Staying alive in the dotcom bubble

The dotcom
companies that have survived and gone on to thrive are those which have put in place
formal HR practices and strategies, according to new research, as demonstrated
by this case study.

This
case study of Internet company, skiing-trips.com is taken from a recent report by
the Involvement and Participation Association (IPA) and Equity Incentives.

The
name and activity of the company has been changed to protect its identity.

A
brief history

The
two co-founders of skiing-trips.com met at the London Business School in 1998
when, as they recall, the "atmosphere in the UK was very positive for
Internet business". As eager entrepreneurs, both wanted to start up an
e-business. They had identified what seemed an appealing niche in the
business-to-consumer market for selling skiing trips online, and wanted to
enter the market before the 1998-99 ski season.

In
common with every other dotcom interviewed for research by the Involvement and
Participation Association (IPA) and Equity Incentives, their business idea was
hatched in a pub. The co-founders had a vision to transform their online ski
travel company into the leading website for booking ski holidays in Europe and
North America. The value proposition for the customer was – rather than rely on
the homogeneous offers from existing tour operators – to be able to select from
a variety of ski chalets according to criteria such as price, group size and
complexity of slopes.

Skiing-trips.com
envisioned a broader range of products – digital ski passes, ski and snowboard
gear and foreign currency services. Customers would search skiing-trips.com’s
database and buy online; queries would then be dealt with through a call centre
(outsourced to a supplier). Revenue would come from margins on all of the
site’s services. The long-term business plan was to start with the UK, then
extend into the European market, and eventually worldwide. Skiing-trips.com was
to remain a stand-alone enterprise.

Start-up

As
for most start-ups, the first challenge was to get the business going with
limited capital. Skiing-trips.com was the first new venture in London Business
School’s "incubator" and this helped reduce the company’s initial
operating costs. The site cost £60,000 to design and set up the online
database, and from a workforce of six, within a few months the founders had
hired an additional 36, which necessitated more capital. In November 1998,
private investors were impressed enough to allow £250,000, and in the second
round one year on provided a further £3 million.

The
business value of skiing-trips.com was evaluated upon launch at between £150m
and £250m by leading investment banks. The management team controlled 55% of
the firm’s capital, three-quarters of which was held by the two co-founders.
Venture capitalists and private investors held the remainder. Perhaps
understandably, the founders were not worried about their future.

Sustainability
– now comes the hard part

One
of the co-founders recalled the early days at skiing-trips.com as a continuous
party. They had recruited people from their network of immediate friends, based
on their "culture compatibility and friendship rather than
skill-related".

The
firm had no formal business strategy or ideas for a workable corporate
structure, "everyone was doing what they liked doing and were there for
fun. I just wanted to make money, and fast." For at least a year,
decisions about all aspects of the business were taken on a day-to-day basis.
There were "no rules, no procedure, it was a free environment",
albeit one in which an informal consensus among the staff was sought as far as
possible.

Initially,
this worked fine. A market survey of customer satisfaction found that 1,300
people had bought from the site in the first season, spending on average just
under £500 (set against each order costing the firm £25 to process). Of 400
surveyed, 94% were happy to recommend skiing-trips.com to their friends. The
firm was doing very well. The workforce quickly reached 50 employees.

However,
as it continued to expand internationally, the co-founders discovered hiring
their friends was a big mistake; as much as they liked and got on with them,
their mates "were not the best people" to run a business with. The
co-founders realised, in fact, nobody was reporting to anybody, and neither of
them could follow what was going on in the company. There were "too many
chiefs and no indians". The company had made the mistake of
"equalising ‘flat, fast decision-making’ and ‘flexible’ business with
being ‘unstructured’".

Also,
the company was incurring greater and greater running costs, and money was
disappearing fast. It was keen to continuously update its website to ensure
efficacy and customer responsiveness (for example, by undertaking real-time
bookings, and bookings through mobile phones), but this was costly, to the tune
of £500,000. To compound matters still further, although most of the senior
managers were compensated in part through stock options, their basic salaries
had become an increasingly burdensome expense. Soon the company needed about
£100,000 per month just to maintain operations.

Running
out of money, and knowing that their record would come under scrutiny from
their concerned investors, the co-founders acknowledged the need for some
semblance of strategy, structure and sense. They had no choice but to
restructure the business. This meant modifying their original dream of getting
rich quick to managing for the long-term.

The
company hired as a chairman the managing director of a major tour operator.
With the help of the new chairman and advice from business specialists and
partners, skiing-trips.com developed a new business strategy and started
thinking, one year on from inception, about an HR strategy.

It
wanted a "star" model for organising the business, recruiting elite
personnel for long-term potential, setting challenging work and demanding
performance targets, and then devolving considerable responsibility to them to
make skiing-trips.com a commercial success.

They
scaled down the workforce to 39 and espoused "new cultural values, from
‘want to make it fast to cash in our stock options’ to building a brand and
wanting to be the best in every aspect of the business".

Managing
people

In
1999 the company finally implemented some HR management practices and policies
in line with the new "star" model.

The
firm does not have a personnel specialist at senior level. The person in charge
of people management is an HR officer whose role is primarily taken up with the
traditional personnel administration. The "change maker" role and the
formulation of HR strategy (including its integration with the broader business
strategy) is the responsibility of the senior managers, "Successful
businesses don’t see HR strategy as common sense, they also have a clear vision
of how to implement it."

Now
skiing-trips.com bears more resemblance to a "traditional" company,
with more formal policies and processes. Decision-making authority is subject
to a clear hierarchy, and the actual process of decision-making is no longer
the organised anarchy of before. It has been extended to involve all staff, and
formalised to some degree, predominantly through regular weekly staff
meetings/team briefings. In these forums the senior managers welcome employees’
opinions and feedback.

There
are no problem-solving groups or formal joint consultative committees, however.
The perceived flexibility and creativity from more ad hoc exchanges of
information remains valuable. Skiing-trips.com has conducted a staff survey and
operates a suggestion scheme. Otherwise, in common with most dotcoms surveyed
for this research, consultation takes place "informally whenever
needed".

It
has implemented more professional HR practices in areas such as recruitment,
employee appraisal and career development, and has a written policy on job
security and redundancy management.

In
terms of reward packages, skiing-trips.com doesn’t use stock options to retain
its best employees. Only the senior managers have stock and share options. All
staff enjoy the fruits of "a profit-sharing plan or bonuses".
Non-managerial employees are subject to individual performance-related pay, as
are managers (although the firm seems keener to apply this scheme to the
former). There are no team performance bonuses.

Skiing-trips.com
emphasises training, which it sees as essential to be able to keep up with the
continuously evolving technology, and to better answer customers’ needs. Most
staff receive a minimum of five days’ training annually.

Finally,
the company does not recognise a union, but the co-founder interviewed for this
study seems ambivalent rather than outwardly hostile toward the value of a
trade union presence.

In
conclusion, the key challenge facing skiing-trips.com is to move away from the
mindset of making profit as quickly as possible toward a long-term commitment to
invest in a sound strategy, which will build a sustainable business. It
believes that by instilling a good working environment and giving individuals
challenging and interesting tasks, which allow them "to develop", it
will succeed. One of the co-founders reflected on the experience, and argued
that now "more than ever" do the old business rules prevail,
"There are no new rules, just a new technology to master" – the
Internet.

This
case study is based on an interview with one of the co-founders.

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