Virtual companies, real profits - small firms which outsource most of their production - Cover Story

Nation's Business, Dec, 1995

Black Rock Ventures is a company that's nearly invisible but has generated roughly $10 million in sales in its first year of operation. One secret to its success is that the Englewood, Colo., company, the maker of the Killer Bee golf driver, is a prototype of the "virtual company."

"We outsource everything," says Larry Hoffer, Black Rock's general manager and one of its five full-time employees.

Black Rock farmed out to a New Jersey company the design of the Killer Bee--which is 2 to 3 inches longer than a traditional driver--uses five marketing agencies around the country for its TV infomercials and other promotional activities, and has two Asian companies produce the club components and two American contractors assemble them. A local company handles telemarketing, order fulfillment, and customer service.

"We basically spend our time managing our vendors and planning our strategic direction," says Hoffer. He also is one of the more than 40 investors who formed the company last year to capitalize on a perceived niche in the burgeoning golf-equipment market.

The Definition Of Virtual

What makes Black Rock "virtual," in today's business parlance, is its outsourcing of so many functions in dogged pursuit of low overhead, its seemingly unlimited flexibility, and the savvy leveraging of resources that has generated quick growth.

Hoffer says Black Rock may bring house a few vital functions, such as customer service, as the company expands with new products and better marketing. But "we don't want to grow this beyond probably 20 employees. We'll leave all the messy stuff to outside people."

The virtual-company concept exploded onto the American business consciousness several years ago as analysts tried to articulate what was happening. On the one hand, Fortune 500 companies continued downsizing and re-engineering. On the other, more-nimble, entrepreneurial businesses ascended in the U.S. economy.

But it has taken some time for the reality to catch up with the theory. ("Virtual" also has been used to describe companies' use of the Internet and other computer networks.) "The `virtual company' was kind of a neat catch phrase that you didn't actually see much of in practice for a while," says Frank Casale, executive director of the Outsourcing Institute, in New York City.

You don't have to be a multimillion-dollar company like Black Rock to be virtual. Public-relations company owner Rob Beswick likes to think of his approach as "insourcing" the functions he needs to create and execute the business he wants. He has a full-time staff of just four people and relies on a tightly strung-together band of independent designers, writers, photographers, and others to keep growing his firm, which specializes in marketing communications for manufacturing technology. (For a look at issues surrounding the use of independent contractors, see Page 26.)

`Greater Value For The Dollar'

"I bring in the talent I need to do the job, so I can provide much greater value for the dollar spent by my clients," says the 48-year-old president of Beswick Communits Inc., in Pittsburgh. "I can provide a level of creativity in advertising, for instance, and a level of design excellence in any project that I wouldn't be able to offer if I had to hire the same people and keep them on the payroll."

Cat's Pajamas has been virtual--and not so virtual. Several years ago, the St. Paul, Minn., graphic-communications company had four full-time employees in addition to the owners, husband and wife Michael Hazard and Patricia Olson. But the couple didn't like what began happening to the core of their business. "We were evolving away from Pat and Mike doing creative communications for individuals and companies to Pat and Mike managing a business, having account executives, and creating more of a hierarchy of production, which we didn't like the feel of at all," says Hazard.

So Cat's Pajamas gradually eliminated its full-time staff in favor of a latticework of relationships with artists, writers, videographers, and other professionals in a virtual-company arrangement that has worked out much better. "The beauty of it is that, as a virtual company, we can grow and shrink depending on the flow of work," Hazard says.

Working Over The Garage

The M.S. Harman Co. is about as virtual as a small company can get. The Columbus, Ohio, firm grosses about $500,000 a year supplying oil-can and other plastic spouts to big retail customers, including Wal-Mart and Kmart. Yet M.S. Harman Co. is basically just Walt Harman and his son, Doug, operating from an office over Doug's garage.

Walt handles product development and marketing; Doug does administration. They contract out package design and product prototyping to local shops, manufacturing of the spouts to a company in China, and packaging to a nearby firm.

"Most companies that get into financial trouble put too much money in the beginning into rent and maintenance," Walt Harman says. "When you have a building, you have to have equipment and someone to operate that equipment. We prefer to put our money into calling on clients and communicating with them and improving our products."