that feeds it. I cannot imagine running any kind of business where at least some of these things were not critical.

The Porn Philosopher

Berth Milton, President and CEO, Private Media Group

I wanted to visit at least one company that was actually making a profit selling things on the Internet. The problem was that none sprang immediately to mind except in the adult-entertainment sector. After some diligent research – in the financial pages of the Internet, I hasten to add – I found what I was looking for. Private is a Barcelona-based porn company which is also listed on the NASDAQ stock exchange. Three days later, I was on a flight to Barcelona to meet their owner, Berth Milton. I was somewhat nervous as I didn’t know what to expect and it is, after all, still a taboo subject. In the event, apart from what was on the screens, I could have been in the chaste, high-tech office of any Internet company. Nevertheless, Private now has a turnover in excess of $20m and, most importantly, a net profit margin of around 22%.

One key aspect of any business, and an aspect which Private seems to epitomise, is the need to give the customer what they want. According to Milton, at least half of all personal Internet users have looked at adult material on the web and 85-90% of the adult population buy at least one adult-oriented product each year. Of course, the Internet is the perfect medium for porn – it is direct, worldwide and embarrassment-free.

Private wants to build a brand name. His ‘big idea’ is to make Private a “young people’s lifestyle product like Playboy once was.” He says that porn has always been available to the elite throughout the ages but now he wants to democratise it. He believes that two trends will massively increase the value of his business: growing acceptance of porn and the revolution in distribution caused by the convergence of TV and the Internet. In a sense, the success of Private today is both a cause and an effect of these trends.

What is fascinating about Private is that it embodies many of the challenges and opportunities facing a very traditional business moving into the new economy. Private is, after all, just a publishing company. Milton seems to have instinctively learned all the lessons being preached by the other people I interviewed and yet he remains very sceptical. He says that “the Internet is not something that solves everything … it’s a good way to spread a rumour quickly … but if your business model doesn’t work in the old economy, don’t go to the Internet.” For example “if you need a 300% mark up in the mail order business to be profitable, what has changed for a mail order business on the Internet?” For him, the new economy hype has all the flavour of a craze, like the South Sea Bubble, in which shareholders speculate but companies don’t get any richer. Ultimately, his advice is “Get the business right first.” I couldn’t agree more.