Verity Inc. Decides to Meet Its Destiny

New management makes risky bid for promising search tool and infobahn standard

When things start to go wrong at a company, one method may be as good as any for making things right: Remove the vice presidents who created the problem in the first place.

Philippe Courtot, chairman, president and chief executive at Verity Inc., did precisely that. He let go 11 vice presidents -- a group he calls the "Mexican Army" -- as one of his first moves after joining the troubled company nearly two years ago. Since then, his plan to restart Verity has unfolded auspiciously. In the argot of business management, he has totally reengineered the firm, transforming it from a niche supplier of text retrieval software for intelligence agencies to one of the key software tools for the Third Wave economy. Of the original 160 employees, only 25 remain. The company now has about 140 employees, but three times the engineers. "I traded management for engineers," says Courtot. And he dropped the price of the company's information search and retrieval products by a factor of 10. He has dramatically downgraded the role of services and consulting. He has rebuilt the core product to work on networks of PCs and servers, and he has tapped indirect channels and dismantled a costly direct sales force.

Throughout the turbulent 18-month restructuring, Verity did not lose a single customer.

To be sure, it has been a painful transition. But Courtot has arguably accomplished the better part of the turnaround. That includes attracting $4.5 million to recapitalize the venture even as he slashed product prices, and embedding the new product in nearly all of the major software programs in cyberspace -- Adobe, Frame, Documentum, Collara, Lotus, Microsoft, NetScape Communications. Revenues are starting to grow, and Courtot could now be looking up the steep curve of a hockey-stick growth phase.

That's because Verity occupies one of the hottest emerging technology niches on the information superhighway, so-called information agents and filters. These technologies can be programmed to search, retrieve, store and publish information culled from multiple sources -- E-mail, various online databases, news feeds, etc. The result is a kind of personalized newspaper, updated in real-time.

Jennifer Mitchell, an analyst with the market research firm Dataquest, puts the problem, and the opportunity, this way: "The '80s were the decade during which we applied computers to create electronic documents. Now we're applying it to manage documents [and their] electronic delivery." The 1980s were also the decade of relational database management systems. These systems from Oracle, Informix, Sybase, CA/Ingres and IBM used a series of commands known as the standard query language to find data stored in corporate databases. But during that same period, PCs began creating documents with E-mail systems, desktop publishing packages and document imaging systems. This body of data -- some estimate it represents more than 80 percent of all electronic data -- lives outside the domain of most relational database systems. Finding and correlating this "unstructured" data and data in more traditional corporate and online databases has become the Holy Grail of the 1990s. "Putting together unstructured data, and getting access to it, that's the real application," says Kurt Mueller, chairman and CEO of Dataware Technologies, a competitor to Verity.

This is not Courtot's first turnaround effort. He took a perennial losing division of the French medical technology company Thomson and made it the top supplier in its field. He has launched successful operations of U.S. computer companies in France.

But his crowning achievement -- so far -- is to have taken tiny cc:Mail from a losing operation no venture capitalist thought had a prayer to the leading supplier of E-mail. In the process, he vanquished Microsoft and Novell in the E-mail market, and then he sold the operation for $60 million to Lotus in 1992.

After what he calls a year-and-a-half of purgatory at Lotus Development Corp., Courtot worked a stint in the venture capital community, then took time off to do extreme skiing -- in the volcanoes of Kamchatka, which to risk fans is known as the easternmost enclave of the former Soviet empire, now Russia's Far East.

That trip brought home the power of the Internet. "These extreme skiers were organizing the trip with the Russian army. They needed to get a helicopter. They [used the] Internet to arrange the trip."

The proverbial light bulb clicked on: Internet plus search tools equals mega opportunity. Verity originally developed its technology for the intelligence community, and it had been plying this emerging trade since its founding in 1988. But the firm had botched or missed two critical waves of technology -- developing an attractive interface for the product, so as to make it appealing to a broader market base, and reaching that broader base with a version able to work on networks of PCs and servers.

Courtot in fact had been talking with Verity in 1992 about becoming the firm's chief executive. But his prescription -- slash product prices, redo the product for client/server networks and push indirect channels -- was too bitter a pill to swallow. "They were afraid I would change the company too much," he said. But the company continued to lose precious time and technological leadership, and potential acquirers began to circle, including Frame Technology. Verity's board decided it had no choice in August 1993 but to hire Courtot and accept his prognosis and painful cure.

So far, the patient seems well on the way to recovery. Revenue is on track to rebound back to $20 million -- after slipping to $17 million during the transition. Courtot says the company will be profitable in its next quarter, and the revamped products have received rave reviews. Acquisition of complementary technology is the next stage, with a public offering to follow.

The key for Courtot is getting the product into the market as fast as possible, because the window of opportunity could soon close -- particularly as the software industry continues a final and decisive period of consolidation. In the meantime, Verity faces a clutch of capable competitors, including database giant Oracle Corp. and a half-dozen or so hungry startups -- all after the same pot of gold at the interface to the information superhighway.

Dressing for Success

The final formula for a company's success contains five elements, says Courtot:

--A technology must be useful.

--It must be affordable.

--It must be widely available.

--The company must have notoriety, brand-name recognition.

--The product must be easy to use.

How many companies can thrive in any given market as it matures? Courtot draws the analogy to big tennis tournaments. The winner takes by far the biggest cash prize; second place gets a substantial but far smaller amount; third place gets a small cash award. The remainder get nothing.

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