STRATEGIES

August 7, 2003

Agiliti has come a long way since starting out as an ASP aggregator in 1999. Back in those heady days, companies like Agiliti and Jamcracker were sure that everyone would need not only one application delivered by an ASP, but eight or ten at a time. They soon found it was not as easy as it appeared.

“We were trying to get 100 applications in the portfolio that we were going to take to market in both a direct sales force as well as a channel model,” Dave Walstad, Agiliti VP Sales & Marketing, told ASPnews. “One of the things the analyst community was figuring out in 2000 and 2001 was that a large majority of IT managers didn’t know what ASP was. We really found out that it was just too early in the marketplace.”

The problem with the aggregation model was a lack of product-specific knowledge among the sales force, Walstad said. Traditional enterprise software VARs will specialize, usually selling just one or two applications in which they have a deep knowledge.

“You can’t train a sales force enough to try to sell an application that has any type of complexity to it in an aggregated fashion. That was the big challenge for us, because we were an inch deep and a mile wide, and you can’t be effective there.”

From ASP to MSP
At the end of 2000, Agiliti’s founder and CEO Tom Kieffer decided it was time to make a fundamental change in the business. The company shifted its focus from a national presence to a regional one. From its St. Paul, Minn., headquarters, Agiliti defined its market regionally, in Minnesota and bordering states. More significantly, the company also scraped the applications off the top of the stack and went to a rentable infrastructure model, becoming a regional MSP, or managed service provider.

“The key value proposition we’re bringing to the market is that we help customers reduce cost, reduce risk and enhance their IT capabilities,” Walstad said. “We provide both collocation services at the infrastructure layer as well as managed hosting at the systems layer. Our partners really provide that application management and take responsibility for that layer.”

“Our initial business model was to do all three of those layers, and we’ve got deep expertise in how those three layers work together, but from a go-to-market perspective, we learned that trying to be the market-maker and sell that application is difficult, doing it in an aggregator sense.”

Unlike a pure outsourcing play like an EDS or IBM, where the outsourcer comes in, replaces the IT people, and moves the entire infrastructure off-site, Agiliti considers itself a “selective outsourcer”, plugging holes in a company’s IT staff to handle critical applications and specific lack of skill sets, Walstad said.

Agiliti found the regional MSP market to be a bit more forgiving than the ASP aggregator space. The company has found a niche enabling independent software vendors (ISVs) who are themselves going to market as ASPs, as well as among large e-commerce players.

“Our largest customers today are ISVs. We’re enabling them from an infrastructure standpoint, but we’re not trying to sell their apps,” Walstad said. “Another large segment of customers for us is enterprises who have a significant e-commerce presence. They can calculate how much money they’re losing per minute if their website ever went down. They have needs for high availability.”

From a customer count standpoint, the ISV count is probably 10 to 20 percent, but from a revenue standpoint, it’s over 50 percent, Walstad said. “It’s a very significant portion of the business, and we see that growing.”

Although the business is a horizontal play, Walstad sees evidence of where Agiliti is getting traction — in healthcare and education. Local fixtures like The Mayo Clinic, Achieve Healthcare, and United Hospital Services fill Agiliti’s customer list, along with online education providers Plato Learning and Anlon Systems. “Because healthcare and education seem to be capital-constrained, but have a need for high availability, it seems to be a good fit,” he said.

Walstad puts Agiliti’s “sweet spot” at companies with annual revenues between $100 million and $500 million. “There is a certain segment of the market that EDS and IBM can’t serve, just because of size. If you’re a $500 million business, you might not be able to get a call-back from IBM. It’s the perfect size for us.”

The company has also found success with divisional levels of Fortune 500 companies. “A lot of times the divisional groups will have a big project, they’ll be fully funded and they need to get an app online. They may go to corporate IT and they get put in the middle of their project list a year out. For them, that’s really not the right answer. It works out well for us to be able to get those up and running for them,” Walstad said.

Agiliti customers’ uptime demands are high, requiring 99-percent or more at the application layer, which means three nines at the system layer, and at least four nines at the infrastructure layer, Walstad said. To provide the necessary uptime, Agiliti has situated its datacenter in the most secure spot it could find.

“We are the only tenant in a building owned by MAPP, which controls the power grid for the upper Midwest. They have federal regulations they need to beat from a security standpoint as well as a power standpoint. They can never be out of power, obviously, and they can never be compromised from a security standpoint. So to be located in a center like that gives us some awesome capability.”

Shoring Up the Finances

In December 2002, Agiliti made more big changes. It re-capitalized the business, bringing new equity in from Tom Kieffer and the two original investors. Decision-making capabilities have been streamlined into the hands of CEO Tom Kieffer and the company added new customers and new services in the areas of storage, security, disaster recovery and professional services. As a result, all of the company’s debt was paid off, and so it has returned to a profitable business, Walstad said. “It was an interesting ride over the last few years, but we’re happy to be back to normal business.”

In 2001 and 2002, it was common for prospective customers to ask questions about Agiliti’s financial viability, but the recapitalization has addressed their concern, Walstad said. “We own the datacenter. We paid off the debt. We’re actually EBITDA-positive in Q1 and we expect our revenue ramp to continue that momentum through the end of the year. We’re in great shape, so we have not heard those questions from our customers recently.”

Adapting the Strategy
Another big change was the addition of a professional services offering. “We used to be very myopic about services needing to be located in our datacenter,” Walstad said. “We’ve taken our stack — the system layer and infrastructure layer — and with a private line we can tap into a customer’s infrastructure and monitor their app, systems and infrastructure with our system. We’ve got a portal we call the customer interaction center that provides high visibility back to the customers in how their systems are working.”

Walstad estimates that that part of the business has grown tenfold since the marketing push began last December. The offering makes use of untapped resources in Agiliti’s engineering ranks, as well as open up new opportunities for sales. Professional services also create a “Trojan Horse” strategy of getting into a company with a professional services assignment, building trust, and then getting hired for more managed services.

“When you’re at the planning table in a professional services gig, the whole opportunity within a customer base would be opened up.” Walstad said. “Certainly if you do a good job delivering and they gain trust, then recurring revenue and hosting could enter the conversation quite easily, whereas if all you had was managed hosting and you walked in talking about that, you’re looking at a real long sales cycle and an RFP process. It’s a strategic play for us as well as it is a chance to get revenue a little bit quicker.”

Another strategic play that has paid off is the regional focus, Walstad said. “When you fundamentally look at what we provide, it looks like an outsourcing play on specific systems. With outsourcing, we’ve seen our customers a little hesitant to give up that control of that environment. When they are convinced that it’s the way to go or they see that there is a value proposition, they would rather not have that system hosted in California or wherever else. They’d like to see it be local.”

It all has a very down-home feel, Walstad said. Companies like to be able to get down and talk with their vendor. Agiliti service managers go on premise to customers and have meetings there, or they come to Agiliti. ISV customers bring their customer prospects into the data center for tours.

“That ability to be close, even though technically there’s no issue with being on the other side of the country, helps us to compete very effectively against the national providers. It’s tough sometimes to get mid-sized customers to commit to moving out of state.

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