Online Office Supplies Switches Strategy

By Marianne Dunn Staff WriterWeb-based office supply superstore Online Office Supplies Co., based in Frederick, Md., is redefining its business model in a move that will put the company in business with the federal government.Online Office Supplies will continue to exist as an online superstore, said Paula Jagemann, president and chief executive officer of the company founded in August 1998. But the company intends to target small business and government agencies to license its procurement software."What we are finding is that our technology is our greatest asset," said Jagemann, who projected 1999 revenue of $6 million. While most of that revenue will come from the online store, Jagemann expects the company's software licensing business to outperform the Web site by the second quarter of 2000."If you think about the actual sale of supplies, the margins are light; single digits if you are lucky," said Jagemann. "Being a technology company and selling technology, the margins are robust, 20 percent to 30 percent."Mark Mandel, an analyst with New York City-based ABN AMRO Bank Inc., said it is very difficult for startup office supply stores to compete with the established market leaders, such as Office Depot Inc., OfficeMax Inc. and Staples Inc. "The market is enormous, but these three are aggressively seeking to establish defensible positions in their business," he said. "They are precluding startups and other players out there from taking the business from them."Jagemann said the big three present competition for her business as office supply retailers and as technology developers. "But they will never shed their brand, which is what we do," she said.Online Office Supplies also licenses its software in a private-label format. She said about 30 companies have signed agreements in which Online Office Supplies software acts as the backbone of their sites. On Aug. 10, Online Office Supplies signed a contract with the National Institutes for the Blind to create jwod.com, a site that sells products made by the blind or people with other disabilities. The non-profit organization's site is set to launch Oct. 15. It is named for a piece of legislation, the Javits-Wagner-O'Day Act of 1971, a procurement initiative requiring government agencies to purchase selected products and services from the National Institutes for the Blind and the National Industries for the Severely Handicapped. They supply the JWOD program with products such as pens, pencils, binder clips, notepads, paper and cleaning supplies.Jagemann said the organization chose to use the .com designation for its business site because it is easier for potential customers to remember. General information about the JWOD program is offered at jwod.gov. Jim Gibbons, NIB president and chief executive officer, said Online Office Supplies was chosen from a group of six companies that competed for the project. He would not disclose the names of the other companies that bid, but said that Online Office Supplies was chosen based on its technology and business solutions. Gibbons did not disclose the terms of the contract. Jagemann said her company will get a management fee based on sales revenue generated from the site."There are not any set values," she said. "But JWOD sells over $200 million of products a year, so if we can defer even a small portion of that online, it will be a fairly significant contract to us."With the new Web site, private citizens will be able to purchase JWOD products. They will also be able to buy them from onlineofficesupplies.com."We will be the first to offer all of the JWOD products," said Jagemann. "Other people who sell to the government may sell the pencils or the pens, but no one has the complete offerings."Jagemann said Online Office Supplies is in the process of expanding its business in the federal space and has set the Defense Department as its first target."There certainly are a lot of government agencies that are trying to get help with procurement," she said. A representative from the Navy has expressed interest in the company's procurement software, she said. Another possible source of business, she said, would be with the office supply stores on military bases. For example, she said, the store on base at Fort Bragg, N.C., could set up an online store using the Online Office Supplies procurement software. Online Office Supplies is finalizing a venture capital investment of more than $15 million from Enterprise Associates in Reston, Va. With the proceeds, Jagemann said she plans to hire technical talent, purchase hardware and software and launch an advertising campaign promoting the technology licensing program.By September 2000, Jagemann expects to grow the business from the 35 employees to 230, a 557 percent increase."While it is difficult to attract technical employees right now, we already have proven success," said Jagemann, who was an executive secretary for John Sidgmore in 1995 when he took UUNet public. Today he is the vice chairman and chief operating officer for MCIWorldCom, which merged with UUNet in March. He is also a member of the Online Office Supplies board of directors. Other members include: Donald Clarke, vice president and chief financial officer of Net2000 Communications, Herndon, Va.; Christopher Scatliff, chief executive officer of UUNet Canada; Sky Dayton, chief executive officer and founder of Earthlink Networks Inc., Pasadena, Calif.; Mory Ejabat, president and chief executive officer of Ascend Communications Inc., Westford, Mass.; and Daniel Rosen, general manager of new technology for Microsoft Corp. of Redmond, Wash.