VERITABLE VERIO

Verio hired Herb Hribar as systems integrator, but not the technical kind. When the growing Internet service provider drafted Hribar in June 1998 as president and chief operating officer, his primary responsibility was integrating the regional ISPs that Verio had been acquiring at a breakneck pace since its start in March 1996.

In his role as intermediary, Hribar immediately faced the task of integrating 16 regional ISPs located throughout the United States (see timeline on page 32 for highlights of Verio's acquisition path). It is a balancing act of sorts.

"Our objective has been that we keep the pioneering spirit of the incoming people but roll it into a single company and a single infrastructure," says Hribar. "We've been working on developing a brand identity and a consistent message across all the companies. People have held onto their brands, and they were really proud of them as they came in. Now people have seen the benefit of Verio as a company, and they are beginning to identify very strongly with the Verio brand."

Since its inception, Verio's business strategy has been to buy small ISPs to expand its national network and serve the growing small and medium-sized business market.

Located in Denver's Tech Center, where high-tech firms have been mushrooming, Verio began life with 17 affiliates and $80 million in venture capital. In the early days, its affiliate ISPs set out their own shingles and Verio acted as a silent partner. One year later, with Internet branding stampeding across the new E-conomy and Verio's national rollout plan in place, Verio consolidated its affiliates.

The consolidation involved dividing its operations into five regions. The company's sumo-like appetite for ISPs continued, and now the company faces the challenges of combining networks, support systems, customer lists and staffs into one lithe body that can move with the agility of a rookie but the experience of a veteran.

Technical difficulties Verio's network has expanded with each acquisition. Currently, it interconnects more than 29 national nodes and more than 180 local points of presence throughout the United States. The company has aggregated the bandwidth and capacity of all its affiliates into one national network, and the architecture includes connectivity at MAE West, MAE East and the NY NAP, the Palo Alto Internet Exchange, NASA Ames and other regional connecting points.

The ISP's access points are linked and use asynchronous transfer mode, DS-3 (44.7 Mb/s), OC-3 (155 Mb/s) and OC-12 (622 Mb/s). Verio leases capacity primarily from Qwest Communications, Sprint, MCI WorldCom and others. Last January, Verio extended its capacity and services agreement with Qwest to gain access to Qwest's long-haul capacity and ancillary services. Qwest increased its original 15-year, $100 million contract to $160 million and moved its minimum commitment from seven to 10 years. Verio's regional operating units either co-locate at access nodes or lease connectivity from a local exchange carrier. Verio is now upgrading its network segment to support data transmission rates at OC-3 capacity.

Migrating a new ISP to Verio's network can take from two to six months. In some cases, such as in Portland, Ore., Verio built new facilities because coverage overlapped. After acquiring three ISPs in the area, the company found itself with five hub facilities in one area, so it chose to build one new, upgraded facility with increased bandwidth and redundancy.

"Verio had purchased three companies in the Portland area, but none of them had the scalability to compete nationally," says Eric Hood, vice president of engineering and operations at Verio. "We had to re-home the customers to Verio, but they are now able to take advantage of our network. We'll be able to provide these customers enhanced business services, such as a universal message storing system, which we're rolling out in May."

Some of the mundane but necessary tasks that follow an acquisition include ordering telecom lines and original routing information and integrating customer support systems such as primary technical contacts, customer premises equipment and circuit IDs. However, the biggest post-acquisition roadblock for Verio's IT department involves accessing and interpreting the new company's data.

"The technical challenges are manageable-if you have the data," says Ed Milstein, vice president and chief information officer. "Whether it is electronic or hard copy, the migration requires a rich source of data on the customers and payments. Technical challenges can be overcome if you have data."

Some of the difficulties in understanding that data have caused ripples of discontent among the customer base of newly acquired ISPs. Customers have complained of busy signals, dropped calls and nonexistent technical support, not an unusual occurrence among ISPs undergoing service changes and rerouting.

As the company increased its service offerings and applications, it looked for a tool to quickly integrate the new services into the business processes. Verio chose Vitria's middleware to interconnect the business applications and allow sales forces to change service offerings on the fly.

"The goal with Vitria was that the applications would know only the middleware, not the business process or other applications," says Milstein.

Verio can add any number of applications and services using Vitria within its business framework. "We want to dummy down the applications so they don't have intimate knowledge about our business," Milstein says. "The Vitria middleware has all the business application knowledge. This keeps IT from having to go back and change each service individually."

"Now we can reuse the elements to make new products and services without going back and creating new services and products. It allows simple-unnatural-integration," says Hood.

Because Verio always knew acquisitions would be part of its business strategy, it built an accommodating back-end support system. One of the early OSS decisions was to use Kenan's Arbor billing software. "Verio needed to be able to absorb different business models and grandfather them in to a centralized customer care and billing system," says Betsy Campbell, marketing manager for the Internet business unit at Kenan.

It takes about three months to move new affiliates onto the national billing system. "Conversion is an arduous process," says Milstein. The accounts receivable data has to be as clean as possible because it's a waste of time to convert old, erroneous information. The process includes cleaning the data, referring to filed paperwork, and loading the data onto the national system.

Verio is also in the process of enhancing its on-line billing interface, iCare, so customers can view their statements on the Web site. One of the challenges for the IT department is that it doesn't have a homogenous view of all customers. "There's no unique customer ID for all the customers. During an acquisition we may add 25 Jim Smiths, and we don't have an opportunity to identify each of them," says Milstein.

Kenan's Campbell says Verio has probably integrated more customers onto its billing systems than any of her other clients. "We want customers like Verio that don't cower in the face of complexity," she adds.

With each acquisition, Verio also has added administration systems and network access servers. Recently, Verio chose Bridgewater Systems' Widespan Service Controller to centrally manage the growing network system. The Widespan Service Controller includes a customer data repository, a policy engine, a Radius server for controlling services and an administrator access area that attaches the service profile to the customer profile and provides user authentication.

The Widespan Service Controller segments the administration database so ISPs can roll out services in a number of ways. In Verio's case, it can begin offering service in one region before rolling it out nationwide. "Verio understands it needs to balance providing national service as well as meeting unique regional needs," says Dave Curley, vice president of marketing at Bridgewater. The Widespan Service Controller segments the database so customers will have access only to those services they've signed up for.

Curley expects Widespan Controller to be integrated throughout Verio's architecture by midyear. Verio will also integrate Widespan Controller into its Netscape mail offering and later into the billing system. The Bridgewater system will create an accounting record when a customer signs up for Verio's service, which will be passed into the billing system.

Customer service representatives use Vantive's customer care software and Kenan's ServiceSoft, which complements Vantive's customer care and trouble ticketing features by extrapolating alerts and resolutions for the CSR. "We felt we could improve the CSRs' experience by adding the notion of learning," said Milstein.

The soft side of sales Characterizing Verio's acquisitions is difficult since they run the gamut. The company crossed the Atlantic for the German WWW Services AG, Long Island Net was a five-desk office, and Hiway, the largest addition to date, added thousands of new heads to the staff count. Following typical good business practice, human resources and senior management visit their new staff as quickly as possible to introduce themselves and the company.

All new employees receive stock options and an employee stock purchase plan. In most cases, Verio's benefits package is better than the previous employer's plan. Additional booty that new staff walks away with include Verio's poster of core values, a company T-shirt and a welcome letter.

"About 80% of new employees never had stock options," said Deb Gahan, vice president of great people and fun (a newly created title, conceived by Gahan to better reflect the Verio culture). "We want to encourage people to be entrepreneurs, and we want everyone to see themselves as owners."

Verio has about a 70% to 80% retention rate among its acquired employees. (Figure 1 shows a breakdown of Verio's staffing.) Gahan attributes the success rate to how the company treats top management after acquisitions. Verio has a history of filling senior positions with executives from its acquisitions. Four of Verio's five regional presidents had been founders or CEOs. At the national level, two of the vice presidents came out of acquired companies.

For Gahan, one of the most important aspects of a potential acquisition is a similar corporate culture. "Most of the companies were a lot like us. The reason that 75% of acquisitions fail is because the people don't connect," she says.

Future tense Going forward, Verio's acquisitions will continue, but the characteristics of the new companies will change. The ISP isn't looking at making an acquisition in every major metropolitan area; instead, it's looking for companies that will expand its current offerings.

"You'll see a shift from many small acquisitions to a few larger ones," says Hribar. "We'll go after companies that either fill a product gap, a geography gap or a channel gap. They'll take a little longer and there will be less of them, but they'll have just as big an impact." Requirements for future acquisitions include a sound financial condition, a quality customer base and additional growth opportunities.

Verio's international strategy has already been put in place. Last October the company bought WWW Services AG, a Web hosting firm in Germany with data centers in Germany, the U.K. and Japan. Verio has customers in 170 countries and partners in 20 countries.

It also has about a 20% interest in Via Networks, which shares Verio's philosophy of buying smaller ISPs. Via Networks currently has acquired five companies in Europe and Latin America.

"Via Networks is a daughter company of ours, but it's not controlled by us. We've been trying to provide them with the know-how we've gained over the last three years and help them develop their national strategy," says Hribar. Going forward, the companies will develop in parallel, but independently and autonomously. "It's hard to tell where the relationship will go. It may become tighter, we may have more of a partnership or we may possibly become one company," he adds.

An international presence is an expensive proposition for Verio. However, the company has offset the costs by working with partners that create subdistribution channels. "It allows us to offload some of the costs of going international from a direct cost basis to a revenue-sharing basis with our partners. It's given us a strong international distribution without having to bear the costs normally associated with going global," says Hribar.

Verio's business model of buying small regional ISPs is comparable to the early cellular days when companies grew by aggregating a number of small operators. One possible reason for this likeness is that many of Verio's top management come from cellular backgrounds. CEO Justin Jaschke was chief operating officer for Nextel Communications and OneComm; Hribar was president of Ameritech's cellular services (see sidebar on this page); and Chris DeMarche, chief technical officer, was senior vice president of Nextel.

While most of Verio's acquisitions' MOs have been reminiscent of cellular in the early 1990s, the Hiway Technologies purchase last July was unusual. Of all Verio's acquisitions, Hiway was the largest and most expensive. It was valued at approximately $202 million and was larger than all its previous acquisitions combined. The price tags for most of the ISPs were less than $20 million.

Regardless of the acquisition or network needs-and despite the fact that Verio is operating in the red-there's been no lack of venture capital. In 1997, the company had $36 million in revenue but lost $46 million. In 1998 it had revenue of $120.7 million but lost $122 million. Total loss before interest, taxes and depreciation was $51.3 million.

Yet venture capitalists remain bullish on Verio's vision. "Investors believe there's a huge future here in e-commerce and Web applications. As a company, we've been able to raise enormous amounts of capital. Much of it is due to senior management being able to clearly communicate our strategy," says Hribar. "They've been good at saying this is what we're going to do, this is how we're going to do it, and here's why it's a great idea."

With the venture capital community convinced, Verio is now out to convert the masses. It is in the throes of creating a stronger national image and has a slick television advertising campaign going in the Chicago, Washington, Los Angeles, New York, Bay Area and Texas markets. The company wants to change its identity from an acquisition-driven rollup to a proven service provider for small business-Verio's average customer has 20 employees and the projected customer life cycle is five to seven years.

"This isn't a financial player or rollup that we've just cobbled together," says Hribar, "It's an operating company that is committed to being successful."

Previous experience: Before joining Verio, Hribar held various positions at Ameritech, including president of the cellular services business unit, vice president of international operations and managing director of Ameritech Europe. Hribar has also held positions in ADSB Telecommunications, Sprint and GTE Telenet.

Overall responsibilities: Integrate regional operation centers and head sales and marketing efforts.

Aspirations: Change Verio's perception as a technology-focused rollup. "In a year or two, I would like people to know Verio as a customer-focused, marketing-oriented Internet company. I'd also like people to look at this as a preferred place to work. Because of the pace and the characteristics of a rollup, it may not be considered one of the top 10 places to work now, but I'd like it to become the best place in the Internet to work. If those two things happen, I'd really feel good about my role here at Verio."

Market predictions: ISPs will target specific vertical markets and make a niche for themselves within certain sectors. "Those companies that find vertical markets and commit to them will have enormous growth. Two we're finding success in are communications and education. The idea that you can tailor your service in a kind of rifle shot rather than a generic splash is going to be really powerful going forward. I don't know of any company who has done that well yet, but the science is there to do it.

"Once you start aggregating the verticals you get natural communities of interest developing, then you get a million customers with common buying or selling characteristics doing business together. These intertwining businesses will lead to very strong communities."