Product development: 'no economies of scale'.

Martin Sacks, IMSI's chief executive, is an ex-accountant who knows that bigger companies are sometimes--but not always--more efficient than their smaller counterparts. "Finance, shipping, retail sales--these are functions where economies of scale are very real," he says. "But the one place where there are no economies of scale is product development. In fact, you'll almost never see a large development organization that consistently creates great products."

Sacks is convinced that the best way to create great products is to build development teams that closely mimic the entrepreneurial environment of a startup. "In a startup, the founder answers support calls, talks to customers, and immediately translates what he's heard into features for the next release." Most big software companies are uncomfortable with an entrepreneurial model, Sacks adds; instead, they hire "salaried managers who are rewarded with a few stock options that are loosely tied to performance."

Sacks says he began rethinking his company's business model after listening to Netscape chairman Jim Barksdale talk about the "network of nodes" concept he helped implement at Federal Express. "Every Federal Express office is a separate business unit that's programmed to operate in a standard way," Sacks says. "I saw that if we were going to keep growing and managing more products, we had to adopt a model like this."

Inspired by the "network of nodes" idea, Sacks has restructured IMSI into a collection of semi-independent product development and marketing groups that look a lot like typical start-up companies. Once the transition is complete (five business units are currently in place), Sacks expects that the parent company will turn into little more than a "thin infrastructure" of sales and support staff for the business units.

But unlike a typical startup, Sacks points out, an IMSI business unit is "programmed"--that is, it operates according to pre-defined rules (often informal) that define hiring practices, performance measurements, incentives, finance, and other key management issues. Sacks recently talked about how he's begun to implement this model:

* The entrepreneurial profile: "The first place to focus is on the human factors," says Sacks. "Entrepreneurs are tough to find, but without them the model doesn't make any sense." IMSI tries to recruit business unit managers who are "incredibly aggressive, with broad-based business experience," he says; an ideal candidate might be "an engineer who went into sales and marketing or a guy who started a company and sold it." Don't overlook current employees, Sacks adds; several business unit managers were promoted from within IMSI and "have turned into unleashed mad dogs" now that they're encouraged to think like entrepreneurs.

* The incentive structure: IMSI pays business unit managers according to a formula that is strongly skewed toward incentive pay. The bonus formula gives equal weight to sales goals, profitability, and "qualitative" factors, such as meeting delivery dates, winning awards, and gaining market share. More importantly, says Sacks, managers earn big bonuses only if they dramatically exceed their performance targets. "An entrepreneur makes a ton of money or he makes nothing," says Sacks.

*The product P&L: Since each IMSI business unit operates with its o wn detailed profit and loss statement, Sacks says the parent company's "information infrastructure" now has to capture finer-grained data about such costs as tech support and product returns. In turn, IMSI closely monitors the individual P&Ls to rank the performance of each business unit and to decide who gets first crack at corporate funds and manpower. "Return on investment is the single most important item we watch," says Sacks.

Martin Sacks, chief executive officer, IMSI, 1895 Francisco Blvd. E., San Rafael, Calif. 94901; 415/257-3000. E-mail: [e-mail].