Information Processing

Coming of Age at Lotus: Software's Child Prodigy Grows Up

A New President Leads the Fight to Tighten Controls and Create New Products

Barbara Buell in Cambridge, Mass.
Business Week

February 25, 1985

Two years ago, the 90 employees making up Lotus Development Corp. met for their bimonthly rap sessions in the renovated glue factory in Cambridge, Mass., that they called home. Today, employees still hold these get-togethers, but they need the grand ballroom of the nearby Royal Sonesta Hotel to hold the burgeoning corps of 760 workers. That's one example of the software star's transformation from a quirky startup to a mature industry leader. ''People here pine for the good old days,'' says ebullient founder and Chairman Mitchell D. Kapor. ''But we're growing up, and we have to grow up organizationally.''

Lotus has been going all out to forge the strategy that it needs to grow as a more mature company. And it is expanding into new worlds: It is moving rapidly into the European market (BW--Jan. 21), and in April it is starting up an ambitious magazine to help readers use Lotus software more effectively.

STILL FRIENDS

Its once freewheeling management style has been replaced with tight controls. There are official policies, for example, for matters ranging from hiring to press queries. When bureaucratic controls recently spurred several of its key product development people to quit, Lotus quickly turned its losses into a key part of its new strategy. It is forming alliances with many of its departed software developers to tie itself to the products they come up with at their new companies. And to stop the outflow of key employees, Lotus has put hefty financial incentives in place.

These dramatic changes reflect the growing struggle by the company to manage its own feverish--and remarkable--growth. Even in the fiercely competitive software industry, Lotus has boosted its revenues in less than three years from zero to $157 million in 1984. Profits for 1984 more than doubled to $36 million. This year's growth rate should slow to a more mature--though highly respectable--pace (chart). Analysts predict a revenue growth of 43%, to $225 million, and a jump in net profits of 33%, to $48 million.

Lotus' revenues started flowing in 1983, when the company rolled out its first product, 1-2-3, still by far the most successful program for personal computers. According to one estimate, 1-2-3 has already sold 600,000 copies. The $495 software provides in one program a way to store information in a data base, use the same data to make forecasts on a spreadsheet, and display it in a graphic form such as a bar graph or pie chart. No single person could better personify the changes in Lotus' style than the company's new president, 33-year-old Jim P. Manzi. ''Manzi is ruthless,'' says Christian Christiansen, a senior analyst with Boston's Yankee Group Inc. ''He's to-the-point. He's arrogant. But that's necessary to get products out on time.''

Manzi, no software developer himself, was a consultant at McKinsey & Co. before he joined Lotus two years ago. As marketing manager, he orchestrated the 1-2-3 marketing effort, which was based on a multimillion-dollar advertising strategy--a software industry first. Last October, Manzi took over operational control of Lotus as president, putting his organizational talents to work by capping spiraling costs and hiring. His appointment also lets Kapor spend more time nurturing new products.

Manzi's management style contrasts sharply with that of Kapor, who once taught Transcendental Meditation and is a self-described ''soft touch.'' But the combination, according to most observers, is a highly effective one. The two run Lotus like a partnership. Describing his relationship with Manzi, Kapor says: ''It's like a marriage where you've got two different people with different styles but underlying similar values.'' The task facing them recently has been complicated by the departure of four of the company's 12 top officers. Developer Raymond E. Ozzie, a manager of the team that created Lotus' second product, Symphony, quit in December to form his own software development company. ''It's difficult to be entrepreneurial in a bureaucracy,'' says the 29-year-old Ozzie. And exiting on Jan. 16 was Jonathan M. Sachs, 37-year-old 1-2-3 mastermind and former vice-president for research and development. Sachs describes himself as ''a lone wolf,'' and will take time off to develop his pet software projects. Two other vice-presidents have also left--on amicable terms, they maintain.

Some of these departing managers will be the major source, however, for the most important element in Lotus' new strategy: They will form the startups that the company can ally with to develop promising new programs, rather than rely completely on internal development. ''They would be fools to think they could come up with all new ideas in-house,'' contends developer Ozzie.

TOP SECRET

Lotus set up its first such alliance last month. Together with Boston-based UST Capital Corp., it invested $1 million in a software startup called Arity Corp. The new Concord (Mass.) company, founded by four former top Lotus software developers, is busily working on a new type of business software for personal computers that incorporates artificial intelligence. A closely guarded secret, the AI project involves a nonspreadsheet program for business users and may be ready by fall.

Lotus cut what could be an even more important deal in February with Ozzie's new software company, Iris Associates Inc. It calls for joint development of a new line of integrated business software, which is scheduled to roll out in 1986. Lotus has provided at least $1 million to Iris for product development. In return, it gets exclusive rights to license, market, and support Iris products.

Other ventures--or outright acquisitions--are likely. But Kapor is busily trying to incubate ideas inside Lotus for the next-generation software that can take advantage of the more powerful microprocessors that are going into personal computers. He is also developing new incentives to reward innovation. A system of financial rewards tied to unit sales of new products, for example, could earn the lead developer of a hit product a bonus of up to a year's salary. ''There's a ferment of creative ideas hatching within the company,'' says Kapor. ''We're not turning into a software publisher'' that just markets the programs developed by outsiders.

Lotus is betting a bundle on a new program called Jazz. Due out in April, the $595 integrated software package for business is aimed at spurring the sales of Apple Computer Inc.'s Macintosh computer in the office. So far, about 275,000 Macs have been sold since sales began a year ago, but few of them have ended up in the office because of the scarcity of Mac business software. Jazz's success is by no means assured, however. Sales will depend on how successful Apple is in selling Mac for business applications, a tall order in light of International Business Machines Corp.'s dominance of the office market.

OLD-FASHIONED

Developing new hit programs turns out not to be such an easy task for Lotus. It has to target the increasing numbers of computer novices if it is to reach a mass audience, according to industry experts. Customers failed to flock to Lotus's latest product, Symphony, for example, because they found it too complex to learn and use. Symphony is an integrated program combining even more functions than 1-2-3, including word processing and communications. The result: While Lotus says it is outselling other programs in its class, Symphony has failed to eclipse the sales of 1-2-3, as the company had expected.

Lotus' strategy calls for it to be more than just a software vendor, however. It wants to be a worldwide player in the ''information industry,'' Manzi says. The company is now considering whether to plunge into the growing market for the electronic delivery of data. And in what seems to be a move in the opposite direction, Lotus is about to enter print publishing. In April it will launch Lotus magazine, a 220-page monthly that will feature software reviews and how-to columns. The $5 million venture has attracted a seasoned management team, including former Electronics magazine publisher Daniel A. McMillan, now a Lotus vice-president. James R. Pierce, who recently resigned as BUSINESS WEEK's publisher to form his own advertising sales business, will be responsible for advertising.

Despite this plethora of new ventures and products, Lotus' 300%-a-year growth is likely to continue to slow to a more sedate 25% a year over the next several years, predicts Harvey H. Bundy III, a partner with William Blair & Co., a Chicago brokerage firm. Nonetheless, chances are good that Lotus will continue to be the personal software industry's leader and biggest success story. ''Lotus is the preeminent survivor in the microcomputer software business,'' says Bundy. Five years from now, Kapor may have to rent Boston's Fenway Park for those regular rap sessions.

Photograph: ''SOFT TOUCH'' KAPOR AND HARD GUY MANZI RUN LOTUS LIKE A PARTNERSHIP Graph: THE FLOWERING OF LOTUS

Copyright 1985 McGraw-Hill, Inc.