@LARGE

Fact vs. fiction

By Scott Kirsner

Every company I meet with lately has some elaborate story about how they're going to cruise through the slowdown in IT spending, unbruised.

Most of them are pretty flimsy fictions.

Barry Bycoff, the CEO of the Waltham software company Netegrity, agrees that leaders of high-tech companies are spinning some pretty incredible tales of why customers can't live without their hardware, software, or services, even during a downturn. His analysis? "It's all bulls--t."

It would seem that Bycoff is in a better position than most to spread the manure. In March, his company was named the best three-year performer in the Wall Street Journal's annual "Shareholder Scorecard" ranking of 1,000 companies in 70 industries. A recent Morgan Stanley survey of 225 chief information officers found that the IT expenditure they were least likely to cut was security -- and Netegrity makes security software that controls access to Web sites, making sure that users can only get access to the data they're authorized to see.

Maybe Bycoff likes to be a contrarian, or maybe he's a truth-teller by nature. "No one's immune to what's happening out there," Bycoff says, occupying a chair at a large circular table in Netegrity's executive conference room. "Well-established companies don't feel the need to compete against new models of companies" -- like dot-coms and other start-ups that are now sucking wind -- "and that has affected the size of their technology buy."

"Companies are being much more selective [in their technology purchases]," he continues. "They're waiting until later in the quarter." Even after Netegrity's salespeople have convinced the chief information officer of the product's technical merits, the chief financial officer's decision "takes forever. When it comes to [signing the contract], there's tremendous feet-drag."

Bycoff started to see the buying cycle slow down late last year. "Leads kept coming in, but buying decisions continued to stretch out," he says. The company had been growing at 40 percent, quarter over quarter. Growth in the first quarter slowed to 20 percent, and the company says it will stall out completely for the second quarter, which Netegrity reports on July 25th. The company's average sale dipped from $239,000 in the fourth quarter to $161,000 in the first.

Bycoff didn't waste much time in reacting. At the beginning of the first quarter of this year, he froze hiring in all departments but sales and product development. "We didn't want to stop our expansion of sales efforts in the Midwest and internationally," he explains. "And we also didn't want to stop moving forward in becoming a multi-product company." (Two new products will join the company's flagship SiteMinder software later this year, and a third will hit the market in early 2002.)

He also sought to reduce discretionary expenses. A new company policy decreed that the Netegrity employee geographically closest to a customer would service that customer, to save in travel expenses. And Bycoff now proselytizes about buying cell phone minutes in bulk: "You save an incredible amount of money!"

Bycoff has taken Netegrity down an unpredictable -- but nonetheless impressive -- path since he joined Netegrity's predecessor company, the Hingham-based Software Developers Company, as CEO in 1993. Listening to him recount the events of those eight years is like listening to someone tell the story of how he walked away from a plane wreck, emerged unscathed from a 17-car pile-up on the way to his hotel, and then successfully rappelled out the window when the hotel caught fire.

Soon after Bycoff took the chief executive's post at Software Developers Company, a reseller of networking tools, the company was delisted from Nasdaq. Bycoff managed to get the company listed again after a short stint on the pink sheets -- a very rare feat. After growing sales from $20 million to $60 million, though, it began to dawn on Bycoff that "this was the worst of all possible worlds. The products we were selling were becoming commoditized by major players like Microsoft. There were a lot of pricing pressures. You could double the size [of sales] with no impact at all on the bottom line."

He decided that he would rather be running a different company. So in late 1995, he began to build a software development organization. His mandate to them was to devise a product that would help companies maintain security while still offering access to their networks.

Bycoff says that such a dramatic change in the business prompted people to ask, "Do you know how brain-dead this is, as a public company? You just don't do this."

He happily sold off the old software distribution business to a competitor, and in July of 1996, Netegrity was born.

The first version of SiteMinder, released in April of 1997, was a failure, at least from a marketing standpoint. "Because the product controlled access over VPNs [virtual private networks, which let companies route private traffic securely over public networks like the Internet], we needed a relationship with network vendors like Cisco to distribute our product," Bycoff explains. Those relationships didn't gel, and Netegrity was forced to alter the product and pursue a more vendor-independent strategy.

Over the next several years, as companies big and small hurried to assemble their own Internet infrastructure, Netegrity prospered. Companies like E*Trade and American Express (and, coincidentally, Cisco) gladly paid Netegrity hundreds of thousands of dollars for help managing the process of having users sign on to their sites and giving them access to the appropriate information. (The Globe was one of the company's earliest customers.)

When the horizons of technology companies began to darken in the spring of 2000, initially Netegrity wasn't affected. The first wave of bad news hit dot-coms, and most of Netegrity's customers were blue chips. Netegrity didn't see its fortunes sour until the first quarter of 2001, when its big, established customers began to spend less on hardware and software -- and take longer to figure out which purchases absolutely couldn't be scratched.

Bycoff doesn't expect the economy to improve before next year, but he's fully confident that Netegrity will endure the IT spending slowdown. The company has $118 million in the bank, and three consecutive quarters of operating profitability. While Netegrity's customers are looking to trim any and all technology expenses, analysts say that security software typically makes up just three percent of a company's overall tech budget, so it's not an especially big bull's eye for cost-cutters. And many prospective customers are still in a position of needing to bolster access control to their Web sites.

"Assuming there are some crumbs available in capital spending land," Bycoff says, "we're going to get some of those crumbs. But it's not the cake that was there yesterday."

Barry Bycoff's story -- scavenging for crumbs instead of feasting on cake -- isn't as cheerful and bedtime-appropriate as what I've been hearing from other CEOs around town.

But it does ring a lot more true.

What We Need

I'm wondering what you think the Massachusetts tech industry needs, right now. Is it bolder venture capitalists? A better place to hang out after work in Waltham? An influx of seasoned Linux sysadmins? Send me an e-mail at the address below. Be creative, specific, and explain why we need what you say we need. I'll use some of the most interesting responses in an upcoming column.

Scott Kirsner is a Boston freelance writer and a contributing editor at Wired and Fast Company magazines.