TURNAROUNDS: HOW INSIGNIA EXITED THE RETAIL CHANNEL.

When Rich Noling took over as CEO of Insignia Solutions in 1997, the company was in deep trouble. Most of its revenue came from mass-market "virtual machine" utilities that let users run Windows on Macintoshes and other non-Intel machines--and sales were collapsing. Worse, Insignia had just gone public, and Wall Street was watching the company's dismal performance with growing annoyance.

There was one glimmer of hope: a small skunkworks group that was trying to create a virtual machine for Java devices. "I went to the director of the project and said, 'You have 90 days to show me why I shouldn't shoot your whole group,'" Noling says. "Three months later, he did."

Noling could see a market opportunity for Insignia in the emerging Java world, but he also knew that moving out of the PC marketplace would be a brutal challenge. The company would have to figure out how to work with large OEM partners, how to operate almost like a startup, and how to raise money at a time when money-losing software companies were getting a cold shoulder from venture investors.

At the end of 1998, Insignia shipped a beta version of Jeode, a Java virtual machine platform for embedded Java devices and Internet appliances. Although Sun and other major customers were enthusiastic, Jeode didn't produce much cash; the company was still living on a trickle of revenue--$14 million in 1998, and $6.8 in 1999--from its old SoftWindows retail product line. Noling had to fire more than two- thirds of his employees and go through "miserable" negotiations to sell off the company's original product lines. "I knew it was going to be tough, but I had no idea how tough it was going to be," he now says.

This year, finally, Noling's long-shot bet on Java has begun to look like a smart move. The company's revenues, now driven almost entirely by Jeode licenses and services, should reach $10 million by year end. In addition, Insignia recently closed an $18 million financing deal that Noling says should keep the company afloat until cash flow turns positive. "And we've gone from having 100% of a $55 million market to being a leading player in a multi-billion-dollar market."

What made the Insignia turnaround work? Noling says he learned several important lessons:

* Leverage core technology: Other retail software companies have tried to leverage their channel relationships by acquiring a fatter portfolio of titles. Insignia's strategy, says Noling, was to look for new applications for its technology skills. "We spent more than a dozen years building virtual machines with a small memory footprint, and that experience made us valuable to partners like Sun and IBM. It didn't matter much that the business scenario was new--that part was much easier to learn."

* Don't invest in declining products: The SoftWindows product line continued to bring in millions of dollars of revenue even though overall market demand was drying up. "But we couldn't afford to fund more than one product line adequately," Noling says, so Insignia "quietly" stopped spending more than token amounts on SoftWindows R&D and marketing. "We bet the whole company on Jeode," he says.

* Cut headcount aggressively: When Noling joined the company, Insignia had over 300 employees. It took three rounds of layoffs to shrink headcount to about 90 people. "It broke my heart," he says. "These were people who were loyal and hard-working." Nevertheless, Noling now says he should have pushed for quicker, larger cost reductions. "Had we cut deeper the first and second times, we could have skipped the third round."

* Sell the vision: Companies that are "sliding down a hill on a banana peel" have a hard time hanging on to key employees and recruiting fresh talent, Noling points out. "I tried to make the same points inside the company that we did for investors: We're struggling now, but have a chance to establish a leadership position in a very big, emerging market."

* Keep an open door: "The emotional ups and downs were tough on everyone," says Noling. "I'd go home at night totally drained." One way to keep morale up, he found, was simply to encourage employees to drop in and discuss their frustrations. "I'll talk to people about most anything. It seems to help."

Richard Noling, president, Insignia Solutions, 41300 Christy St., Fremont, Calif. 94538; 510/360-3700. E-mail: [e-mail].