Little fish feast well on what big fish swim by

06:56 PM CDT on Sunday, June 3, 2007

In the turbulent sea known as the technology sector, there are mostly sharks and pilot fish. That is, a tech company either cuts a wide swath - such as Google, Intel or IBM - or it feasts off lucrative crumbs that sharks are not nimble enough to carve into dinner.

Jon Shapiro's company - Dallas-based Alliance Systems Ltd. - is the consummate pilot fish. It thrives in the cracks created by technology titans. This is the story of what pilot fish must do to stay relevant.

After stints in and out of a few companies, by 1992, Mr. Shapiro was selling equipment for 900 numbers. Even though his customers were legitimate and had steered clear of the sex-call business, they closed shop after a 60 Minutes exposé condemning the 900 number industry.

Jon Shapiro has learned that in technology, a small business must shift quickly with the tides.

Mr. Shapiro was left with what he assumed was worthless voice-mail equipment. With low hopes, he placed a small, nondescript ad in a trade magazine for the second-hand equipment and, to his astonishment, got 400 calls in two days.

His unlikely treasures sold for prices beyond his imagination.

A hello moment

Fluke? Mr. Shapiro wondered. He bought more cast-off voice-mail equipment for pennies on the dollar and again realized a considerable gain. Continuing this trend, Mr. Shapiro earned $500,000 in profit over six months, and that's how his pilot fish, Alliance Systems, was hatched.

Initially, Alliance Systems repaired and sold used voice-mail equipment. As its success grew, it added people, office space and product lines. Today most of the world's cellular voice-mail equipment is built by Alliance Systems. Its customers are great sharks who have no taste for such noncore, adjacent business.

By 2000, Alliance Systems' revenue reached $55 million, with $5 million in profit.

Mr. Shapiro doesn't trust past success, and he knows how quickly the technology business shifts. Virtually all tech products rapidly reach a profit maturity phase; that is, their profit margins reach a point where they diminish. It's hard for any business to plan for this.

For instance, Alliance Systems used to sell a single piece of equipment for thousands of dollars. Today, it must sell four times as much of the same equipment to reap the same profit. And Alliance Systems' beloved sharks now have to compete against free telephone services.

Because free is hard to beat, life can get tough for the sharks and unpleasant for their sometimes too-loyal pilot fish.

So Alliance Systems doesn't count on old sharks or maturing technology. Its focus has never been so much about voice-mail equipment as it has been about capturing the velocity and momentum of new ideas. When Alliance Systems' core product approaches its profit maturity phase, Mr. Shapiro repositions.

The hooks

One of our favorite chants is: If you dislike change, you'll like irrelevance even less. To remain nimble and relevant, Mr. Shapiro uses these techniques:

Identify adjacent areas where value can be added. Any company must limit its offerings to ones in which it can truly add value.

Otherwise it will find itself providing a commodity that can be easily matched or bested, competing on price and living meagerly on high volume and low margins.

In contrast, Alliance Systems ventures only into bespoke offerings that meet sharks' otherwise unmet needs.

And Mr. Shapiro prides himself on knowing what is practical and achievable, so he doesn't go off the deep end.

Realign through new relationships. Once a strategic offering is identified, Alliance Systems hires people who either have solid relationships with emerging sharks with needs in that area or have the entrepreneurial energy and know-how to start a new venture.

Outsource where value cannot be created. Mr. Shapiro outsources that which can be done better by others, leaving Alliance Systems more agile and able to concentrate on its core competencies.

Prune strategically. Mr. Shapiro is like the West Texas car dealer who explains at the end of his ad: "And I ain't married to any of 'em." Make hard decisions to eliminate business products that are silently passing through their profit maturity phase.

Be a fast follower. Today Alliance Systems is concentrating on the next big thing: the mobile Internet business.

Mr. Shapiro is transitioning his shark base from telecom to the Internet and wireless by building infrastructure to bring Internet and video streaming to mobile wireless devices.

Movies on cellphones alone will attract inventive pilot fish to help build acres of servers. And Jon Shapiro is sharpening his teeth.

Pauline Graivier is president of Dallas-based Verbal Communications Inc. Rob Hoffman is a partner with Gardere Wynne Sewell LLP. (Jon Shapiro is a client of Gardere's.)