Sales: $364.5 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: FILE
NAIC: 511210 Software Publishers; 334112 Computer Storage Device Manufacturing; 33411 Computer and Peripheral Equipment Manufacturing
Since the mid-1980s, FileNet Corporation has been helping paperwork-heavy enterprises efficiently track and store digitized documents. The company has reoriented itself more than once in order to stay alive amid rapid changes in technology. In its early years, FileNet pioneered the use of optical disks to store digital images of documents. Later, it changed its focus from hardware to software, marketing programs that helped companies manage the flow of documents using their existing hardware. Now FileNet refers to its services as "enterprise content management," or ECM. The company's "P8" software allows organizations to store, track, and retrieve information in almost any format, from images to spreadsheets to e-mails. FileNet's typical clients are large financial services concerns such as insurance companies and government agencies. The company has a network of offices across the United States to provide technical support and consulting services. In addition, about 25 percent of its sales are in Europe, and it has subsidiaries in Asia and Australia as well.
Developing Optical Storage Systems: 1982–91
In 1981, Ted Smith had just gotten fired from his job as president of minicomputer maker Basic Four over a policy disagreement. Smith had over two decades' experience in the computer industry. After earning a bachelor's degree in aeronautical engineering in the 1950s, he had learned about electronics in the Air Force and then worked for several different technology enterprises. When his stint at Basic Four came to an end, Smith took a few months to ponder his next step. He considered running an existing company, but none of the job offers he received was sufficiently enticing. So, as he told Forbes in 1988, "I decided that I wanted something over the horizon."
It did not take him long to find that something. A handful of U.S. laboratories and Japanese companies were working on something called optical disk storage. Unlike the magnetic disks common at the time, which stored information by magnetizing and demagnetizing parts of the disk, optical disks had data burned into them with a laser. A 12-inch disk could hold ten times more information than the highest-density hard disks then in use. The only drawback was that they could only be written on once. Who would want to use a disk that could not be modified?
Smith knew that many companies needed to keep exact replicas of documents such as loan applications, personnel records, and tax files. These documents needed to be stored as images rather than text files so that signatures and other unique elements would be preserved. However, images files were far too large to be stored conveniently on regular computers, so companies relied either on paper files or on expensive microfilm and microfiche systems for document storage and retrieval. Since this information was not digitized, it could not be integrated with the company's computerized operations. An optical storage system had the potential to increase productivity at paperwork-intensive businesses by allowing documents to be stored and exchanged electronically.
In 1982, Smith created FileNet Corp. in Costa Mesa, California, with the goal of commercializing optical disk technology. He raised $4 million in venture capital from investors and recruited Edward Miller from Xerox as his chief engineer. However, optical storage systems were far from being ready for the marketplace. The technology was still in the development stage at laboratories, and the supporting hardware needed to be designed and built. It took a year and a half of work before a complete optical storage and retrieval system was ready for commercialization. While the laboratories refined optical disk technology, Smith worked with his engineers to develop a large piece of hardware they called a "jukebox," which was able to stack and retrieve over 200 optical disks using a robotic arm. To provide for the digital conversion of paper documents, FileNet had a scanner custom-built in Japan. In addition, the company was the first U.S. customer for Hitachi's new desktop laser printer, which would allow clients to print a copy of the image they saw on their screen.
After investing $30 million in the venture, FileNet installed its first system at Security Pacific Bank in 1985. The sale included all the hardware, wiring, scanners, jukeboxes, and PC consoles that were needed to work with optical document images. In addition to the hardware, FileNet's "WorkFlo" software provided for interface with the optical storage system. WorkFlo eventually developed beyond a mere document-viewing interface into a structured tool for regulating the way paperwork moved through an enterprise. "Workflow" became a generic term for this concept when the rest of the software industry developed similar programs.
FileNet's 1986 sales totaled $30 million; by the end of 1987, FileNet had sold about 120 systems, priced between $500,000 and $1.5 million, to clients such as Chase Manhattan, Citibank, Merrill Lynch, and the U.S. Air Force. Several of its clients were in Europe, so FileNet launched a division to market systems there. The company went public on the NASDAQ in July 1987 and raised $25 million for business development.
In 1989, FileNet had a large contract with the State of California turn sour. The secretary of state's office had installed a $4.1 million FileNet system to keep track of commercial borrowers and the assets they pledged as collateral. However, bugs with the new system led to a two-month backlog in requests for document searches. FileNet claimed the state would have avoided problems if, as advised, it had run the new system alongside the old system for a transition period of a few months. FileNet worked with the state to restart the system but eventually defaulted on the contract when the state demanded an earlier startup date than what FileNet believed was feasible. While the company lost a few million dollars in the deal, it nevertheless retained a largely positive reputation and remained able to convince potential clients of its reliability.
By the end of the decade, competitors were challenging FileNet's early dominance in the document image-processing industry. Small startups, including EastTek Corp. in New Jersey and Plexus Computer Inc. in California, as well as giants such as Kodak, Wang Laboratories, and 3M were able to develop their own systems as optical storage technology became more well-known. In 1988, IBM entered the market as well and captured the largest share of clients by the early 1990s. FileNet was also hurt by the fact that the corporate world was not embracing the new technology as enthusiastically as predicted. The company posted its first loss in the third quarter of 1988. Smith responded with more energetic marketing, including new territories such as Japan, and made sure the FileNet's clients were led step by step through the conversion to optical storage technology. FileNet's superior customer support and its Work-Flo software gave the company a competitive edge, and it posted a $3.8 million profit in 1990 on sales of $102.9 million.
Reorientation from Hardware to Software: 1991–97
In 1991, FileNet introduced a new version of WorkFlo that was compatible with Microsoft's Windows interface. Unlike earlier versions, the software could be used on computers that were not directly supplied by FileNet. However, customers still needed to buy the scanner manufactured by FileNet. The incompatibility of FileNet's systems with less expensive off-the-shelf hardware was becoming an increasing burden to the company. Many of FileNet's competitors offered document storage solutions that allowed clients to use their existing hardware or buy workstations and scanners from the vendor of their choice, but FileNet was still shipping full systems of proprietary hardware to its customers.
In response, FileNet shifted its focus from hardware to software in 1992. The company discontinued many of its manufacturing operations and began buying file servers from IBM. New software known as FolderView came out that year; it was more flexible than WorkFlo, allowing people with less structured work routines to sort through documents and find what they needed. FileNet's software reorientation, as well as slower orders and economic problems in Europe, led to an $8 million loss in 1992. The company was also facing a few lawsuits that claimed it had misled investors with overly optimistic predictions.
FileNet laid off about 150 of its 1000 employees in 1993 after stopping production of customized computers. The company's selling point now was software that helped establish processes for moving work through an organization. At $100,000 to $250,000 for a software package, FileNet's products were much less expensive than they had been a few years earlier. The company also began marketing through resellers instead of using only its own sales force. In 1993, software sales accounted for about half of revenue, up from 5 percent at the start of the decade. FileNet posted profits in 1993, 1994, and 1995 and started hiring again. Net revenue was up to $215.5 million in 1995.
FileNet Corporation helps organizations make better decisions by managing the content and processes that drive their business. FileNet's Enterprise Content Management (ECM) solutions allow customers to build and sustain competitive advantage by managing content throughout their organizations, automating and streamlining their business processes, and providing the full spectrum of connectivity needed to simplify their critical and everyday decision-making.
Now that it had successfully reinvented itself as a software company, FileNet began seeking acquisitions that would enhance its product line. In 1995, it acquired Watermark Software for $61 million in stock. Watermark was a two-year-old Massachusetts-based company that made document imaging systems for smaller companies than the clients FileNet generally targeted. The next year, FileNet acquired Saros, a Seattle-based software company, and International Financial Systems Limited, a New York developer of archiving software. The acquisitions gave FileNet a broader product range without requiring extensive research and development investment.
Nevertheless, the acquisitions turned out to be difficult to integrate. Sales teams at the various companies did not function together well, and FileNet hit another rocky period. It lost $9.4 million in the first three months of 1997, sales fell 29 percent, and the company laid off 150 of its 1,650 employees. The Watermark subsidiary was shut down, and customers were saying they found the company "slow and stodgy."
Refining Internet Capabilities under Lee Roberts: 1997–2004
Amid the turmoil, Smith recruited Lee Roberts, a former IBM executive, to take over as FileNet's president and chief operating officer starting in the summer of 1997. Roberts became chief executive a year later. One of his first efforts was to replace many of the sales executives with an ambitious new team charged with revamping the entire sales force. Roberts also adopted a new motto, "To put the right information in the hands of the right person at the right time to make the right decisions," as well as a new FileNet logo featuring a window reminiscent of Microsoft. Software development was also in need of revival, so Roberts hired about 40 new engineers. A major goal of the new generation of programs was to make it possible to query and retrieve documents over the Internet or a corporate network. Engineers were also working on something called "integrated document management." This would allow users to access both documents and images using one program instead of the two separate programs that were necessary at the time.
By the end of 1997, sales were already picking up. At the start of 1998, FileNet launched Panagon, a set of integrated document management and workflow products that provided some Internet functionality. However, in the first stumble since Roberts took over, FileNet reported a loss in the third quarter of 1998. The company laid off about 6 percent of its workforce. Nevertheless, the new products and sales team were successful over the long term. After a small profit in 1998, FileNet had profits of $19.7 million in 1999.
Internet-based management of documents was the strongest trend in 2000. The simple storage of static documents was no longer an impressive service. In the electronic age, information could be stored in dynamic paperless form. E-commerce, for example, could be conducted using electronic documents with digital signatures. Flexible content management would also help firms provide more responsive customer service. These emerging applications gave FileNet a wider market for its products. The company refined its Panagon software to work more seamlessly with the Internet and mesh with a wider variety of Microsoft programs. FileNet had a record profit in 2000 of $38.5 million on revenues of nearly $400 million. Near the end of that year, Ted Smith resigned his chairmanship to Lee Roberts.
FileNet's high-flying performance came to an end with the economic downturn of 2001. Once again, the firm was cutting employees, and it reported a net loss of $16.6 million that year. Times were tight into 2002, and the company instituted mandatory vacations around Thanksgiving and Christmas to keep costs down without cutting more employees. Still, FileNet moved ahead with product development. In April 2002, it bought eGrail Inc., a small company making software to manage content on Web sites. Sales rose slowly toward the end of 2002.
January 2003 brought FileNet's largest product launch ever. Its "P8 architecture," which had been under development for several years, integrated the three previous programs—Panagon, Acenza and Brightsphere. P8 provided a uniform framework that clients could use to access more than 200 types of content, including PowerPoint presentations, photographs, streaming video, legal forms, and word-processing documents. The software had several parts, including a business process manager, a Web content manager, a document manager, a records manager, and an image manager. Customers could buy one or all parts for a cost of about $125,000 to $500,000 and scale the program to fit their needs. FileNet expected its clients to gradually shift to the new program over the next few years. In the spring of 2003, FileNet acquired Shana Corporation, an Edmonton, Canada-based company that made software for managing electronic forms. Shana's software was integrated into the P8 architecture.
As FileNet entered 2004, it was marketing its products as a solution for legal compliance in the wake of several corporate governance scandals. By helping enterprises keep track of information, FileNet promised to make it easier to follow newer, more stringent regulations. Meanwhile, the content management industry was going through a period of consolidation. FileNet was largely steering clear of the merger game and relying on organic growth and small acquisitions. The content management field was projected to grow over the next several years. Roberts expressed confidence that FileNet would keep a step ahead of the competition and remain standing through the consolidation shakeout.
- Ted Smith founds FileNet to develop optical disk storage technology.
- FileNet ships its first document storage and retrieval system.
- FileNet goes public on the NASDAQ.
- FileNet changes its focus from hardware to software amid declining sales.
- Lee Roberts takes the helm at FileNet and revamps its sales force and product line.
- FileNet reports record sales and profits as Internet-based content management grows.
- The company introduces P8 software, a framework for managing information in many formats.
FileNet Corporation Pty. Limited (Australia); FileNet GesmbH (Austria); FileNet Canada, Inc.; FileNet S.A.R.L. (France); FileNet Hong Kong Limited; FileNet Company Limited (Ireland); FileNet Italy, S.R.L.; FileNet Japan; FileNet Corporation Korea; FileNet Corporation BV (Netherlands); FileNet Poland Sp. zo.o.; FileNet Corporation (Singapore); FileNet Iberia S.L. (Spain); FileNet Sweden AB; FileNet Switzerland GmbH; FileNet Limited (United Kingdom).
IBM Corporation; Oracle Corporation; Microsoft Corporation; Documentum Corporation; OpenText Corporation; Interwoven Inc.
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—Sarah Ruth Lorenz