Finding the profit in storage: the owners of Data Products and Solutions scrambled to get into the data storage business when the Y2K boom in information technology subsided. (Small Business).

WHEN Brian Levine and his partner Randy Tennant founded Data Products and Solutions Inc. in Simi Valley in 2000, they realized they had a tough road ahead of them.

The Y2K phenomenon turned out to not be quite the disaster some had predicted, and there were plenty of information technology service companies already in the marketplace ahead of them. Still, after seven years each with another company that had just gone through a merger, the two saw their days there were numbered and decided to take a chance.

"We just knew we had to he better than the competition," said Levine who, along with Tennant, sank a combined $80,000 into their new information technology business.

With what they felt was no shortage of contacts to call on and an office and equipment financed mostly with a $120,000 loan from the U.S. Small Business Administration, Levine and Tennant were set to take on the scores of IT firms already in business throughout the region.

And sure enough, offering just the standard IT services like technical assistance, hardware, software and computer cables and peripherals, the young company was able to grow. Thanks in big part to the surge in IT required for all those Y2K computer system upgrades--and that Rolodex of past contacts they brought from their former employer--the company saw its numbers rise almost from the get go.

In its first year, Data Products posted $1 million in sales. In 2001, sales increased to $3.7 million. But as 2002 began, the company's fortunes started to turn.

"We could see that the numbers were going down and getting worse," Levine said.

The brief post-Y2K era of complete computer system upgrades was gone for good, companies were no longer spending money by the bushel on IT, and Levine and Tennant saw the writing on the wall.

The competition for what business was left was fierce, with competitors offering services at a loss just to keep their customers.

"You couldn't sell hardware at what you were selling it just a few months before because (IT) people were selling it at less than cost," Tennant complained.

Levine and Tennant realized they had to retool to survive.

"We had a storage business, but it was really small. So we decided to really start to emphasize it and sell it," Tennant said.

By offering to store data companies wanted to safeguard from fire, earthquake damage or some other catastrophe, Levine and Tennant began tapping into a concern of companies which had never used such a service.

"Some people were realizing the value of storing their data for the first time," Levine said.

With the help of another SBA loan, this one for $275,000, Levine and Tennant built a temperature-controlled, heat-resistant vault to store data from customers at their Simi Valley location.

"We felt that offsite data storage would complement the rest of the business and help pick up new customers," Levine said.

Even then, the odds seemed stacked against them.

Shifting gears into new markets is a risky way to deal with a down IT market, said Eric Kuppinger, a sales consultant with Veritas Software Corp. in Mountain View, which sells software to IT firms.

"There was a lot of that going on last year--IT companies going into data centers and Web hosting and diversifying--but a lot of those companies who are still around are still stinging from that," Kuppinger said.

But for Levine and Tennant, data storage has revitalized its IT business. Due in part to its free courier service that picks up data from companies for transport to its storage vault, the company says it has attracted a number of firms who want to combine their storage and IT services.

"We have banks and other financial institutions that like the fact we use unmarked vans and offer high security at the offsite storage facility," Tennant said.

Although 2002 revenue has been relatively flat, the company is projecting a ramp-up in 2003 to about $4.2 million.

Such figures are in keeping with an Aberdeen Group study showing IT spending in the U.S. will increase in 2003 by about 3.6 percent, marking the first time IT spending will have grown in two years.

RELATED ARTICLE: Data Products and Solutions Inc.

Year Founded: 2000

Employees in 2000: 2

Employees in 2002: 7

Revenues in 2000: $1 million

Revenues in 2002: $3.9 million

Goal: To grow the company's data storage business to compensate for revenue lost on the IT side

Driving Force: The growing need for offsite data storage