Richard Scannell, Co-Founder & SVP, GlassHouse Technologies

In the cold, cruel world of technology startups, GlassHouse Technologies Inc. is toasty warm and full of goodwill.

It's no surprise: While IT intransigence has choked off funding to many so-called storage service providers, GlassHouse is not only surviving, it's thriving to the tune of 30 percent growth quarter on quarter – by offering basic storage consulting to large companies in North America and Europe.

Richard Scannell, co-founder of GlassHouse and its senior VP of North American Consulting, can rightfully claim part of the credit. He helped define the particular mix of factors that have helped make GlassHouse a hit – so far, anyway.

Scannell started his career as a software engineer after graduating with a computer science degree from the University College Cork in Ireland. It was during 12 years as an IT manager and advanced technology buyer for Motorola Inc. (NYSE: MOT) that he developed an interest in IT management and consulting.

Next came a brief and, to the jaundiced observer, somewhat puzzling stint as president and COO of UpSource Inc., a startup specializing in call center services.Case in point: While at UpSource, Scannell did things like open a 77-person call center in economically depressed Cape Breton, Nova Scotia, for which he made headlines in local papers. But it was a startup, and that's where Scannell wanted to be.

Things came together more when Scannell joined with Mark Shirman and Jim Damoulakis to found GlassHouse in the summer of 2001. With Shirman, now the company's CEO, and Damoulakis, its CTO, Scannell and others focused GlassHouse as a consulting company based on extending, not replacing, customers' storage gear. The firm's biggest selling point became the vendor-neutral expertise of its consultants.

So far, it seems to be working. From 15 employees and a regional scope, GlassHouse now has nearly 250 employees and upwards of 700 clients throughout North America and Europe. Growth has been boosted in part through an aggressive acquisition strategy (more on that later).

We caught up with Scannell in early November to pick his brain about the future of his company and the state of storage networking in general. Click on the links below for specific portions of the interview:

— Mary Jander, Site Editor, Byte and SwitchByte and Switch: What are the hot areas in storage?

Scannell: There are a number of things. One of our favorite subjects is backup. As kind of old-fashioned and unsexy as it seems, it's probably 50 percent of our work at major businesses – Global 2000, big corporations. The reality is, their data protection is pretty screwed up.

One of my favorite questions for any executive is, "How much to you spend on data protection?" And then, "How much value do you get?" They look at me as if I'm weird; they can't articulate what it is they need, let alone what they hope to get from it.

A significant portion of our work is looking over the economic statement to strip out costs and improve performance. A large chunk of work is in the backup arena. There's not a lot of competition. What we do see is traditional OEMs and resellers just trying to sell more storage, and most customers are beyond that.

Byte and Switch: What about data replication? Is that mostly a function of backup? Do you see more replication occurring in other kinds of applications?Scannell: Disaster recovery planning is where we see replication coming in, and we've been involved in a couple of seven-figure deals around that. I would not want to say that's a market change, however. It's not a shift in the market but more a statement of where we are... It's getting to the point where customers are willing to have us bid [on disaster recovery projects]...

Interestingly enough, a lot of disaster recovery work is not with the highly sophisticated IT shops, the Wall Streeters, but more with the brick-and-mortar type companies, such as large-scale manufacturing, where they reacted to 911 but took a year or so to figure out they didn't have a plan in place, then realized they were looking at 15 or 20 or 30 million to build out another data center.

Byte and Switch: What about compliance?

Scannell: We're working on compliance in two areas: First, helping companies recover emails in response to, or in preparation for, what they feel may be discovery or enquiry or in response to a subpeona. Usually, this is where email is backed up, but there's no archive, so you need to perform a massive email recovery.

We also see significant interest in compliance up front. A lot of people have already gone through the Sarbanes Oxley stuff, but they're getting to find out what it means to manage data in a compliant fashion. They'll ask, "Do I really need to install an email archive and auditing policies?" Typically, this kind of work is in more sophisticated, large financial services and insurance environments that are really being thorough in that area.Some companies, such as pharmaceuticals and healthcare, have been highly regulated for many years, with HIPAA and FDA mandates. This is just another slice of that effort. They have to add some standard operating procedures, but there is not a shift in the way they do things.

Byte and Switch: Are companies really getting subpoenaed?

Scannell: We have worked with a number who have been subpoenaed. I think anybody who may feel they're at risk is taking steps to be ahead of the curve. It's a real horserace when you get subpoenaed.

Byte and Switch: So the need to comply with regulations is really a big deal, not just hype. What about Europe?

Scannell: There are some corresponding regulations in Europe that are more stringent than Sarbanes Oxley. But on a generic basis, Europe's been coming along more slowly. Companies have had more time to respond or less data to deal with – there's not as huge a scurry.Byte and Switch: How does your business shape up geographically? There seems to be a big emphasis on the U.K. [See GlassHouse Acquires UK Cos.]

Scannell: We're headquartered in the U.S., and on a services basis, 70 percent or a little higher [of our revenues] come from the U.S. and Europe, predominantly the U.K., and we have plans for additional expansion into continental Europe.

Byte and Switch: No Asia?

Scannell: Not now. The Asian market has a very different model. Major integrators there basically run the IT environment soup to nuts, from strategy right through to product installation. You don't sell to a Toyota, you sell to the integrator that manages their IT environment. We've talked to a number of companies a number of times, but when you consider the time zones, languages... Well, there's a lot of work right now in the U.S. and Europe.

Byte and Switch: How do you see the business developing from here?Scannell: We have really three lines of business, starting with consulting, which is what we started with, and our knitting, if you will. That's basically strategy and integration work, or design and integration, and continues to be our strongest brand. We're very pleased with that, and the business grows 30 percent quarter-over-quarter.

At the same time, there's a new and emerging element: operational services – or "eat your own dog food." This is where the customer says, "I want you to come in and run what you designed" – backup and storage operations, for instance. We have some press coming on this, but we're in the early stages...

But we have a number of customers and a family of offerings, from 24x7 remote monitoring to where we actually put people on your site. Right now, our marketing department is working to create materials and pick the right events, but the business continues to tick away.

These kinds of services are not core to businesses, but they're critical. We are suggesting outsourcing them to a center of excellence, and our economic value proposition is in line with that. We will put our staff on the ground. It's heavily leveraging an internal methodology, and the client has service-level-driven performance.

A third element is customer service and support. You'll recall we purchased the remnants of Auspex a bit over a year ago. [See GlassHouse Picks Auspex's Bones.] We're transitioning that business, preserving units in the field that are serving 200 odd customers, and at the same time in order to grow that business, we're bringing additional new services to them by introducing a support center, a call center. We're offering companies, some who may be venture backed, a global reach through our call centers and customer support services. [Ed. note: Recall that UpSource call center in North Sydney, Nova Scotia?]We've basically taken on a group of people known for their attention to customer service, and we've signed deals with storage companies who need level 1 and 2 services... So we can offer an outsourced customer services department to an emerging storage company.

From an end-user perspective, we have a very established service organization and underneath this the brand of the company. All this grew out of Auspex.

This is an interesting story, not only economically, but in the sense that as Auspex declines, this picks up. We took a company that was almost in bankruptcy and transitioned it to a growth business, providing opportunities for the remaining 20 or so employees. This is not outsourcing to India, but with locations in the domestic U.S...

Byte and Switch: So what about GlassHouse in general? Are you profitable? Is it true you're spending more money than you're taking in?

Scannell: The business was profitable just prior to our C round of funding. We did a first round, then a B round to grow... We hit breakeven and then went to series C. [See GlassHouse Gleans $7.1M and GlassHouse Clears $6.4M Round.]We are losing money because we have no reason to raise more... As long as healthy margins are maintained, it's okay to spend more money than we're making – that's as long as our deals are strongly profitable and investors continue to be extremely pleased with us.

We could be profitable tomorrow, but as long as we continue to have a profitable sub-business it's acceptable to our investors to have the overall business run at a loss.

We think we have a considerable first-mover advantage, which is vital in storage, and we have the growth and the footprint. In the latest Gartner study, we came third behind EMC and IBM.

Byte and Switch: So will you look for more funding?

Scannell: We'll likely do another round. If all the terms were correct... We are looking at the longer term and how we would invest. Every time you look to bring money in, you look at the impact on shareholders, at what you expect to achieve as a result of getting the cash. Another round would be a pretty modest way to equal or better shareholder position. Why would you not take advantage of that while it's on the table? We do have a number of existing investors and outsiders interested.Byte and Switch: Will you go public?

Scannell: I would say not anytime soon. We have outsiders in this business, and we're at the 3.5-year mark. At a certain point, those investors will look for their return. We could buy them out, which is unlikely, because then if the business is growing, why wouldn't they want to stay in it? We could be acquired or we could file for IPO. A lot of people around the company from the investment community feel this business could go public eventually. As long as you're not subject to having to do something, the choice is yours.

Byte and Switch: Will there be more acquisitions? [Note: GlassHouse has bought four companies in recent months, including two U.K. storage companies, and the U.S. consultancy, The Storage Group (see GlassHouse Extends Vertical Reach and GlassHouse Adds a Wing).]

Scannell: We've never really gone out to look for acquisitions. They've presented themselves. We continue to look at the market and whether to look into new markets.

To go into continental Europe, for example, we'd only continue to do it through acquisitions. In Germany and other parts of Europe, you get local help – you don't bring U.S. consultants in.Byte and Switch: Speaking of moves, how important is the recent GSA contract award? [See GlassHouse Wins GSA Contract.]

Scannell: GSA is pretty significant... We put a couple folks in DC and we've been delivering under some partners. Now, with GSA, we can sell directly to government agencies. We see the federal space having just as much, if not more, of a need for services.

The government has been a watering trough for vendors for a long time. Now, various factors, including the war in Iraq, are putting on some pressure for cost reduction. There's an opportunity for cost reduction.

Byte and Switch: Last question: Are you happy with a startup? Has it met your expectations?

Scannell: More than I ever could have imagined. I've never had more fun at work.— Mary Jander, Site Editor, Byte and Switch