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A Winning Combination: Software-as-Services Plus Business Consulting and Process Services
By Laurie McCabe
January 30, 2004

The consensus is in, and it appears, based on a cross-section of industry insiders, that recently bankrupt “extended enterprise company” divine never really stood a chance of succeeding.

Founded in 1999 with a business plan along the lines of Internet incubator CMGi, divine hoped to acquire service providers en masse and then roll out integrated offerings to its customers. This put divine in the same category as the once high-flying startup Jamcracker, which sought the same business niche but also fell on hard times after the Internet bubble burst and the economy nosedived.

The difference between divine and others (aside from the $900 million or so it raised in venture capital), however, was the fact that divine’s ideas were based on a ruthless, slash-and-burn acquisition plan that left many a purchased company’s employees by the wayside.

This hurt the company’s ability to build a loyal, dedicated group of employees to drive it forward, said Laurie McCabe, vice president and practice director at Summit Strategies in Boston. For example, divine, in a yearlong buying binge from November 2000 to November 2001, acquired 29 companies.

“I remember when they first presented to us, when they first came out of the closet,” McCabe told ASPnews. “I think they were on a crash-and-burn course from the get-go. I remember coming out of that meeting saying ‘There is no way this is going to work. You can’t just rapid-fire, acquire and fire.'”

Chris Oberbeck, a partner at venture capital firm Saratoga Partners, which recently purchased the Data Return assets of divine for $24 million, observed that while certain business units inside of the divine umbrella were doing well (like Data Return with $60 million in annual revenues) the company itself was very hard to decipher from the outside looking in. And divine’s management did little to lift the veil.

“From the outside, divine looked like this big, opaque situation, but inside of it a number of the business units that were sold were very interesting,” he told ASPnews. “The whole divine clouded up a lot of things. The problem was their fundamental business model, which was this kind of incubator roll up kind of concept, which I think was basically flawed from the outset.”

Oberbeck is quick to point out that divine was hardly the only spectacular failure among this group.

“It worked in terms of funding, they got funded,” said Oberbeck. “Actually, the business model worked as a fundraising mechanism. They raised a huge amount of money, but it didn’t work as an operating model. That was sort of the Catch-22 of it.”

At Corio, one of the few surviving enterprise ASPs left over from the early days of the industry, and a former competitor of divine’s, John Ottman, Corio’s executive vice president of Sales & Marketing, also said the basic concept of divine’s business strategy was too unwieldy.

“With a portfolio of companies like that, you can’t necessarily draw any conclusions other than to question the overall strategy of trying to build the United Nations of companies,” he told ASPnews.

From Ottman’s 10,000-foot view, divine’s business plan rolled up too many disparate businesses (most of them startups themselves) making it next-to-impossible to succeed as a single entity. Ottman’s willing to bet that 90-percent of most startups fail for one basic reason: lack of focus.

“Young companies need to focus on a core competency and stick with that focus,” Ottman said.

Since both divine and its main investor Oak Management, which pumped over $61 million into the company and held two board seats, declined to be interviewed for this article, however, definitive answers are hard to come by. Certainly divine was not the only incubator failure that made headlines, but it was one of the few that tried the concept that worked so well for CMGi and others for a short time, in the service provider niche, said Oberbeck.

And its not that the incubator model itself doesn’t work; many a small successful company has been spawned this way, but then again, the buying spree divine undertook over the past few years is probably something that even the most intrepid entrepreneur would more than likely steer clear of as folly, said McCabe.

“They basically wanted to seamlessly integrate all the business process and IT stuff for customers but they could never even halfway integrate all the companies they acquired, so it’s kind of ironic,” she said.

This lack of integration combined with the company’s goal of becoming a billion-dollar business in just under 24 months, sending up huge red-flags from the business plan for Summit’s McCabe.

In the end, the best way to describe one of the Internet bubble’s last major entrants and calamities is with words that can be applied to so many aspects of the early part of this millennium: over-exuberance.

“I guess in summary they were late. They were later than most, but probably didn’t do that much different than some of the other spectacular (failures),” said Oberbeck.

 

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