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| Home - CEO Spotlight - Sep 05 Issue |
CEO Spotlight: Jonathan Yaron, Enigma Inc.
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Angel Mehta: So what did you do?
Jonathan Yaron: I got the team together and I said, "we either diversify out of aerospace or we're done." We made the decisions quick….cut deep…and moved on. I let go of 40% of our staff and went back to the original model of the days when we were running on a shoestring. Controlling the burn…expenses in line with revenue… and so on.
Angel Mehta: When did you turn the corner from managing for survival to managing for growth again?
Jonathan Yaron: We started to win major business in automotive and construction. We won Ford in Europe, Volvo and Daimler, Mercedes cars around the world. Then we partnered with Ford North America; and we believe this year we'll add to the portfolio another two or three companies, major brand names, and each one of those brand names becomes a world of its own because it's sold to different regions and different languages and different sub-brands that a lot of them own. So each relationship actually opens up a series of other deal possibilities; it's not just a single deal.
Angel Mehta: Government should be a prime target for you, shouldn't it?
Jonathan Yaron: Yes, in fact, at the end of 2003 we made a strategic decision to start going after the U.S. defense market. Prior to that I was worried about the red tape in government, and blocked any decision to get involved. But it became obvious very early on that they really needed our system, as they'd been hurting for a very long time by not having a standard platform.
Angel Mehta: Help me understand the nature of the product offering and how it's different from any of the extensions or modules that SAP might offer.
Jonathan Yaron: SAP is largely focused on developing modules that leverage their transactional system. It's all relational database applications. We focus on a different audience that needs more than a database app. Enigma is linking the transactional world with the document world to provide mechanics with a one-stop-shop of all the information they need to diagnose, maintain and repair complex equipment. Because of our singular focus on this difficult problem, SAP is actually a partner to Enigma. In fact, an SAP executive sits on my Board.
Angel Mehta: What strikes me as so interesting with your story is that most of the pundits have labeled the enterprise applications game a foregone conclusion - that is, it's owned by either SAP or Oracle. All point applications end up becoming an extension to a major ERP player and it's just impossible for smaller vendors to compete. What has Enigma done differently that has allowed it to grow the way it has?
Jonathan Yaron: Foregone conclusion is a description the pundits use to describe the industry five, ten years out. But look at what these large companies are really doing. They're buying smaller vendors to integrate to their own product suite. As long as smaller vendors stay totally focused on meeting the needs of their markets, they will always have the advantage. Companies like Enigma are more nimble, better able to respond to changing conditions. Look, there were four major challenges that we faced over last four years: technology meltdown, commercial aerospace dying, excessive inventory of real estate and the death of enterprise software. The real estate caused us to lose millions of dollars around the world. We actually were luckier than other companies. Just think about it: a company that goes from $9 million to $22 million and obviously prepared itself for public offering to become $60 million…excess real estate was a big problem and that took down a lot of companies. The fourth was the death of the up-front buying of a million dollar software license. Everyone touts the ASP model as this huge advantage for the software industry but in truth it really hurt the vendors because they were depending on 50% of their revenue from license and under an ASP model, you're not going to realize that until it comes up.
Angel Mehta: What is the single biggest challenge you see for Enigma over the next 12 months?
Jonathan Yaron: The biggest challenge is to create a large enough revenue stream that is recurring, that goes with a subscription and takes away the volatility that comes from very large deals. It's a challenge because the sales force that is good for a multi-million dollar is not necessarily good for subscription business.
Our biggest opportunity by far in the next 12 months is the DOD in terms of business, and it's actually the old model. We've reached a point where we can make a serious difference in the cost and in the readiness of the American Soldier. Readiness meaning the equipment up-time… more equipment that works in the field on time… and the cost of maintaining the equipment could be reduced significantly.
Without any political clout…because frankly Enigma has no political clout…we have won very significant business. Thankfully, some of the system integrators that work with us have political clout and know how to play the game…but if we didn't have such a superior technical advantage we'd be finished.
I should say that adapting to the subscription model is a huge challenge also. There are only 400 - 500 companies in the world that would buy the old-school software license because they want to control every last detail of how the product works - basically they want a custom application. But we know that the general commercial market - the one that wants an ASP model - is going to be very lucrative and so making sure we have an offering for them is key.
Angel Mehta: What have been the biggest non-customer related successes for Enigma over the last couple of years?
Jonathan Yaron: I would say that enriching our board with great people has been a huge victory. Ray Lane accepted an invitation to join the board, and is one of the most active board members we have - a great mentor to me. Also, Leo Apotheker, the President of Global Field Operations of SAP, is a great contributor and a very strategic advisor.
Angel Mehta: But how did you acquire these Board Members without securing them as investors?
Jonathan Yaron: It's the story. I keep telling people: there are more workers serving as mechanics and field service engineers than any other job function on the planet. When you aggregate all the people that fix cars, fix airplanes, repair utility and telecommunication equipment…this is an unbelievably huge number. And it's an untapped market, so far. The west is going to have to become better and better at servicing to compete with the manufacturing business moving to China, the current low cost labor threat. So we've got an enormous opportunity in front of us!
The other thing is… it's amazing how much bluntness works. In a very simple and direct approach, I said, "the only thing I'm interested in is having you join the Board of Directors. I want you to make a difference". And I think that made a real impact with both of them - they just hate bullshit. Obviously, there are other factors. We have a good story here: the company is synergistic with other things they're doing…I guess they're comfortable with me as an entrepreneur. So it's a combination of all those things.
Angel Mehta: Give me some examples of the types of problems that the Board would help you solve.
Jonathan Yaron: Ray Lane is a big proponent of the subscription business and he's been helping Enigma shape our approach to the ASP delivery model. Leo and I had a whole discussion on how to actually sell it into the SAP market. So those are examples.
Angel Mehta: You started Enigma at 27 years old, which means you really started your career as an entrepreneur. Do you ever feel that maybe you don't have the management competency to guide the company beyond the level it's reached today?
Jonathan Yaron: It's not in my personality to think that way. Right now, I feel like I'm running too small a business. Now obviously in the first five or seven years, I was learning on the job. In those days, you could raise money even if you didn't know what you were doing - people would pay you to learn, which today wouldn't happen. In the last five years though, I've gone through so much… from the peak of being on the verge of going public to facing basically a debt penalty for the business. I've gained so much from those experiences. So the answer is I feel quite comfortable.
Jonathan Yaron is chief executive officer and co-founder of Enigma, Inc, which was incorporated in 1992. Under Jonathan, Enigma has emerged as the leading provider of aftermarket service and support solutions for manufacturers, operators and dealers of capital equipment. For article feedback, contact Jonathan at: jonathany@enigma.com
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
 
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