Good Things Come In Small Packages

Joseph Schumpeter put it well when he observed that economic progress, in capitalist society, means turmoil. In Michigan, this is all too apparent; the gutted Rust Belt factories here are a persistent reminder of the Austrian economist's acuity. Now, as new industries — notably information, biotechnology, and nanotechnology — germinate in the land once bustling with the Big Three, the beleaguered economy is trying not to repeat the mistakes of the past.

One lesson that is becoming apparent is that of David and Goliath: Bigger does not necessarily mean better, and small, nimble firms often weather the vagaries of business better than behemoths.

LLamasoft, a software firm occupying an Ann Arbor office populated by engineers and stuffed versions of the company's namesake, embodies this notion. The company operates within a relatively small ($150 million) niche known as supply chain network modeling, which is tucked within the larger supply chain management software industry ($6 billion). They make decision support software called Supply Chain Guru, which helps companies decide on critical factors like where to build factories and when to ship supplies.

"Why does anyone ever want to do simulation at all? Because everyone wants to predict the future," says company founder and president, Donald Hicks. "The rub is in the actual prediction."

In a sense, this means that LLamasoft competes with companies like Oracle (50,000 employees) and Accenture (150,000 employees). But the company's employees will be quick to tell you this is not exactly the case. The economics of software engineering encourage large companies to tailor their technology as widely as possible, which usually means missing some nuances.

Do one thing well

"What companies are coming more and more to realize is, they can hire out an answer for one specific problem and then as soon as that project is done, they've basically lost their ability to evaluate new scenarios," says Toby Brzoznowski, vice president of sales and marketing.

LLamasoft takes the opposite route. By focusing their software on the integrated supply chain to the exclusion of all else, they can offer a unique solution. In this sense, their size and scope — nearly opposite that of the Big Three — is one of their biggest advantages.

It doesn't end there. To the east, MR Innovations, a similarly sized company, is just firing up their international operations.

Innovations shares a historic Detroit house just north of Wayne State's medical campus with its nonprofit research-oriented sister, the MRI Institute. Both are the brainchildren of Wayne State University's Dr. E. Mark Haacke, a magnetic resonance physicist at Wayne State.

Innovations' biggest asset is its patent on Susceptibility Weighted Imaging, a technology developed by Haacke and the MRI Institute that can dramatically cut the time taken for research on many neurovascular diseases. At a recent magnetic resonance imaging convention in Germany, SWI garnered an encouraging amount of buzz from the international community.

But after the patent was licensed to Siemens about three years ago, Innovations has remained largely dormant. Now, as clinics catch on to SWI, they are trying to attract more companies to buy in. This means expanding.

Enter ELM Research and Strategy, a consulting firm that helps companies from community nonprofits to Fortune 100 firms do just that.

ELM, itself a small company of about twenty, is comprised mostly of professionals working in a variety of countries. Much of the time their work is to help companies "find the needle in the haystack" as they expand their global networks, says senior partner Jabril Bensedrine, who currently works with Innovations. 

"People talk to me and tell me, 'I have a project in Alaska. Can you help me?' or, 'I'm looking for people in India,'" Bensedrine says. "Part of our service is really taking people into the world."

What's remarkable about these smaller companies is that, while they are still able to compete internationally thanks to modern communication technology and the services of firms like ELM, they are not burdened by the layers of bureaucracy that often stymie larger companies. At LLamasoft, for instance, the boss is rarely more than a couple dozen feet away (a few hundred if he's on one of his daily Starbucks runs). If programmers find something that will enhance their product, Brzoznowski says, they simply add it.

"I've sold software for a long time now, and the sales cycle is just so long usually, because you have to have these extra layers of approval," Brzoznowski says. "By being able to cut through that red tape, our cycle is 60 days or less, as opposed to 6 months"

But the question remains whether this can last. Bureaucracy, for all its obvious disadvantages, institutionalizes practices often crucial to long-run stability. Often, when companies like these grow, they must face a paradox: The structure that brought early success is not feasible to sustain them.

For LLamasoft, now on their fourth year of 100 percent employee and revenue growth, going bigger means making the jump into the "mission-critical" support services provided by many larger companies. While this would swell LLamasoft's revenues, it would mean renting new offices, hiring new employees and generally abandoning much of their current freedom.

And for a small company with lucrative technology like LLamasoft and Innovations, there is always the threat of a buyout. "Everyone has a price," Rachel Martin-Lase, administrator at MR Innovations says.

"There's always the wave," Brzoznowski of LLamasoft observes. "There's a certain point where there's a critical mass of these point solutions and eventually the large companies in order to compete and keep growing their own market share start to gobble up those companies."

More Davids, less Goliaths

For now at least, it is clear that these companies have a steady and important role to play in any attempt to rebuild Michigan's economy. The trouble, though, is how to attract and keep them.

"People always ask, 'would a tax break or would this and that bring us in?'" Brzoznowski says. "I don't think most entrepreneurs pay much attention at the level we're dealing with."

This may be frustrating to those bent on concrete guidelines, but there are at least some clear lessons to take from the examples of LLamasoft and Innovations.

First, invest in universities. Michigan has a distinct competitive advantage, and it is foolish not to press it. Universities fuel an intellectually adventurous culture, drawing innovative companies like LLamasoft and Innovations and encouraging them to stay.

"We have top-notch talent from Michigan State and U of M right at our disposal," Brzoznowski says. They even made an offer to a consultant from the United Kingdom, only to eventually choose a local graduate. Bensedrine of ELM says that Innovations will soon be looking for a business graduate who will almost definitely be local.

The next step for Michigan, Bensedrine says, is to encourage large firms to spread their technology into other industries by funding and promoting the growth of new companies.

"In terms of the Big Three companies, and generally the large players, I'd say develop some corporate venture programs or reinforce them," he says. "That will create jobs and will help find a national — or global — market. It will attract people to Michigan who are world-class sort of people."

Nice restaurants, views, and historic homes like the one Innovations occupies don't hurt either. In other words, place matters. The emerging global marketplace has erased many of the barriers to entry for businesses, so where a company sets up shop has a lot to do with where talent wants to live. Both Martin-Lase and Brzoznowski said the attractiveness of their locations were a large part of the choice to locate and stay there.

Even then, careful consideration must be given to growing companies. Google's Ann Arbor office recently elbowed most of LLamasoft's employees out of their traditional parking structure.

Keeping them around, Brzoznowski says, "is as simple as not kicking us out of our parking spaces."