Entrepreneurial Dominion

          Scholtes

High-Flying Dutchman

Johannes Scholtes has big plans for ZyLAB's paper management system. Powerful search-and-retrieval capabilities make it the tool of choice for spooks, prosecutors and, with luck, public corporations.

When VA Newswire asked Johannes Scholtes, CEO of ZyLAB North America LLC, if Iraqi authorities were using his software to help prepare for the war crimes trial against Saddam Hussein, he dodged the question none too subtly. “You are looking for a headline,” he said, “but I cannot give it to you.”

But Scholtes does say this: ZyLAB, which develops powerful search and retrieval software, sells the best technology on the planet for combing through millions of pages of paper documents. And ZyLAB’s paper-search software, the only one that can read Arabic, is used extensively in the Middle East.

Furthermore, Scholtes says, the McLean-based company is a favorite among law-enforcement authorities, intelligence agencies and judicial organizations that keep tabs on drug trafficking, money laundering and … war crimes. The United Nations war crimes tribunal is using ZyLAB to prosecute Hussein's rival in villainy, former Serbian strongman Slobodan Milosevic.

Whatever may or may not be happening in Iraq, it’s a great time to be ZyLAB. The War on Terror has created an unprecedented demand among U.S. and European security agencies charged with tracking ever-shifting networks of violent jihadists. Not only does ZyLAB work in 200 languages, including such terror tongues as Arabic and Farsi, but it transliterate suspects’ names and nicknames from one language and alphabet to the next. Meanwhile, prosecutors have used ZyLAB technology to sort through millions of pages of documents in massive, white-collar crime investigations from Enron in the United States to Parmalat in Italy.

Scholtes expects ZyLAB to generate about $15 million in solidly profitable revenues this year. Building from a strong European base of business, the company is enjoying robust revenue growth in the United States as well, mainly among federal agencies. Looking ahead, Scholtes aims to make inroads in the commercial marketplace, supplying tools to help companies meet corporate-governance requirements for preserving and handling documents.

What a long, strange trip it has been. The company, founded in Chicago in 1983, has reinvented itself twice in its 21-year history. In its original incarnation, ZyLAB first developed a utility software that searched hard disc drives. This business fared reasonably well until 1993, when Microsoft introduced a product that served the same function. Unable to compete against the software leviathan, ZyLAB extended its search and indexing expertise to a realm beyond Bill Gates’ reach: paper.

Describing itself as “the paper filing company,” ZyLAB knits together several discrete processes with its ZyIMAGE paper management system. First, paper documents are scanned and the images archived. Second, the pages are read by an optical character recognition (OCR) engine, and the data stored. Third, when someone runs a search query, ZyLAB uses its proprietary “fuzzy logic” to find the document and highlight the search terms on the page. Finally, because even the best OCR software is not flawless, copies of the original document are made available for inspection and cross reference.

Dutch-born Scholtes, who has a Ph.D. in computational linguistics, started his career with the Netherlands Navy, where he developed an expertise in text retrieval while learning “all the spooky intel stuff.” Hopping from the Navy to ZyLAB in 1989, he was put in charge of building ZyLAB’s international business. Scholtes targeted law enforcement authorities, prosecutors and intelligence agencies, all of which sort through vast volumes of paper documents. The U.N. war crimes tribunal alone put 50 million documents online.

Scholtes was so successful that, within several years, ZyLAB’s European operations dominated the company. With U.S. sales languishing, ZyLAB evolved to the point where it was an American company in name only. Other than a nominal headquarters in Denver, virtually all corporate operations were located in Europe, mainly Amsterdam.

In 2002, having risen to the post of CEO, Scholtes "robooted” the U.S. operation. Acquiring the assets of ZyLab's U.S. distributor, he moved the corporate headquarters to McLean with the goal of penetrating the federal government market. “Washington is the biggest pile of paper in the whole world,” he explains. The market was too big to ignore.

The Virginia location proved fortuitous in more ways than one. A Tysons Corner address, of course, provided close proximity to federal agencies buying ZyLAB's document management system. But Scholtes, who describes Northern Virginia as “the Silicon Valley of the east,” also appreciates the wealth of IT talent and professional expertise he finds there. Furthermore, he notes, Virginia laws are favorable to software companies negotiating licensing agreements, and the state's sales tax regulations are exceptionally clear and reasonable. “You feel welcome here,” Scholtes says. “I’ve seen it differently it other places.”

Although ZyLAB’s European business still dominates the company, Scholtes is banking mainly on U.S. sales to propel the company forward. In just two years, the North American business has grown from about one percent of revenue to 20 percent. Says Scholtes: “It is my personal goal in the next three or four years to make as much [revenue] in North America as in the rest of the world” – even while growing revenues in Europe and other markets.

ZyLAB's next big application is in corporate governance. In the wake of Enron, MCI and other accounting scandals, the Securities Exchange Commission requires publicly traded companies to retain all their documents, whether paper, electronic or e-mail. No more shredding! One of the greatest challenges will be storing e-mail in a world where the major e-mail readers – Microsoft Outlook, Lotus and others – are stored in proprietary formats that may not be supported 10 or 20 years from now. ZyLAB’s solution is to convert all such documents to an open-standards XML language that’s not likely to become outdated.

Scholtes is confident that ZyLAB can stay on the leading edge of rapidly changing technology one step ahead of giants like Microsoft. Small and nimble, the company can move rapidly to exploit emerging markets. And, committed to investing 20 percent of its revenues in software development, it can roll out new products quickly.

ZyLab also enjoys a pricing advantage. Enterprise software systems typically start at $500,000, but ZyLab can get its customers started with modules costing only $25,000 to $30,000. “Customers can spend at their own speed, their own pace,” says Scholtes. “They can grow [their system] over time.”

A recent report published by International Data Corporation noted that ZyLAB’s low-cost product made it a potentially “disruptive” vendor in the search-and-retrieval arena. If anyone should be worried, it’s ZyLAB’s competitors -- and, of course, Saddam Hussein.

-- October 27, 2004

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