Don Beeler, CEO, President, and Chairman, NSI Software

NSI Software Inc. may be one of the storage networking industry's quietest success stories.

For the last three years, this 13-year-old data replication software supplier has steadily increased sales in a fiercely competitive market, against entrenched players. It's established enviable distribution deals with more than 50 resellers, including Dell Inc. (Nasdaq: DELL), which is also an erstwhile investor; Hewlett-Packard Co. (NYSE: HPQ); and SunGard (NYSE: SDS). And it's gained "traction" with high-profile customers, including Citigroup, Pacific Life Insurance, and State Street Bank. Presently, the company boasts 4,000 customers worldwide.

Yet throughout, NSI Software, which now has roughly 200 employees (about 50 more than it did this time last year), has kept a relatively low profile compared with flashier private firms. There's no big IPO talk, no hints of moving anywhere other than straight ahead, along a carefully considered path.

CEO Donald E. Beeler Jr. has helped define this modest but determined corporate demeanor. A business administration major in college in Kentucky, Beeler later worked at GTE, Ameritech, and other phone companies, honing his hands-on engineering skills. Eventually, he and three partners cofounded NSI in 1991 as a network integration consultancy.

Poking around telecom control centers for 10 years appears to have made Beeler a focused realist, less interested in big plans than in the next practical opportunity. And so far, he sees plenty of opportunity in NSI's chosen field, namely, multisite replication and disaster recovery software priced lower than competing wares from the likes of EMC Corp. (NYSE: EMC). (See Top Ten Private Companies: Summer 2003, page 6.)Consider his statement in NSI's latest financial release: "The ability to understand the real-world problems facing IT managers is dictating the storage software market's winners and losers. Success depends upon a sound technology strategy focused on practical implementations to deliver continuous data protection without breaking the bank." (See NSI Touts 12th Quarter of Growth.)

Speaking less formally to Byte and Switch recently by phone from NSI's modest headquarters in Hoboken, N.J., Beeler talked about his firm's position, its focus, its prospects, and its strategy for navigating a competitive environment that gets fiercer by the month. Click on the links below for specific portions of the interview:

— Mary Jander, Site Editor, Byte and Switch

Byte and Switch: So what's your focus these days? Compliance?

Beeler: We do have a very specific strategy. We're focusing on recoverability coming out of compliance and regulatory issues. But you need to look beyond what is said about compliance...What we're seeing is that general regulations filter into the audit and accounting world, which is telling its enterprise customers, "Hey, you guys need to think about this stuff." There are two factors in compliance. Public companies that must do it, and – the real interesting piece – non-public companies affected because their accounting firms are looking at it and making them consider and think of their futures as public companies.

It's hard to be told as a private or public company that you must follow guidelines. You need to present guidelines to the industry as best practices. Then it's hard to argue against them. The regulatory and compliance market is really a big educational force.

The flip side is the availability and affordability of solutions. That's related to the cost of standard hardware, storage, and servers coming down so dramatically. So in order to implement a [compliance] solution, customers don't have to spend a fortune. We offer solutions in partnership with companies like Dell and HP that already supply low-cost hardware. Bundling with them, we come in with an extremely affordable price.

Once you're looking at, say, a $10,000 high-speed tape drive, software, and a server, that's not a problem. Our performance from a throughput standpoint is multiples of tape drives...

One area that's interesting from the fundamental trends standpoint is that today, a lot of the market is split into host-based or subsystem-based products... Our gut opinion is that IBM, EMC, Hitachi, and other big players will end up owning the subsystem space.... We're positioning ourselves for growth, and there's a huge upside to being in the host-based segment, addressing the mid-tier. If a server is attached to the SAN, we protect all data on the SAN. Companies focused on subsystems will be eaten – they're really positioning themselves to be acquired by one of the big players.Byte and Switch: So what specific market segments are you addressing?

Beeler: There are really four markets in general – enterprise, large, medium, and small companies. We're focused on the large and medium-sized firms, the mid-tier. That's where companies like HP and Dell [both NSI Software resellers] also see most growth. Of course, we sell into the other two markets as well, but we see the biggest uptick in the mid-tier.

Byte and Switch: What are some of the other key trends you see in the market?

Beeler: From a trend standpoint, "How fast can you back up?" went from how fast the drive can go to grouping drives together... The next natural trend – and we're already seeing it – is disk-to-disk backup. The other piece is recoverability.

Recoverability is more of an issue than speed. The issue is how fast applications can come back up, and subsets of that. We used to get caught up in buzzwords... In reality, the customer just wants applications back up and running in two hours.The ability to instantly recover is very valuable, but the need to recover in a short amount of time varies with the application you're looking at more than anything... Our products allow you to recover almost instantly, or choose to save money and recover slower. What you choose depends on how much you want to spend on the network. Other solutions on the market are focused on "If you want to recover, you must spend a lot of money." Price is always an issue.

In the mid-tier and large markets, partnering with a large hardware vendor to drive down cost allows us to go in at a price point that makes the decision very easy. The variables are things like bandwidth. We allow the user to say how much they want to use.

Byte and Switch: What do you see organizations opting to use?

Beeler: Again, it depends on the company. Email is a perfect example. A wide swath of people say it can't be down for more than an hour. Others can go longer. It really boils down to its effect on a company. If a company is solely based on email and you lose it, there's an ROI... Take the publishing and writing industry. [Ed. note: Yes, please take it!] How long could you afford to be down before it would affect your ability to deliver stories in a timely manner?

Add a bit of policy to that, look at regulations here and overseas, and it's obvious we're going toward initiating a set of standards, recommendations that set specific times on information and compare it against customer financial data. What we're going to see over time, is that the window will continue to go down.Customers buying something now need to ask, Is it going to meet the potential changes in the market? It's balancing: How much can I get for this and how much protection could it give me? In some cases, our product has the ability to give minutes-worth recovery, and once you install the system you can add more or less bandwidth.

Byte and Switch: Are customers buying more of your software with servers or with NAS boxes? [Ed. note: NSI Software products are bundled with Dell servers and NAS boxes, and with HP Windows-based NAS boxes.]

Beeler: It depends on the NAS box. Servers have more CPUs and more memory. Two servers give most flexibility. The question is, how long do you want to plan to be on the second system in failover? We rename server B and allow it to look like Server A if Server A fails. Most people say, "I'll put a slower system in for something I'll be at just a short while."

It's interesting... When you're using only tape, you pay just for that tape backup. But if the server were to fail, you now have to get a new server to restore what's on the tape. The number of people who just don't think about that is interesting. They assume they have tape backup, and that's enough. Then there's failure, and they're suddenly faced with the need for a new server.

The server typically won't come in the same day. What position do you want to put your company in? If you have no second server ready to go, your ability to recover data will be affected. We're helping people say that for a couple of licenses of Double-Take, I can afford [to replace tape with] a new server.Byte and Switch: What is the biggest challenge facing storage companies?

Beeler: A lot of companies showed poor performance in the second quarter this year. Part of the problem was that solutions that were focused on enterprise customers fell down in feature set and price. The challenge for many companies is how to bring enterprise products to the mid-tier and not eat into sales at the high end.

We can enter low and move up. There's no need for us to preserve pricing at the high end and then push into the mid-tier.

Channel conflict's also a problem. Companies with large direct sales organizations find it very difficult to move to another channel. But the mid-tier companies like integrators.

Also, in the last year, we've seen companies redoing their purchasing process. In the past, you could deal with a department or a manager or a division and sell them one thing. Now, the purchasing people gain more power because there's a whole set of legal issues to comply with. A lot of that has slowed down enterprise purchases.Byte and Switch: You have a bureaucracy now.

Beeler: Yes, there's a bureaucracy.

Byte and Switch: What else is going on?

Beeler: A lot of larger companies' products are priced in a way that's unrealistic. For mid-tier organizations, the price has to be right.

Byte and Switch: Are you focused on any particular vertical markets?Beeler: There are several verticals in the mid-tier – legal, finance, healthcare. I always sort of throw government in there, too. There are a lot of agencies in that size range...

Byte and Switch: Not education?

Beeler: We do well with education, but when you look at who is really buying, it's those who completely rely on IT as their number one priority.

Byte and Switch: What's next on your roadmap?

Beeler: We have some unreleased products... running with Netware, Linux variations. We will focus our efforts in the areas of most growth.Byte and Switch: How do you decide what those are?

Beeler: Based on the market... Feedback drives what we're doing next – next month, next quarter.

Byte and Switch: What are you doing next?

Beeler: One thing, we're looking at partnerships in the Windows area... It's not that we don't have Windows products. [Ed. note: Both of NSI's products, Double-Take and GeoCluster, work with Microsoft Cluster Service.] But we want to enter that area more aggressively. Windows is going to be the biggest market.

Byte and Switch: What about Linux?In Linux, you have a lot of Web services, other applications that may not need replication today. In Windows, you have a huge amount of applications to replicate.

Byte and Switch: What is your number one priority?

Beeler: The number one thing is making our products easy to install and use. That's primary. As you start to open up more of the market, you start to run into people who are less technical. You must make sure you can provide them with tools to focus on a business issue, such as protecting email.

The three main elements of our strategy are affordability, ease of use, and reliability. Reliability is key to OEM relationships...

Byte and Switch: Will you go for an IPO?Beeler: I really don't think of it in terms of IPO. If we keep growing the way we are, we'll look at our options.

Byte and Switch: What about mergers, acquisitions?

Beeler: In this current market, you see more storage companies getting acquired than going public, because they haven't gotten any traction. They may have really cool technology, but what they're lacking is customers. In this market, you can only go so far without customers.

We have a good rate of growth, and at some point when we see the right timing, we'll think about what's next.

Byte and Switch: Will you move out of Hoboken?Beeler: We'll stay, as of now. No change. I live in Woodbury Common [in upstate New York]. The nice thing about success is that I don't have to worry about getting to Hoboken. I just need to be able to get to the airport.

— Mary Jander, Site Editor, Byte and Switch