Firm Finds Tighter Focus After Internet Slump.

INSIDE the offices of Guidance Solutions are remnants of the anything-goes Internet days. A surfboard hangs over the receptionist's desk. Silly pictures adorn workers' cubicles. There's a "hang-out lounge" of comfy couches and beanbag chairs.

But make no mistake -- these are sober times for the Marina del Rey-based Web-services firm.

"Our energy level is equivalent to where it was during the dot-com peak, but the environment is entirely different," said Joseph Tang, chief executive and co-founder.

That means workers riveted to their computer screens instead of strolling to the "hang-out lounge." It also means a big drop in sales.

After generating revenues last year of $21.2 million -- a 158.5 percent increase from 1998, making Guidance the 11th-fastest growing private company in Los Angeles County -- the bottom has fallen out.

A 160-person workforce as of mid-2000 has been slashed to 70. A big portion of the hip office space has been subleased and a short-term lease expired on other space. Even with all the slashing, Guidance is looking for 2001 revenues of just $8 million to $10 million, which may be a stretch given that it generated just $3.5 million through the first nine months.

"Our cost structure is about $800,000 a month, right about where our revenues are now, so we've been able to avoid tapping into our remaining $9 million in cash. But it's hard," said Pillan Thirumalaisamy, executive vice president and also a cofounder.

Guidance Solutions' predicament is hardly unique. Similar scenarios are being played out at former high-fliers all over Southern California. And likewise, the company's strategy is a common one -- getting back to basics, fast.

Tough day

For Guidance, the big jolt came in January.

"We let go 40 or 50 people in one day. Several of our senior people each met with five or six people, individually," Thirumalaisamy said. "That was a tough day."

The next month or two was spent re-evaluating core competencies, which involve developing Web-related software, user interfaces and other technologies to help clients better manage their customers, suppliers and internal functions via the Web.

During the late '90s boom, Guidance and other "e-business solutions providers" expanded far beyond their tech roots in a grab for as much Internet cash as possible.

Guidance positioned itself as a one-stop shop where dot-comers with a vague idea and a satchel full of venture money could get business strategy advice, marketing consulting and design services. If a promising client didn't have enough cash, Guidance would accept equity as partial payment. That left Guidance with an investment portfolio of a dozen different companies, all but three of which are worthless today, Thirumalaisamy concedes.

Drastic times call for drastic measures. Guidance Solutions no longer offers business strategy or marketing consulting services, and it no longer accepts equity as payment.

"I'm not in the venture capital business," Tang said last week. "The history of this company is not in investing. Our company is about technological development. That's who we are -- I'm from MIT." (So is Thirumalaisamy.)

Rather than deal with startups, Guidance Solutions now focuses on established cash-paying corporations -- Walt Disney Co., Footlocker, Weider Publications and Right Start Inc.

"We just launched new Web sites for Weider and Footlocker, so we're in a monitoring phase right now," said Thirumalaisamy, motioning to two separate clusters of workers.

Added Tang: "Footlocker did $40 million in e-commerce last year, and it's looking to double that this year."

Bells and whistles 

To help it reach that goal, Guidance has developed more functionality for Footlocker's Web site. Among the improvements: online order tracking and various "YMALs" (pronounced why-malls).

"It's industry jargon for 'you might also like,"' Tang said. "If you order a Laker's jersey, for example, the site might ask if you'd also like to buy a pair of Laker's shorts."

In a sense, Footlocker is looking to grow its business in the same way as Guidance -- by doing a better job of delivering its core products and services. This distinguishes today's growth from that of the 1990s, which was driven largely by mergers and acquisitions and outside venture funding.

"The M&A market has been dead for the past year, so the only marriages you're getting now are shotgun marriages between two staggering companies, like two drunks holding each other up," said Tim Lovoy, technology practice leader at Deloitte & Touche. "Growth at healthy companies today is happening organically, by people growing their businesses in a much more orthodox fashion."

As a result, today's growth rates are less spectacular. But Lovoy added, "It's healthier. It's more sustainable now."

Even so, it's a far different scenario than envisioned when Guidance Solutions received a $48 million venture round in late 1999 from Clayton Dubilier & Rice Inc. of New York and BCI Partners of Teaneck, NJ. "Our plan was to double our business in the next year (2000) and then go public," Thirumalaisamy said.

The same approach was pursued by competitors like Razorfish Inc., Scient Corp., March-First Inc., Viant Corp. and Rare Medium.

Rocketing fortunes

Many of those companies went public in 1999, and enjoyed huge run-ups in the first few months. Scient went public at a split-adjusted price of about $19 in May 1999 and had soared to $113 by March 2000. Razorfish went public in April 1999 at about $17 a share and jumped to $55 by February 2000.

"There were all these companies, much younger than ours, with billion-dollar-plus valuations, opening offices left and right," Tang recalled. "I felt like I was way too slow. We were failing to capitalize on the euphoria."

It turned out to be a blessing. Last week, Scient shares were trading at 38 cents apiece. Razorfish was at 26 cents. "A giant. machete came through our industry and cut these giants to ribbons, but just shaved the top of my head," Tang said.

How do Guidance's venture backers feel?

"We have every confidence that Joe (Tang) and his team will re-emerge," said Jim Rogers, an operating partner at Clayton Dubilier & Rice. "They have adapted to the market, which is 20 percent of what it was when we got involved."

CD&R isn't in any hurry to exit its Guidance position, Rogers said, citing the firm's average holding period of five years. Besides, it employs Guidance to develop Web sites for its other portfolio companies, which include Allied Van Lines, Kinko's Inc. and Remington Arms Co.

Last month, CD&R hired Jack Welch, longtime chairman of General Electric Co., as a special partner. So will Tang be able to tap business legend Welch for turnaround advice?

"I think Joe is too small for Jack," Rogers responded. "If he has a question for Jack, he [INCOMPLETE]

Guidance Solutions

Location: Marina del Rey

CEO: Joseph Tang

Core Business: Web-oriented technology services

2000 Revenues: $21.2 million

1998-2000 Growth Rate: 158.5 percent

Clients: Walt Disney Co., Footlocker, Allied Van Lines, Weider Publications, Right Start Inc.