04-16-09 | Blog Post

Opportunity In Companies’ IT Cutbacks – Crains Detroit

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Crain’s Detroit Business Coverage of Online Tech’s Growth
Through the Current Economic Downturn

By Tom Henderson, April 5, 2009; Reprinted from Crains Detroit Business

Online Tech Inc., an Ann Arbor-based provider of data storage and file backup for disaster recovery, sees the current economic downturn as an opportunity to continue growing its business at a double-digit rate.

As other companies deal with budget problems by cutting their IT staffs or putting expansion plans on hold, Online Tech wants to use its beefed-up marketing and sales staff to take advancategorye of the opportunity.

“In the fourth quarter, we started getting a lot of people coming to us, saying they were putting their IT plans on hold,” said Online TEch CEO Yan Ness, who in 2003 led a group of investors to buy the company, then known as Online Technologies Corp.

The company, which changed its name this month, was founded in 1994 as one of the state’s first Internet service providers but has morphed into a provider of off-site data storage services.

“It costs $1,000 to $1,500 per square foot to build a data center, so that becomes an easy project to delay or stop,” said Online Tech President and COO Mike Klein, a finalist in 2000 for Crain’s Entrepreneur of the Year after the sale of Ann Arbor-based Steeplechase Software, a company that grew out of an MBA project at the University of Michigan.

Klein grew the company, which used PC-based systems to run factory floor operations, to $10 million in revenue before selling it.

Online Tech has had strong growth almost from the time Ness led the acquisition.

In 2005, the company was named by the Edward Lowe Foundation as one of 50 small companies in Michigan to watch. And the company won Fast Track awards from Ann Arbor Spark, an economic-development organization, in 2006, 2007 and 2008 for its consistent growth of 30 percent or more.

Last year, the company again grew revenue by about 30 percent, to almost $4 million, and hired 10 staffers, many of them in marketing and sales, to bring employment to 16, plus six contractors.

Ness said the company expects to grow revenue about 15 percent this year and add another four to six employees.

Klein said they decided to shorten the company name to help marketing efforts.

As Online Technologies Corp., it tried to brand itself as OTC but, said Klein, “OTC sounds like over the over the counter … over-the-counter stocks, over-the-counter drugs. Building a brand around that was hard to do.”

The company has revamped its Web site and switched to a new logo. It has 280 customers, 90 percent of them in Michigan.

It targets small to midsize companies with $50 million to $2 billion in revenue. Most have a focus on financial institutions, software-as-a-service companies and biotech companies that tend to generate vast amounts of data as they do genomic research.

“They are the first hosting source we ever talk about with our clients,” said Rich Sheridan, CEO of Ann Arbor-based Menlo Innovations L.L.C., which designs custom software for area firms.

“What I like is their approachability. Everyone wants to believe hosting is cut and dried and cookie-cutter, but it’s not. It’s nice to sit down with their team and work out the right strategy to handle security and scalability.”

For the short term, Ness and Klein plan to grow the business primarily in state.

“We want to own Michigan. Then we’ll own the Midwest and go from there,” Ness said.

The company plans to grow both organically and through acquisitions. Klein said he hoped to buy another Michigan or Midwest data-storage company of Online’s size or smaller in the next year.

Longer term, Ness and Klein hope the increasing cost of energy will help them lure customers from warmer states. Two longtime trends expected to continue for network servers is that they grow ever more powerful and continue to shrink in size.

That requires more and more energy to keep them cooled.

“Forty percent of your energy costs are from removing heat. It’s like waste. It’s like scrap metal on a floor,” said Ness. “One thing about Michigan that helps us is it’s cold here for a long time. It costs less to cool here. We even use outside air to cool our data centers.”

He said cooling issues can also help Online capture more local business.

For example, customers who built large data centers eight or 10 years ago thinking they had a 20-year life might find themselves butting up against their cooling limits as new servers generate more heat.

Another factor in growth plans are national industry marketing studies that show data-storage demand increased by 14 percent last year while supply was up only 6 percent, figures that are expected to remain stable the next three years.

Online has plenty of excess capacity to handle demand, with three hosting sites — a 10,000-square-foot facility in Avis Farms, south of Ann Arbor; a 10,000-square-foot facility in downtown Ann Arbor; and a 32,000-square-foot facility in Flint it bought from Gentech L.L.C. in 2006.

Southfield-based Secure-24 Inc., another firm that provides data storage and disaster recovery in addition to managing local area networks and providing a full-range of outsourced IT services, also has seen a boost as a result of the economy.

“We’re seeing the same effect from clients who are reducing their staffs,” said COO Volker Straub. “Companies are deciding they don’t want to manage an IT staff, they’d rather manage an IT contract with a vendor. We are seeing that a lot.”

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