Y2K: The Boom That Went Fizz

By Richard McCaffery, Staff WriterThe year 2000 computer crisis is not turning into the gold rush many companies had expected, and the few that built profitable Y2K practices are switching gears to find a new niche."People thought [Y2K] would be a total bonanza, and that you'd be picking up money off the street," said Kevin Weaver, executive vice president of Infoliant Corp., a Pittsburgh company that built an online database to track the Y2K compliance of 33,000 computer products. "It hasn't been like that."Weaver is not complaining. Infoliant, founded in October 1997, broke even less than a year later and now has customers that include IBM Corp., Computer Sciences Corp. and leading Wall Street firms — many of which have contracts with Infoliant that continue through next year. Infoliant now is leveraging its database to create an Internet publishing business. "1998 went extremely well," Weaver said. "We're one of the few Internet companies actually making money."Seec Inc., also of Pittsburgh, grew its revenues from $2 million in 1996 to $12.5 million in 1997 and went public the same year on the strength of its Y2K business. Now Seec is using its experience with legacy systems to help companies Web-enable business processes on old mainframe systems, according to Ravi Koka, president and chief executive.Keane Inc. of Boston, a well-established integration and consulting company, is using its Y2K contacts to pursue IT outsourcing deals."We saw Y2K as an opportunity to connect to executive management as it relates to [its] most pressing business issues," said Charlie Lippman, managing director of Keane Inc.'s Washington/Baltimore branch. "Y2K has been an overwhelming success from that perspective."Not every Y2K company has fared as well. Peritus Software Inc. of Billerica, Mass., for example, saw its Y2K market shrink dramatically in the second half of 1998. And it lost $26.6 million on sales of $31.5 million last year. Its stock, which hit a high of $23.75 in the first quarter of last year, now is trading at 34 cents a share. The company has let go more than half of its employees and is considering filing for protection from creditors, according to its 1999 annual report. Peritus officials did not return calls seeking comment.Seec's Y2K business tapered off in 1998 as well, Koka said. Revenue dropped from $12.5 million two years ago to $11.1 million for the year ended in March — a little less than half what Koka had expected to bring in. Net income last year dropped 84 percent to $400,000."That's definitely because the market was smaller than people expected," Koka said. "In that sense, it was a little bit of a disappointment."Andy Bochman, Y2K services director at the Boston-based research company Aberdeen Group, said the Y2K boom never materialized because many organizations used their own IT staffs to fix the problem. "They didn't think it would be that complicated," Bochman said. "In many cases, they were right." It also made sense because employees know the systems better than contractors, he said.Bochman said about 400 to 600 exclusively Y2K companies popped up in the United States as a result of the computer glitch, and that most are out of business or going out of business because they lack a transition strategy."Some are still waiting for their [Y2K] ship to come in," he said. "They ask me what will be the next big event. I tell them to let it go." The key to making the transition, Bochman said, is toa have a plan and start early.Though Seec made a name for itself with Y2K products and renovation services, the company got its start helping customers transition legacy systems to the client-server environment. Because of its history, Koka said he knew Seec would return to its roots of legacy transition. In that sense, Seec, which has 121 employees, has not had to worry about reinventing itself.But with the growth of the Internet and explosion of electronic commerce, Seec had to change gears to bring its products up to speed. This year, the company has launched two products that help customers put a Web-face on business processes running on mainframe systems. That is where Koka said the future lies, and he has managed Seec's cash well enough to take advantage of the opportunity. Seec raised $30 million when it went public in January 1997 and now has $31 million in cash and cash equivalents. Less than 10 percent of Seec's business is with the federal government, but the company has taken steps to boost its presence, including building partnerships with systems integrators in the federal arena. Partners include Keane, SRA International Inc. and Unisys Corp. Government customers include the General Services Administration and National Imagery Mapping Agency.For the last five months, Seec has been in discussions with CACI International Inc. to develop an electronic-business pilot project for the federal government. The company declined to disclose for which agency the product is being developed.Seec's Y2K work continues to pay off. In April, SRA chose Seec's validation and verification tools to accelerate testing for a civilian client in the federal government. The deal is worth $600,000 to Seec. SRA will not disclose the agency because its client does not want to endorse any Y2K product. Koka expects revenue of $14 million to $15 million this year. He expects the company's 1999 revenue to be split evenly between Y2K work and what the company calls electronic legacy work.Privately held Infoliant has been approached by insurance companies and law firms interested in using its Y2K compliance database as a resource for litigation, said Weaver, who expects to have an index set up to support the service by midyear. Weaver said the litigation database likely would include the 3,000 products whose compliance status changed since Infoliant started tracking it. Weaver expects that number to hit at least 5,000 by year's end.Infoliant's government customers include the Army, NASA, Los Alamos National Laboratory, the Agriculture Department and other agencies that have signed non-disclosure agreements. Federal, state and local government agencies make up about 10 percent of Infoliant's customer base.Weaver said Infoliant's revenue stream is solid through the end of next year since many of its customers — who pay a subscription fee for access to the database and daily compliance updates — have signed contracts through 2000.Meanwhile, Weaver is hard at work trying to determine other uses for the database. For example, he is examining whether there is a profitable way to continue gathering information on computer products across the industry and publishing the information. Many customers have shown an interest in having access to a resource that tracks the thousands of new products brought to the market every year, as well as updates and changes to existing products, Weaver said. "We're trying to figure out the right niche."Weaver does not expect the transition to be easy. "Will revenue in 2001 be as high as it is now? In all honesty, probably not," he said. "We have our own Y2K problem in that all of our revenue is tied to it."Glenn Giles, general manager of Keane Federal Systems Inc. of Rockville, Md., said Y2K business continues to be robust. Keane Federal Systems, a subsidiary of Keane Inc., had revenues of $1 billion and net income of $96 million — a 110 percent increase from the year before.Giles said Y2K helped spotlight the importance of IT assets among government officials at the highest levels, and he expects that will lead to new outsourcing deals as soon as agencies have the millennium bug under control.Getting the ear of upper management has been Keane's strategic goal with Y2K all along. "I achieved what I wanted to [with Y2K] from a revenue standpoint, and we're in the midst of achieving what we wanted to from a strategic point," Giles said. "It's going to happen."Keane Federal has not yet landed any outsourcing deals as a result of its Y2K work, but Giles said the company is in discussions at the state level with a revenue agency to outsource the maintenance of legacy systems. He expects the outsourcing floodgates to open once the government has Y2K in the rear-view mirror.Keane Federal's Y2K business hit a high point in the fourth quarter of 1998 when it accounted for about 20 percent of the division's revenue, said Giles, who would not break out the company's overall federal numbers. But Giles said federal Y2K business is tapering off slower than he expected since it is still the top priority in many agencies. Keane's Y2K customers include the Navy, Social Security Administration and the departments of Justice and Treasury, an even mix between defense and civilian customers.