6.4.1 THE STORY OF LOTUS NOTES

    David Reed, former chief scientist for Lotus Development Corporation and now a technology investor himself, recently told us the story of how the OCI approach worked for the development of Lotus Notes, a software product that allows organizations to create collaborative work spaces over local and wide area networks (and now the Internet as well). Notes was released in 1990, when Lotus's chief product offerings, the 1-2-3 spreadsheet program and the Symphony suite of related products-themselves killer apps-had largely died out. Notes became the company's principal source of revenue until 1994, when IBM acquired Lotus for $3.3 billion, a price that largely reflected its valuation of Notes.

    Ray Ozzie, a talented programmer who had designed Lotus's Symphony product, came up with the idea for Notes in late 1984. Ozzie wanted to develop a new approach to sharing information among PC users in a group. "In those days," says Reed, "the idea sounded totally off the wall. PCs had barely penetrated the market. Local-area-networks (LANs) were just starting and it was not obvious what they were good for. E-mail had been heavily used by programmers in DEC and Software Arts, where Ozzie had worked earlier, but Lotus did not use E-mail at all. Windows 1.0 was a cute idea, but a technical dog, and Ray's product idea depended on the multitasking capabilities of Windows. There was no market case for such a product, and most people could not imagine why anyone should care."

    Nonetheless, Ozzie believed that the idea would take off once a critical mass of networking applications and PCs with the power to support graphical interfaces and multiple applications running simultaneously were available at reasonable cost. Lotus founder Mitch Kapor shared that belief, but neither could say when the prerequisites would be met. There was no sensible way to make a business case for investing the resources it would take to develop the Notes concept sufficiently to decide whether it was a winner or not.

    Kapor, a leader as well as a visionary, found a way to keep Ozzie involved with Lotus. The solution was a new investment model that aligned the interests of both parties while managing the uncertainties of the Notes project. Kapor formed a new corporation called Iris Corp., which was founded solely to develop the Notes concept into a product. The structure of the transaction was unique. According to Reed, "Lotus was committed by contract to fund the development of the product, but Lotus did not own the product. Instead, Lotus had the right to review progress periodically and decide whether to continue funding the project. As long as Lotus continued to fund the project, Lotus had the right to take the product to market at the point when it was ready. If Lotus stopped funding the project or decided not to bring it to market, Iris was free to take the product to market by any means it chose, including working with another company, such as Microsoft."

    Between the time the project was initiated and the time Lotus brought Notes to market five years later, there were many inside Lotus, Reed says, who felt that the investment in Iris was a bad idea and urged Lotus's senior management to cut Iris's budget. "Typical questions raised were: `Why are we wasting some really talented people on a wild goose chase?' `Before we cancel project XYZ, shouldn't we look at the money we're pouring into Iris?' and `What does Iris have to do with our strategy?'" Unlike other projects, however, Iris had a contract in hand that gave it leverage in such discussions. Their leverage, however, was limited to the value Notes had outside of Lotus-if the project really had no value to the market, then Lotus could easily drop its funding. "As a result," Reed says, "Lotus was highly motivated to invest resources to learn how to bring Notes to market in the most effective way. If the best possible analysis determined that Notes had no value, then Lotus would suffer no remorse at writing off its sunk costs."

    After several years and multiple senior management reorganizations (including the departure of Kapor), an entrepreneurial manager brought the product to market, and after a shaky start in 1990, Notes gradually evolved to become the centerpiece of Lotus's strategy and the basis for IBM's hostile takeover in 1994. Says Reed, "I'm convinced that had Notes been handled as a `normal' internal development project, the pressures to apply the best talent to short-term crises, plus the uncertainty about when the market would materialize and what the demand would be, would have caused Ray and his team to be reassigned, and the project would never have happened. Or, alternatively, had Notes become known as the `chairman's pet project' it would have been overprotected and would not have had the close scrutiny that it did receive, resulting in a much more polished product and positioning when it was finally introduced."

    Managing innovation as a portfolio of options, as these stories suggest, requires new skills. It also requires leadership and will. As we will explain in Chapter 7, the disruptive power of digital technology alters the roles and relationships between I/S executives and the rest of the management team in many ways. From the standpoint of innovation, senior executives must now be involved in technology investment decisions. They must take ownership of the portfolio and manage it, as Mitch Kapor did, as if the future of the organization depended on its paying off. Because it does.