Software Firm Rides High on Aggressive Marketing Strategy

The figures that Quadratron Chairman Karl Klessig ticks off are impressive.

About $10 million in revenue this year for the Sherman Oaks-based computer software company, $30 million next year and maybe as much as $100 million in 1987. Much of that, he says, is as good as money in the bank, because it will come from contracts already signed with major computer makers in the office automation business.

No one can doubt Quadratron’s tenacity at getting those pacts. In the 2 1/2 years that it has been providing software for makers of office automation computer systems, Quadratron has signed 59 contracts with computer makers, far more than any of its competitors.

“When we start discussions with a hardware manufacturer,” Klessig boasted, “we conclude it with a contract.”

But some customers, competitors and market researchers are not impressed. They say the company is getting many of those contracts by promising software packages too long before they are developed. The result, they complain, is software that is delivered late and often doesn’t completely work.

“They have rushed ahead so fast in development that there are bugs in the software. Some people think that Quadratron is great. Others think it’s terrible,” said Michael Millikin, associate editor of Seybold Report on Office Systems, a Boston-based newsletter.

William Kiely, president of R Systems, a Dallas-based competitor, said: “Quadratron is the best marketing company I have ever run across in my eight years in the computer business. Their marketing approach is to go in, get the contract and worry about getting the product done as time permits.”

Defends Policy

Klessig said customers know the products are sold in advance, and they don’t mind.

“It is true that we get the contracts before the products are finished,” he said. “The reason people are willing to make major commitments is because of the superiority of the product and the design of it.”

Quadratron has built its business primarily by marketing a software package used in Unix-based office automation systems--computer networks that link terminals, printers and other machines for office workers.

Unix is a software operating system developed by AT&T; that runs the basic functions of the computer. Quadratron’s software gives the system such functions as word processing, graphics, calendars and electronic spread sheets, used for financial calculations. Quadratron was one of the first companies to offer a word processing system for Unix-based systems.

Klessig, 43, who previously owned a so-called value-added reseller that sold computers with software tailored for customers, founded the company in 1983 with Stefan Zimberoff, 42, who had developed software for Fortune Systems, a San Carlos-based computer maker. They brought in accountant Les Kristoff, 38, as a third partner, raising $750,000 to start the company.

Unix historically has been a favorite system for educators, but its acceptance in the office automation market has been slow. Demand has picked up, however, largely because government agencies and regional telephone companies like Unix--and Quadratron has profited as a result.

Klessig estimates that after-tax profits this year for the privately held company will be 30% of revenue, or about $3 million.

Company executives are confident that they will become a force in the software industry. Said Klessig: “It’s no longer a goal. We know we are going to become one of the largest and most significant software companies in the world.”

Indeed, people who call the company, when they are put on hold, are treated to music identical to one of the themes that software giant Lotus Development uses in its advertising. Klessig says it’s only a coincidence.

In July, the company moved to the 18th floor of the new American Savings building on Ventura Boulevard in Sherman Oaks, which boasts one of the best views of the San Fernando Valley, a far cry from the one-room office in Encino where it began.

About 45 of its 70 employees worldwide work in the new office, which is decorated throughout in Quadratron’s burgundy and pearl-gray colors. Visitors are greeted in the lobby by a neon sign bearing the company’s name that looks like it came from the set of “Miami Vice.”

Missed Deadlines

But the impressive new offices and the confidence that Quadratron exudes have not been enough to satisfy some of its customers.

Executives with Plexus Computers in San Jose, a Quadratron customer since February, 1984, are furious with the company over its failure to meet deadlines. Cynthia Pilkington, Plexus’ product marketing manager, says Quadratron has missed “at least three” deadlines to deliver software in the past nine months, including one just last week. The deadlines, however, were verbal, not contractual, agreements.

“They haven’t made any friends here,” she said, adding that she recently signed a software agreement with rival R Systems but hasn’t terminated the relationship of Plexus with Quadratron.

Another computer maker that says it has had problems with Quadratron is Charles River Data Systems in Framingham, Mass. The company says it has been waiting since April, 1984, for a word-processing program free of problems.

“The frustration has been getting them to produce a complete product. When they have produced some part of the product, it has been bug-ridden,” said one executive with the company, who requested that his name not be used.

But Robert Vernon, vice president of office information systems for New York-based Sperry, one of Quadratron’s three largest customers, said the number of bugs that his company found in the software has been about what could be expected for new software.

“They aren’t innocent in that regard. But we feel that we made the right choice and that the product has pretty much worked as expected,” Vernon said.

Klessig called the delivery and software glitches a “delivery perception problem” among customers caused by unexpectedly strong demand for its products.

“Once we start selling it in the marketplace, they got very, very anxious to get the product sooner than we could deliver it,” Klessig said. “We think we have delivered it in a remarkably short time.”

Klessig said he is looking into Plexus’ problems, adding that Quadratron’s contract with the company does not specify delivery dates. He acknowledged that there have been problems with the software sold to Charles River, explaining that the equipment involved “is not a standard hardware operation.”

Nevertheless, he conceded that there have been some quality problems with the software. He said the company recently fired three of its 17 engineers because of the problems.

Some industry experts believe Quadratron’s problems were not because of heavy demand for its product. They say Quadratron stretched itself thin by signing more agreements than it could reasonably expect to meet.

“They introduced a whole range of packages and hadn’t ever really completed one. I would think it would have been more prudent to introduce one package, have it completed and bug-free,” said Jean Yates, vice president with International Data Corp.’s IDC West division, a Palo Alto-based market research firm.

Quadratron’s complete office package--including such functions as word processing, spreadsheets, and calendars--has a base price of $1,960, which the computer maker pays to Quadratron. A manufacturer ordering more packages receives a discount, sometimes as much as 60%.

Typical contracts, the company said, are four years long and require manufacturers to buy 400 to 1,000 software packages. Those agreements, Quadratron said, might require the computer maker to pay Quadratron $500,000 in the first year and from $1 million to $2 million in subsequent years.

Amy Wohl, president of Wohl Associates, a Bala Cynwyd, Pa.-based office automation consulting firm, said software contracts frequently require equipment manufacturers to make a substantial payment only after they actually sell equipment packaged with a software firm’s product.

“You have to watch those kind of contracts. Often they involve commitments by the seller, not the buyer,” Wohl said.

But Quadratron President John J. Theiss said the company, by requiring computer makers to sell a minimum number of software packages, doesn’t structure its contracts like most software firms.

Theiss said audited information about the contracts is being shared with investors while the company is raising $5 million by selling preferred stock. He said the company plans to sell stock to the public within two years.

Although Theiss says his company’s contracts are solid, competitors say that contracts in the software business can unravel quickly if there are delivery or quality problems.

“Agreements are about as good as . . . your last delivery,” said Jim R. Smith, president of rival Handle Technologies in Houston.

Consultant Wohl predicted that outside pressure may force Quadratron to lift its performance to the level of its marketing.

“I think what will happen is that the competition will force them to clean up their act,” she said. “I’m sure they would like to stay in the business. They’ll either have to come closer to delivering on time or get better at estimating when they will deliver.”