Bob Aldrich, a 30-year veteran of the energy business, had plans for a small, innovative electric generator that could power shopping malls and corporate campuses. There was just one problem: potential customers wouldn't give him a contract until he had a factory to build the generators, and he couldn't get financing to build a factory until he signed a customer.
Aldrich's solution? Create a virtual company.
In mid February, Aldrich, chief executive officer of Dirigo Energy Institute Inc., a startup utility, helped launch another firm to manufacture 27 of the generators this year. The first unit is scheduled to roll off the production line in June. What makes this still-unnamed company so distinctive is that it has no offices, no workers and no factories. Instead, all its production will be done by six manufacturers that will each get a stake in the venture.
This is no shell corporation. While a shell is a way of hiding a business practice, a virtual company is meant to produce goods - in this case generators - that the participants wouldn't necessarily make on their own. Making this virtual company possible is a young business called G5 Technologies Inc., based in Cherry Hill, New Jersey, with added support from IBM Corp. G5 specializes in pulling together the expertise and excess capacity of small and midsize manufacturers to create virtual companies that can compete for big contracts. Aldrich worked closely with G5 and says he would have had a much more difficult time getting the new venture off the ground without the company.
The concept of virtual companies isn't new, but until now the technology wasn't available to create them profitably and on a large scale. G5 can trace its roots to 1994, when the Defense Department joined with a venture unit of the Pennsylvania state government to create G5's precursor, a project called Agile Web. That company soon hired Bill Adams, a former senior executive at General Electric and Lockheed Martin who had experience managing large contracts. As Agile's director, he helped the firm gather information on small, struggling manufacturers that did everything from industrial design to assembly. When a market opportunity arose, Agile bid on the contract, using the capabilities and excess capacity of each company. On several occasions, when its bids were accepted, it then formed virtual companies - legal entities in which each manufacturer has equity - to make the goods.
Still, Adams realized that Agile Web, which did much of its work manually, was not agile enough. Last year, he and three partners raised US$5 million, formed G5 and bought Agile Web. Since then, they have teamed with IBM to automate the process of creating virtual companies. The aim is to put information about the capabilities of manufacturing firms into a database and use artificial intelligence to figure how they could form a virtual company to address a market need.
IBM, incidentally, is not only a G5 partner, it's also looking to help its suppliers form virtual companies. Big Blue just finished testing its Virtual Enterprise Builder and plans to bundle it into its existing e-business offerings.
Setting up virtual companies isn't a piece of cake. Small manufacturers are loath to share their expertise with anyone, and larger ones will try to corner big opportunities for themselves.
Aldrich couldn't have manufactured his generators without the virtual company. Before signing on with G5, he had talked to several large manufacturers about the order, but they all gave him the brush-off. Had he decided to build his own factory, he'd have had to shell out $10 million. And that's more of a commitment than he ever wanted to make.