Q&A with Zach Lonstein, Infocrossing CEO: The Beauty of a Business with Recurring Revenue | Article

Zach Lonstein, CEO InfocrossingInfocrossing, a provider of selective IT and business process outsourcing solutions, is on the move. On November 30th, 2005, Infocrossing acquired (i)Structure. The acquisition was an important move that strengthened Infocrossing’s market position, added capabilities in higher growth markets, and provided a foundation for achieving greater results. Infocrossing now has a strong national footprint with five data centers and offers multiplatform computing capabilities such as mainframe, midrange, distributed systems, and network management outsourcing services, along with IT-enabled healthcare business process outsourcing and managed enterprise application services.

Editor Beth Ellyn Rosenthal talks to CEO and Chairman Zach Lonstein about the wisdom of selective outsourcing, the impact of offshoring on the industry, and why a business with recurring revenue is a beautiful thing.

Q: What was your first outsourcing experience?

A: I started a business in the 1970s that provided payroll outsourcing services for taxi cab companies in New York City. At the time, most companies paid their employees in cash, but when the taxi cab drivers unionized, they needed to establish a payroll system that would automatically deduct union dues from the cab drivers’ paychecks. The company I started provided an online payroll processing system that ultimately grew to support approximately 11,000 cabs and 100,000 drivers. I sold the business in the early 1980s, and then founded Infocrossing.

Q: What lessons did you learn from that experience?

A: There were probably three lessons that I learned that have guided me over the years. The first is the strength that comes from having a recurring revenue base. Having an established client base that provides predictable revenue month over month affords you the opportunity to make long-term investments to grow the business. The second is the necessity to build long-lasting relationships with your clients. That’s particularly true in the outsourcing industry, where a company’s decision to outsource can affect the next ten years of their business. And the third lesson is to develop a business that provides substantial operating leverage. For example, in the payroll business, all of our processing was done from a proprietary system that resided in a data center. New customers were added to the existing infrastructure, which provided substantial profitability as the business grew. Those are the lessons: recurring revenue, under long-term commitments, delivered from a consolidated infrastructure.

Q: What was your next act?
A:
Not surprisingly, I started another company that enabled companies to outsource some piece of their operation. Infocrossing began as a company that offered an inventory tracking system for manufacturing companies. The proprietary application resided on a mainframe computing platform, and we sold the service on a monthly subscription basis. Again, this provided a monthly recurring revenue base for a service that resided on a shared infrastructure.

Q: How did you grow the company?
A:
The recurring revenue base and the operating leverage from the shared infrastructure provided us with the latitude to invest in growth through new services and targeted acquisitions. We had excess capacity in our data center, and found that once we had taken over one piece of our clients’ operations, they wanted us to take over other applications that could be consolidated onto our mainframe. So we expanded our offerings to include IT outsourcing services. We also began an initiative to grow through acquiring companies that offered complimentary applications that ran on a mainframe platform. We acquired these “tuck in” companies, consolidated their infrastructure to achieve the savings required to fund the purchase price, and began offering the services to our expanded client base.

Q: Why did you take the company public?
A:
We had grown the business to approximately $10 million in annual sales. I wanted to share some of the value of the company with my employees, and I wanted to access some capital to accelerate our growth. Taking the company public enabled me to do both. We raised a modest $5 million in the initial public offering by selling one million shares.

Q: What lessons did you learn from the dot com era?
A:
It was an interesting time in which selling equity was cheaper than taking on debt, so like most companies, we took in a lot of capital in exchange for stock, changed our name to “Infocrossing,” declared our “new economy” growth strategy and saw our share price increase five-fold in approximately three months. For a brief time, I believed the new paradigms, but the euphoria was short-lived, and the market quickly began favoring companies with traditional business models based on revenue growth and profitability. For me, the period strengthened my belief in building a business around recurring revenue, long-term relationships with our clients, and operating leverage.

Q: You specialized in selective outsourcing, only offering to take over certain portions of your buyers’ infrastructure. Why?
A:
We’ve been a provider of selective outsourcing services since the company was founded. Outsourcing isn’t a new proposition, and the rationale for outsourcing has been constant – to save money. But the biggest roadblock to outsourcing is the uncertainty and fear of turning over operations to an outside provider. We’ve found that selective outsourcing offers a compelling value proposition because it enables companies to achieve the cost savings without the risk and loss of control associated with other types of outsourcing engagements. The mega-deals are usually very complex, and either one or both of the parties can end up wanting out of the engagement. We don’t have that problem because our deals are very precise; the client understands what they are outsourcing and we understand what we need to deliver.

Q: How is offshoring affecting your business?
A:
Outsourcing used to be a decision made by financially troubled companies that wanted to cut costs or offload assets. But over the last several years, the pendulum has swung, and virtually every industry views outsourcing as a smart business practice. Offshoring is a good indication of how mainstream outsourcing has become, and I think the practice is benefiting Infocrossing. But we don’t compete with offshore outsourcing companies. Our business model is based on leveraging IT infrastructure, including hardware, software, communications, management tools and people across multiple clients, where offshore outsourcing is largely about labor arbitrage. In the next couple of years, it’s more likely that we will be a customer of offshore outsourcing companies, rather than a direct competitor.

Q: Today, what’s the biggest challenge you face in the sales process?
A:
Although more companies are accustomed to outsourcing, the process is still very long and involves high-level decision makers from across the client’s business. A twelve month or longer sales cycle is not unusual in this industry.

Q: What’s your corporate challenge at the moment?
A:
We acquired (i)Structure at the end of 2005, and funded the purchase price, in part, with additional debt that we expect to repay by realizing significant operating synergies and increased cash flow from the combined business. Right now, we are obsessively focused on integrating the company to achieve the expected cost savings, and leveraging our enhanced market position to drive greater organic growth. Those are our priorities: achieve our targeted cost reductions and grow the business by selling more of our services.

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