Web Business 50 Awards: Staying Power

Among the footnotes to the year, 2001 will be remembered as the time the Internet lost its get-rich luster. Hundreds of dotcoms failed. Billions in venture capital vanished. And the prevailing wisdom that once said the Internet would radically change the business world has sobered with time. "Few innovations in recent business history have promised more but delivered less than e-business," write authors Joel Kurtzman and Glenn Rifkin in Radical E: From GE to Enron - Lessons on How to Rule the Web. The companies and individuals that have succeeded on the Web aren't necessarily those that jumped in first or developed the most novel strategies. Instead, many have focused on simplicity and on applying traditional business thinking to a new channel.

This return to reason makes the success of this year's Web Business 50 winners all the more instructive. Despite the dotcom debacle, they show there are still organisations that are using the Web to improve business and create valuable services.

Excelling online isn't easy (in retrospect, it never was). Now the uncertain economy adds to the challenge. So, unlike previous years when profitability wasn't in the picture, we focused this year on tactics that give these sites staying power.

Consider Web Business 50 winner Southwest Airlines Co. Southwest takes pride in the ease of use of its Web offering, which reflects its no-frills approach to business. Last year, the airline generated 31 percent of passenger revenues or US$1.7 billion through Southwest.com. Not bad for a company that invested $5 million to launch the site and spends $21 million a year to maintain it. The airline industry has taken a devastating blow this year, but Southwest's Internet strategy will no doubt give the company an advantage over its competitors.

Sites dedicated to customer service also rose to the top of our 288 Web Business 50 contenders. (We changed the name from Web Business 50/50 after deciding that the distinction between Internet and intranet sites had blurred.) The Atlanta-based American Cancer Society recently spent $7 million to redesign its site, Cancer.org an effort that included sending six employees of Web consultancy Sapient to spend a week with cancer patients and their families. The result is a more personalized and interactive site for the nonprofit group that addresses specific questions and concerns of cancer patients. "It doesn't matter what your tax status is," says James Miller, ACS's director of Internet strategy. "Customer expectations continually evolve, and you have to meet those expectations." In order to improve its customer service, mail-order giant Lands' End, another Web Business 50 winner, partnered with My Virtual Model, a Montreal-based software company whose virtual modeling engine gave Lands' End visitors a chance to "try on" clothes without having to order them first.

Apply Business Basics

Many companies fail to apply basic business principles to online ventures. Not so for Eastman Chemical, which listened to its customers by monitoring its site activity and found that they wanted more technical information on the company's 400 chemical, fiber and plastic products. In response, Eastman Chemical created online tools that help customers compare and select solvents.

Intranet winners this year also showed an increased awareness of the needs of their customers, in this case employees and company business partners. Ford's intranet, Myford.com, gives 175,000 employees access to personal information and company news, as well as more personalised data relating to each division. GE Capital Fleet Services invested $20 million in developing its intranet site, which in turn has helped the company move a large portion of its vehicle-ordering business to the Web.

This year's list of Web Business 50 winners is by no means a definitive list of the world's greatest websites. Online innovators such as Amazon.com, Dell and eBay would surely make the roster if it were. As in past years, the applicants were primarily self-nominated. This year, we also opened up the competition to nominations from our staff, who added first-time winners Google, Mary Kay and Washington State's website, among others, to the mix. For a two-week period, our judges immersed themselves in their task, clicking on every link, debating design and comparing functions, customer service and navigation. To determine the winners, we relied on the following criteria: usefulness, ease of navigation, business value, survival prospects, design and credible content. We then closed ourselves in a conference room, and debated and lobbied each other for hours, finally settling on our list of 50 winning Internet and intranet sites.

Our varied list of winners ranges in style and mission from the National Center for Missing and Exploited Children, which helps parents search for lost children nationwide, to game site Shockwave.com. Throughout our judging discussions, we consistently returned to the theme of survival tactics and found that our winners, in their diversity, shared several more traditional business strategies for keeping their heads above water. Returnme.com, which returns lost items to their owners, formed a crucial partnership with FedEx instead of spending $100 million on a custom-built infrastructure. Similarly, Drugstore.com joined with General Nutrition Centers and RiteAid to boost customer trust and recognition and help it outlast Web competitors. In addition to forming close partnerships to stay alive, some of our winners, including K2 and O'Reilly & Associates, are successfully promoting community on their websites in order to boost sales and increase customer loyalty. And sites of companies such as Harrah's Entertainment and The United States Mint are taking advantage of Web surfers' love of games to keep them coming back.

Through it all, our winners though certainly not all profitable yet are keeping an eye on the bottom line. Southwest.com, which has made money from the start, has helped the company continue to keep offering cheaper fares. Another Web Business 50 winner, Glasgow, Scotland-based Global Recycle a trading platform for the recycling industry controlled its costs even as it watched its competition overspend. For eLance, which helps freelancers and those seeking services find each other, making money has meant a round of layoffs last October and switching to a subscription model at the beginning of the year.

Given the ups and downs of the past year, do we have a better idea now of where the Internet's future lies? Mohanbir Sawhney invites us to look at the history of other popular communication networks as a means of looking ahead. Newspapers, radios and TVs have challenged each other in succession but have ended up coexisting, Sawhney points out. The future of the Internet, he argues, won't be radically different. Though not as flashy or society-transforming as we thought, the Internet isn't going away. To glimpse its future, we need only look over our shoulder.

Senior Writer Susannah Patton (spatton@cio.com) covers e-commerce for CIO.

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If the dotcom bust has taught us anything, it's that some vertical industries are better suited to the Internet than others. Travel, B2B exchanges, career services and personal finance are notable for staking out a healthy if not profitable slice of the online pie. This trend is certainly reflected by this year's Web Business 50 winners: Eight of them fall into one of those categories. Yet what do AIRS (Advanced Internet Recruitment Strategies), Eastman Chemical, eLance, Foliofn, Global Recycle, Salary.com, Sidestep and Southwest Airlines have in common besides residing in industries prone to Internet success? What lessons, if any, can they offer companies in other industries about doing business online? It turns out that those companies are pursuing similar strategies and following fundamental business practices that enable them to survive and thrive on today's Internet.

A mile in your customers' shoes

Putting customers front and centre sounds obvious, yet more than a few online businesses never considered how or why an actual human would use their site. In industries like travel and career services, where data begs for consolidation via the Internet, hundreds of companies vie to provide customers with access to the same information. So how the data is presented, the convenience with which customers can access it and the reliability of search results may be all that separates one successful company from the pack, says Sandeep Varma, vice president of new strategic initiatives for New York City-based consultancy Stern Stewart & Co. This is a philosophy that Southwest.com credits in achieving its status as the most visited airline website (with 4.4 million monthly users), according to Jupiter Media Metrix Inc.

"We made sure [our site] is in English, not 'Airline-ese,' and we organised it around the way a traveler thinks, not the way our business is set up," says Kevin Krone, vice president of interactive marketing for Dallas-based Southwest Airlines. One nice touch: Southwest.com engineered its ticket search so that travelers can see both schedule and fare information. Site users can choose flights based on what's most important for them; a businesswoman looking for an 8 a.m. flight might opt for an 8:30 a.m. trip instead because she'll save US$30. "Showing them all that information gives customers a lot of comfort," Krone says.

It also cultivates trust, an invaluable commodity on the Internet. "Trust has always been a big issue for businesses outside of the Web, and it is especially important on the Web," says Patricia Wallace, author of The Psychology of the Internet (Cambridge University Press, 1999). "The companies that maintain their integrity will survive."

Customer confidence has been a key to the online expansion of 81-year-old Eastman Chemical, a Kingsport, Tenn.-based provider of 400 chemicals, fibers and plastics that are used to make everything from Pepsi bottles to nail polish remover. One of the top 10 global chemical suppliers with $5.3 billion in revenue, Eastman was among the first of such companies to do business online in 1999. Currently Eastman.com has 34,000 users a month. "There are so many things you have to do to sell chemicals in terms of compliance, testing and regulations that people just feel more comfortable coming to us online than they do some new online company or exchange," says Jenny Quillen, content manager of Eastman.com. "Trust is a big thing, and you build that by being reliable online and off."

For AIRS, tuning in to customers led to an entirely new stream of revenue. Born as a training provider in 1997, the Hanover, N.H.-based company taught recruiters how to locate passive job seekers on the Internet. After conducting thousands of its $2,000 Search Lab classes, AIRS executives noticed they were getting the same comments from clients: They loved what they learned but couldn't remember everything on their own. So in 1999, AIRS introduced Search Station, an online tool automating the search techniques taught in its seminars (such as zeroing in on employee contact information on company websites or finding candidates in chat rooms). "We pride ourselves on really taking our customers seriously," says Director of Internet Operations Matt Swett. More than 2,000 companies, including Microsoft, Motorola and Oracle, pay $3,000 per year for a Search Station subscription.

"Constantly asking customers what kind of information they want is vital to success on the Internet," says Wallace.

Be different

In 1998, former Securities and Exchange Commissioner Steven Wallman hit upon a novel idea. Using the Internet as a self-service platform, he founded Foliofn, to let individual investors play professional portfolio managers by buying and trading customised baskets of up to 50 stocks. When Wallman devised the business plan, the stock market was flying high and online brokers were a dime a dozen. In addition to a new investment approach, Wallman decided to further differentiate his company by offering individual investors the service for a flat fee of $29.95 a month, an alternative to the pay-per-trade strategy of the competition. The decision has since proved fateful. As the stock market has softened, Foliofn's subscription model has resulted in a steady revenue stream, according to CTO Jerrold Grochow. And the company's do-it-yourself focus resonates with investors who seek diversity and control in tough times. Revenue has remained strong, and assets under management have grown despite tough times, according to Grochow. (The company declined to release figures.) Foliofn attributes its success to its sole focus of creating and enabling an innovative investing approach. "If you look at the hundreds of thousands of businesses on the Internet, the ones that are of interest are the ones that provide something that is above and beyond what you could get before or provide something in a way that you could not get before," says Grochow.

The $15.4 billion online travel industry is crowded with well-known brands. To carve out a niche, Sidestep acts as an intermediary between consumers and travel-industry suppliers such as airlines, hotels and rental car companies. As a self-described purchase facilitator, the Calif.-based company searches the websites of its suppliers, presents the options it finds in their entirety and takes the customer to the suppliers' websites for the purchase. That approach allows Sidestep to offer consumers a variety of travel options including specials that appear only on supplier websites and not on those of competitors such as Travelocity and Orbitz. It also relieves Sidestep of any fulfillment and customer service responsibilities.

Suppliers prefer Sidestep because fees are as much as 50 percent less than those charged by travel agents or other sites, according to Jung Shin, vice president of engineering and operations. And consumers like Sidestep because they know they won't get a cheaper quote at a supplier website. That combination has garnered the company more than 1 million users in the year it's been operating.

Money matters

Great ideas and customer focus are important, but the bottom line for any online business venture is...the bottom line. As Stern Stewart's Varma says, "Red is dead." Successful websites must eventually either make money or reduce costs, so figuring out a viable business model is critical.

Like many companies, eLance has had to resort to layoffs in order to contain costs; it trimmed its staff from 135 to 90 in January 2001. The company provides a marketplace that connects companies seeking help on projects, which range from administrative support services to flash animation to tax preparation, with a pool of professional talent. The company not only provides a professional matchmaking service, it also offers a billing and payment system, online file sharing and quality assurance programs. While not yet profitable, eLance has overhauled its revenue model, switching from transaction fees to subscriptions, and it is on track to break even early next year. It now offers its services for a range of subscription fees beginning with $25 per month for projects under $500, to $7,000 per month for projects up to $250,000. The tiered strategy has not only evened out the company's revenue, it has weeded out many "hobbyists," so the site offers an even stronger pool of professional help.

Making money is only one part of the equation; spending money judiciously is an equally important success factor. Whether profitable or not, these eight winners maintain the same tightfisted control over their funds. There are no multimillion-dollar advertising campaigns or swanky urban office suites among them.

For lessons in frugality, Glasgow, Scotland-based Global Recycle found that competition is the best teacher. "We watched as other [executives at] commission-based trading platforms flew first-class," says Pat Daly, managing director of Global Recycle, a trading platform for the recycling industry. Many of the companies burned millions of dollars and quickly disappeared. "They had dramatically overspent on technology and man power," Daly adds. "Controlling costs is what we do best."

Salary.com, a provider of Web-based career compensation information and recruiting services, decided to build its product through syndication. The strategy is both a low-cost alternative to buying up half-time spots at the Super Bowl and a source of revenue. The Wellesley, Mass.-based company's Salary Wizard is now on 300 sites as well as its own. Typically, Salary.com receives a syndication fee from partners for use of the Salary Wizard; the partners in turn get a slice of advertising revenues. As a result of syndication, Salary.com was the eighth most visited career site in July 2001, with 768,000 visitors that month, according to Jupiter Media Metrix. All that attention despite little spent on advertising. "Our marketing budget is very, very, very, very low," says Tim Driver, senior vice president and general manager of consumer products.

Many burgeoning dotcoms with their sights set on becoming the next big IPO ramped up staff before they earned the revenues to justify it. But at Sidestep, managers didn't hire extra employees to accommodate future growth. The company maintains a lean staff of 35, who each either maintain and improve the site or sign up new suppliers and expand existing partnerships. The company keeps things simple on the technical side as well. "If you buy the latest and greatest product solutions, it will hurt you especially if you have to keep paying for them year after year when you're not getting the revenues you hoped for," says Shin. Sidestep pays nothing to use Apache and Tomcat servers, both open-source products, and Shin runs his Java software on inexpensive Linux machines.

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Be nimble up to a point

Initially the plan for Foliofn was to grow by building business partnerships among the online community. However, as the company was preparing to launch its site, it ran into the beginnings of the dotcom shakeout, according to CTO Grochow. Executives quickly realised they'd have to come up with a new plan and launched a Web consumer product instead. "Then we literally ran smack-dab into the Nasdaq crash," Grochow recalls. "One might have to question our sense of timing." Nonetheless Foliofn caught on. "Those potential partners that we had originally been thinking about began to see that we had done this successfully, and they started calling us," Grochow says. "Because we changed our strategy, we're moving ahead even more quickly than we had imagined." Foliofn recently penned a pivotal partnership to offer Quick & Reilly customers its products.

Global Recycle readjusted its initial plans to be an Internet-only exchange for scrap dealers. "As a pure-play exchange, we would have crashed and burned by now," says Daly. Global Recycle now offers customers a variety of channels to do business. "We realised quickly that by using a balance of phone, fax and Internet communications, we could satisfy all of our members," adds Daly. "You can't be afraid to change things at the drop of a hat even if it means going in the complete opposite direction of your business plan. Plans are rewritten monthly, sometimes weekly."

At Eastman, its relatively smaller size in comparison to chemical giants keeps the company and its website on their toes. Having a dedicated e-business group that's closely aligned with the company's business teams also allows Eastman to make continual changes to its Web offerings. For example, Eastman knew that its customers wanted basic product information online, such as data sheets and specs. But when Quillen went to her business partners, she discovered Eastman.com could offer customers more. "We went to our technology community and found they were using all sorts of databases and special tricks to help customers," Quillen says. Eastman.com then transferred such helpful tactics to the Web, according to Quillen.

Robin Minga, technical solutions program lead, and her staff created the site's "wizards" including the Solvent Selector Guide, Flow Rate Calculator and Part Cost Estimator. Information that on paper once covered a very large desktop, according to Quillen, is now incorporated into simple tools. In the process of taking some business processes online, Eastman has strengthened customer relationships, reduced costs and driven revenue, says Quillen. The percentage of orders entered through Eastman.com from DuPont, one of its biggest customers, increased from zero in the first quarter of 2000 to 23 percent during the first quarter of 2001, freeing up Eastman's customer service representatives to work on other initiatives. Eastman.com continues to respond quickly to customers and business partners, which has most recently led to efforts to integrate the site with Eastman's customer ERP systems.

There's a balance between staying nimble and stretching too far beyond your strong suits. A good example is eLance, an online business that's ever expanding its offerings but only within its single area of expertise. The company began in 1998 as a marketplace connecting individual professionals, but eLance executives quickly found that buyers of services weren't the only kind of group using its site. Seventy-five percent of its providers were companies as well companies capable of handling much larger projects. Today, eLance is leveraging its existing technology and base of providers to create an enterprise product that will result in larger licensing fees. This winter, eLance plans to charge Fortune 1000 companies several hundred thousand dollars to use its enterprise software solution, eLance Enterprise Services Procurement and Management, which helps place professionals and vendors on projects.

Successful e-businesses have mastered one or two areas before entering new markets, according to Stern Stewart's Varma. "If you expand into lots of new areas, you may increase market share, but profitability will continue to elude you," he says.

While these eight Web Business 50 companies may have had an initial advantage in their Internet-inclined industries, they are not passively relying on happenstance in order to make it. Each company proactively seeks success either by honing in on customer needs, crafting and perfecting a niche, staying atune to the market or keeping costs in check. These are practices that other companies in other industries will do well to heed.

Share your ideas about online success with Senior Writer Stephanie Overby at soverby@cio.com.

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When Elliot Klein conceived his version of the dotcom dream, to create a lost-and-found service for laptop and handheld computer users, he believed he was filling an important market niche. And to his credit, Klein knew he needed some big-time help.

Returnme.com LLC, which was inspired by Klein's losing his address book in a New York City taxi in 1998, would need capabilities such as shipping, reverse logistics and customer support. Rather than seek the capital to build all of those capabilities from scratch, the entrepreneur sought out partners that could make it happen. He formed marketing and development relationships with handheld makers Palm Inc. and Handspring Inc. to make his company's "eTagit" retrieval service available to device buyers. And Klein struck a key deal with FedEx Corp.: Returnme.com would use FedEx's established NetReturn delivery network to ship found articles back to customers.

After the dotcom shakeout, companies are relying on traditional business practices and focusing on actions directly tied to customer value. Executing successful partnerships represents one of those core competencies. The staying power of Returnme.com, a Web Business 50 award winner for its innovative service, is attributable in large part to its partnerships with players like FedEx that help it serve customers. Other Web Business 50 winners highlighted in this article - Lands' End, Drugstore.com and Bid4Assets created partnerships that support their business models while improving customer service and contributing to growth.

Partnerships are not a new strategy, but the development of the Internet created a potential for connectivity that didn't exist before. The Web has also spawned new kinds of partnerships, such as industry consortia and online exchanges. During the dotcom boom, companies partnered constantly and often in shark-like feeding frenzies in an effort to stay competitive. In a 1999 study of deals among dotcoms and bricks-and-clicks companies, McKinsey & Co. found announcements for 13,000 e-commerce alliances. Then, partnerships were a way for companies to generate press releases and (attempt to) boost their stock prices, says David Ernst, a principal at McKinsey & Co. in Washington, D.C., and coauthor of a report titled "A Future for E-Alliances." Partnerships were great to talk about, but talking and successfully executing are two different things. "It used to be that you could get great buzz by announcing a partnership, and companies looking to do an IPO were advised to partner with a major portal, an IT platform provider and a major e-commerce site," he says. "Now companies have to focus on partnerships that create value."

With a changed economic climate, partnerships have emerged as a survival tactic. In April when the Borders book chain realised its e-commerce efforts were falling flat, it partnered with Amazon.com, whose ordering and distribution channels were established. "Partnerships are Amazon's only real life raft," says Carrie Johnson, an analyst at Forrester Research in Cambridge, Mass. "Sales are slowing, retail is reaching saturation in many categories, and so partnerships are their saving grace."

The Skinny on Partnerships

Partnerships can be an effective way of gaining access to customers, brands and markets that you didn't have before. For e-commerce endeavors, they can provide a cash infusion without taking the venture capital path. But they are not a panacea.

"Partnerships can help you survive and grow and acquire new skills," says Benjamin Gomes-Casseres, associate professor of international business at Brandeis University in Waltham, Mass., and author of The Alliance Revolution: The New Shape of Business Rivalry. "But they are not a cure-all. You cannot assume that you'll get results just because you have partners."

These relationships fail often and for a variety of reasons. One party may try to dominate the relationship, goals and priorities may change over time, and arguments can arise over finances. In September, Cox Communications said it would end its partnership with Excite@home, a broadband access provider, because of Excite's financial difficulties. Ending the partnership was a "protective measure that allowed us take back control of our network and ensure quality and customer service," says Laura Oberhelman, a Cox spokeswoman.

To launch a partnership, a CIO must first have a clear understanding of his own organisation's strengths and weaknesses, says Stephen Spalding, a San Francisco-based principal in the management solutions group at consultancy Deloitte & Touche. "You have to look at your core capabilities and focus your efforts on those," Spalding says. "Partnerships must start with both partners knowing the other will commit resources, blood and muscle to make it work. That way, if someone messes up, they will work together to make it better."

Collaboration Incentives

When Lands' End launched Landsend.com in 1995, executives weren't concerned about going public or buying Super Bowl ads. After all, the company had 38 years of mail order success under its belt, and a business model focused on strong customer service. The site had revenues of US$218 million in fiscal 2001, or about 16 percent of Lands' End's total revenues of $1.35 billion. But the Web project was more of an experiment than a strategic initiative, says Bill Bass, senior vice president of e-commerce. "We didn't bet the farm on a big deal with Yahoo, like some companies did," Bass says. "The business model is very important to us. The site's growth was purely organic we got it running, learned as we went and watched what paid off."

What paid off were noticeable improvements to customer service. Bass says his online team is small (though he declined to say how small). So when he decided to add more features, like personalisation and a product search engine to the website, he looked for help. "It's hard for us to both come up with new concepts for the site and do it ourselves. We always need outside help," Bass says.

In October 1998, Lands' End partnered with My Virtual Model, a Montreal-based software company whose "virtual modeling" engine gave Lands' End visitors a chance to try on clothes without having to order them first. The equity and affiliate marketing partnership is indicative of the company's approach to its online strategy, Bass says. "We saw an opportunity to provide a new service to customers," he says. "Partnerships are important to any business, but they have to be based on solid business models." Bass's development team worked in concert with My Virtual Model's developers to make sure the modeling technology was placed conveniently but not prominently on the Lands' End site. "At the end of the day, people come to our site to buy our clothes, not play with our partner's technology," he says.

Creating and nurturing a close relationship with a partner like My Virtual Model is imperative, Bass says, because such relationships are more beneficial for customer service. As a result, the company's online partners often move in to Lands' End offices for months at a time to ensure good communication.

The partnership is equally important for My Virtual Model, which started the relationship as a provider of custom-built Web designs. With the support and urging of Lands' End, My Virtual Model changed its business model and became a software provider. Lands' End executives "are true partners on many levels," says Yona Shtern, chief marketing officer for My Virtual Model. "We know their outstanding commitment is to customer service, and our solution has to be complementary. That doesn't happen with memos; it happens when both teams work together in unison."

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One reason the Lands' End site has been profitable since 1997 is that company executives don't treat the site as a new business, Bass says. "We never say that traditional business rules don't apply, because they absolutely do," he says.

Bass says he shoots for one major partnership a year whose contribution to the site will reset the bar on how people shop online. So far, the site as partnered with Quickdog, a provider of personalisation software, and EasyAsk, a search engine. Lands' End beta tests the new technology, and if it works, the new feature gets promoted online and in the Lands' End catalogs. But the deal isn't free. "We've made our partners successful, and we've given them a lot of free PR. And in return we ask for a period of exclusivity on their technology and an equity investment in our company," Bass says.

Build a RELATIONSHIP

Drugstore.com President and CEO Kal Raman puts it bluntly: "If we didn't have partnerships, we wouldn't exist." When Raman wanted to know how to make the online shopping experience better for his customers, he went to a local drugstore to ask shoppers how an online version of the shop could make life easier for them. "Customers came and said they wanted the option of picking up prescriptions in-store around the country," Raman says. "We knew we couldn't do everything on our own, so we looked for a retail partner that could help us do that."

In vetting potential partners, Raman (Drugstore.com's former CTO) and his team looked for retailers that shared his company's values and view of the industry. Prospective partners had to be obsessed with customer service. "You have to make the relationship successful for you, your partner and your customers, and you can do that only if you share a common goal, like customer service," Raman says.

In June 1999, after scoping out the business plans, internal operations and strategies of several nationwide chains, Raman chose Rite Aid. A partnership with General Nutrition Centers (GNC) was generated at the same time.

Drugstore.com was founded on partnerships. Amazon.com, an initial investor, still owns 20 percent of the Bellevue, Wash.-based company; CEO Jeff Bezos is on the board of directors. As part of the deal, Drugstore.com gets 10 years of unlimited access to Amazon.com's technology and distribution network. Rite Aid and GNC own 14 percent and 5 percent interest in the company, respectively. In return, Drugstore.com acts as their online pharmacy. The equity and exchange partnerships also give Drugstore.com the exclusive online rights to sell all GNC brand products. GNC and Rite Aid later formed a partnership, and Drugstore.com now has the rights to sell the Rite Aid/GNC PharmAssure brand of vitamins and nutritional supplements. Rite Aid and GNC purchased 12.3 million shares in Drugstore.com for $10 million in cash. These exclusive deals also called for Drugstore.com to share access to its customer base for resales.

By teaming up with Drugstore.com and Rite Aid, GNC was able to extend its retail channel beyond the more than 4,500 stores it operates nationwide, says Archie Isherwood, director of Internet initiatives at GNC. "These partnerships expand GNC's customer reach and lets us offer consumers a number of options for buying our products," Isherwood says.

These deals helped Drugstore.com stack the odds in its favor, says Rob Leathern, an analyst at Jupiter Media Metrix in San Francisco. They helped Drugstore.com overcome issues of trust and name recognition that contributed to the fall of rivals like Mothernature.com and PlanetRX.com, he adds. "You can't just expect people to come to your website and know your brand," Leathern says. "The problem with the Web is that it's very difficult to get the customer to the provider. A user may look for information in a particular context online say, for a book or a gadget and the ideal provider will have no idea that the consumer is there reaching out to them."

Focus on QUALITY

Bid4Assets, founded in November 1999, auctions the assets it gets from surplus government properties and bankruptcies, ranging from office furniture to buildings to financial instruments. The company, which expects to be profitable by mid-2002, has only 35 employees, and its network of contacts is small. Standing alone, the company's chance for success was slim, says Executive Vice President David Marchick.

Marchick made a list of auction leaders in the markets Bid4Assets wanted to penetrate: real estate, financial, bankruptcy, liquidation and food services. His criteria were multilayered. He looked for leaders whose network of contacts, service capabilities and sales staff would benefit Bid4Assets without incurring added overhead. In addition, he wanted companies whose culture and mission fit his company's mix of traditional and entrepreneurial endeavors. In exchange, Bid4Assets offered ties to a Web front-end and the technology supporting it.

"We wanted to partner with a leader that was more established than us and who was interested in using auction technology, but one that didn't want to develop it themselves," Marchick says.

The result was a partnership with Trumbull Services, a subsidiary of The Hartford Insurance Co. Trumbull handled the administrative side of bankruptcy court claims and had a vast network of contacts in the bankruptcy field. In August, The Hartford invested $4 million in Bid4Assets. Trumbull gave the company access to its contacts, and now the two companies sell bankruptcy claims on Bid4Assets' auction site. They also partnered with SB Capital of Dallas, a leading liquidator whose sales and inventory force let Bid4Assets expand its sales capabilities.

For Trumbull, the partnership offered a way to get on the Internet without hiring a staff to develop a site. Bid4Assets had a business model that differed from every other startup Trumbull interviewed, says Lorenzo Mendizabal, vice president of the Windsor, Conn.-based company. "We looked at five or six other companies, none of which are still in business," Mendizabal says. "There was an enthusiasm, vision and strategy that attracted us to Bid4Assets, and that energy helps us be more entrepreneurial."

"We had done only online auctions, and we knew a large part of the liquidation business is more amenable to offline auctions," Marchick says. "Someone in California is not going to fly to Washington, D.C., to buy 10 cubicles. Since we have only 35 people, sending 10 of them around the country to round up material made no sense. SB Capital had people all over the country who could handle inventory, live auctions and equipment removal."

Choosing a partner based on set criteria can be difficult, Brandeis's Gomes-Casseres says. The key is to find a partner with capabilities that match your needs and the incentive to contribute those capabilities to the union. Having more than one partnership is fine, but too many can spread a company thin and create competing interests that can distract from the business plan, he says. "Polygamy is OK, but promiscuity is not," he says. "It's hard enough to run one alliance well, but it gets exponentially harder as you add more partnerships to the equation."

E-mail your partnership insights to Staff Writer Simone Kaplan at skaplan@cio.com.

Ideas You Can STEAL

Pick partners that help you better serve customers.

Insist on deals that are exclusive at least temporarily.

Look for partners that will benefit from your online presence.

Profitable Pals.

Five criteria for building successful partnerships

1. Put the business plan first, and then think about what partnerships can contribute.

2. Make sure there are compelling incentives for each party to cooperate.

3. The deal is important, but the relationship is more important.

4. A few partnerships executed well are worth more than many partnerships done poorly.

5. For the partnership to be managed smoothly, your internal organization must first be well-managed.