SRI International, Inc.

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SRI International, Inc.

333 Ravenswood Avenue
Menlo Park, California 94025
U.S.A.
Telephone: (650) 859-2000
Fax: (650) 326-5512
Web site: http://www.sri.com

Nonprofit Company
Incorporated: 1946 as Stanford Research Institute
Employees: 1,400
Sales: $180 million (2001 est.)
NAIC: 541710 Research and Development in the Physical, Engineering and Life Sciences; 541720 Research and Development in the Social Sciences and Humanities; 541690 Other Scientific and Technical Consulting Services

SRI International, Inc. is a leading technology research firm. SRI is responsible for a host of innovations over the past 50 years, including some seminal contributions to computing such as magnetic core memory, the mouse, the electronic pen, and the prototype Windows operating system. SRI began as an affiliate of Stanford University, and now operates as a standalone nonprofit entity. Its researchers specialize in several core areas, including information science and software development, automation and robotics, chemical and material engineering, Pharmaceuticals and biotechnology, and sensors and measurement systems. SRI also consults and researches in the social sciences, and contributes to new thinking in the fields of public policy, education, health, and economic development. SRI consults or carries out research under contract to scores of major corporations, including Monsanto, Hitachi, John Deere, Mattel, and Charles Schwab. It also works with various government agencies such as the Department of Defense, the Department of Energy, the National Aeronautics and Space Agency, and the U.S. Agency for International Development. Other clients include prominent foundations such as the Gates Foundation and the Ford Foundation, and industrial consortia such as the Electric Power Research Institute. SRI occupies approximately a million square feet of office space in its main campus in Menlo Park, California. The institute also maintains facilities in Washington, D.C., and 20 other U.S. locations, and has a branch in Tokyo. SRI has one major subsidiary, the for-profit Sarnoff Corporation. Sarnoff is also a technology research firm, with particular expertise in television and communications. Both Sarnoff and SRI have spun off a host of new technology firms since the late 1990s. These include Intuitive Surgical, Inc. and Nuance Communications, Inc., both listed on NASDAQ, as well as Discern Communications, Pangene Corp., PolyFuel Inc., and SRI Consulting Business Intelligence.

Under Stanford’s Wing: 1940s–60s

SRI began as the Stanford Research Institute, designed as an engine of economic growth for California and the West. The idea for such an institute surfaced back in the late 1920s, when a Stanford chemistry professor, Robert E. Swain, bent the ear of Herbert Hoover, then Secretary of Commerce in the Coolidge administration. Hoover, a Stanford graduate, was enthusiastic about an industrial research center at his alma mater. He encouraged Swain and others to lay plans. The Stanford Research Institute had to be shelved because of the Great Depression, and when the idea was revived in the late 1930s, it then had to be put on hold again for World War II. Finally the Stanford Research Institute became a reality in 1946. It was chartered as a nonprofit corporation closely tied to the university, and its basic mission was to promote the educational objectives of Stanford, as well as to extend scientific knowledge in general. The relationship with the university, as well as SRI’s overall aims, went through several early amendments. About six months after SRI’s founding, it moved its offices off the Stanford campus into its own building in nearby Menlo Park. SRI’s first director resigned after only one year, but with its second director, who took over in March 1948, the institute began mapping a strategy of growth. SRI invested not only in new facilities but in marketing its services to leading national corporations.

The postwar years were a booming time for California, which was experiencing rapid population growth. Industrial production in the United States overall rose by close to 50 percent in the ten years after the war, and total spending on research and development tripled by the end of the 1950s. Hence, SRI debuted at a propitious time. By 1950 it had revenue of $2 million, and it had already been involved in one signal invention, ENIAC, the world’s first digital computer. ENIAC was installed at SRI in 1946, and the institute’s researchers immediately began work scaling down the behemoth machine. SRI scientists came up with the first magnetic core computer memory, which allowed the computer to operate in a much smaller casing. SRI made many other firsts in computers, and in its early years it made key contributions to other industries as well. One of its first projects was market research that led to the development of Tide laundry detergent. SRI also did initial research on prospective sites for what became one of California’s most famous tourist attractions, Disneyland. In the field of banking, SRI pioneered a way to process checks automatically. In 1955 it invented a magnetic ink process that became the standard in banking worldwide and opened the door to the automation of finance.

By 1955 the institute had become self-supporting, with its balance sheet in the black for the first time with income of some $325,000. SRI broke ground for new quarters in Menlo Park that year. By that time SRI also operated several regional offices, including one in Zurich, Switzerland. Over the next decade, SRI continued its prominence in the young field of computing. Its scientist Hew Crane invented the first all-magnetic core computer in 1961. Crane’s system became the standard in the industry for the next ten years. Crane and others at SRI also were the first to make a viable desktop computer. Another famed SRI employee was Douglas Engelbart. He and his SRI team debuted the first computer mouse in 1968. Engelbart later licensed the mouse to Xerox and to Apple Computer, which developed it further. The institute was also on the ground floor of artificial intelligence. SRI researchers created the world’s first robot that could demonstrate reasoning. This was a machine nicknamed Shakey, which could navigate itself across a room using various sensors.

Separating from the University in the 1970s

By the end of the 1960s, SRI had grown enormously, and its revenue in 1968 was about $65 million. It had roughly 3,000 employees by that year, and it was known the world over for its research in computers and in other fields as well. SRI researchers handled about 800 projects altogether each year, and these ranged from earthquake prediction to studies of how mosquitoes responded to repellants. Yet not all its work was clearly benign. The institute worked increasingly for the government, and its work for the Department of Defense eventually brought a severing of relations with Stanford. By 1969, 10 percent of SRI’s research was classified work for government agencies in the fields of biological and chemical warfare and in counterin-surgency techniques. SRI’s work directly supported the unpopular war in Vietnam, and the institute was the subject of wrathful student demonstrations. Students occupied Stanford’s applied electronics laboratory in 1969, and spoke out against SRI’s chemical and biological weapons research. Almost 100 students were arrested in relation to protests at SRI that year. In 1969 a committee made up of Stanford students, faculty, and administrators began to look into ways of dissolving the ties between the university and SRI. The committee concluded that the university should not be affiliated with the kind of research SRI was engaged in, which it termed morally objectionable. Thus in 1970 Stanford gave up its control of SRI, in exchange for payments totaling $25 million. In addition, the institute was to take “Stanford” out of its name. It made this change in 1977, going by its initials, simply SRI International, Inc. The firm remained a nonprofit. It also continued to do classified work, in particular, studies of radar and other communication techniques.

SRI continued to work for government agencies in the 1970s. It carried out controversial studies in parapsychology, and in 1974 attracted much attention with its so-called “cheat-proof ’ tests of the psychic abilities of the spoon-bending magician Uri Geller. It also developed a military technology for detecting objects at great distances using high-frequency radar. Over the 1970s SRI also was responsible for several important medical advances. Its scientists developed a medicine to treat malaria, as well as a blood clot inhibitor for heart disease. The institute had many profitable contracts, and its revenues swelled over the 1970s. By 1981 its revenues stood at $163 million. SRI had developed a strong reputation in computers and mathematics, and in behavioral sciences, biology, and pharmaceuticals. The break with Stanford did not seem to have any lasting negative effect on the institute.

A Gift of a Subsidiary in the 1980s

In the early 1980s, the federal government began watching the cost of its military research contracts more closely. As a result, SRI had to compete more vigorously for government work, and in some cases it lost out to other groups. SRI decided that it would be prudent to lessen its dependence on government contracts, and so in the early 1980s it began branching out into management consulting. SRI had expertise in a wide array of subjects, but it was up against older and better-run companies in the management consulting field. Booz, Allen & Hamilton and McKinsey & Co. were the giants of that industry, and SRI’s management consulting foray did not do well against them.

Company Perspectives

SRI International, a nonprofit research institute, is a pioneer in the creation and application of innovative solutions for governments, businesses, foundations, and other organizations. Since our founding in 1946 as the Stanford Research Institute —our name until 1977 —we have been committed to discovery and to the application of science and technology for knowledge, commerce, prosperity, and peace.

SRI also looked to branch out geographically. It hoped to find a location on the East Coast near the center of the pharmaceutical industry. In the mid-1980s SRI did consulting work for General Electric (GE), which would soon become the new owner of the David Sarnoff Research Center in Princeton, New Jersey. Sarnoff functioned as the research and development arm of RCA, and its laboratories had produced color television, the fax machine, liquid crystal displays, and many other advances in electronics. GE bought RCA in 1986, and the Sarnoff lab became redundant. SRI negotiated with GE, and in the end the company donated Sarnoff to the nonprofit for a tax write-off.

The new arrangement seemed to suit both Sarnoff and SRI. The Sarnoff lab had been rumored to be closing, but with its gift to SRI, the facility stayed open, and most of its researchers kept their jobs. Sarnoff had particular strength in applied physics, an area in which SRI felt itself to be weak. Sarnoff’s location was also very attractive, situated in the midst of a high-tech corridor on the East Coast, similar to the bustling Silicon Valley SRI presided over in the West. GE promised to give Sarnoff contracts worth $250 million over the five years after the giveaway. The aim was to gradually wean Sarnoff from corporate sponsorship, and within the five years it would be able to support itself. Thus SRI seemed to have little to lose by taking on the prestigious electronics lab. The transition did not go smoothly, however, and by the early 1990s both Sarnoff and SRI were losing money. GE sold its consumer electronics business to the French firm Thomson in 1987. This complicated the Sarnoff contracts with GE, though Thomson did continue to work with the lab. SRI’s president, James Tietjen, wanted to shift Sarnoff’s direction. Sarnoff had been doing mainly corporate work, with some 13 percent of its contracts with the government. Tietjen hoped Sarnoff could increase its proportion of government work to 50 percent over the coming years, as its work in electronics, optics, and robotics had many potential military applications. But this shift toward military work came at a time when such contracts were more difficult to procure. By 1992, Sarnoff was $9.3 million in the red.

SRI was in even worse shape than its new subsidiary. Revenues increased between 1981 and 1991 from $163 million to $300 million. Yet over the same period, a close competitor grew sixfold, and other research centers were larger and more profitable than SRI. SRI’s management consulting unit was a drain on resources, losing an estimated $7 million in 1991. This contributed to an overall loss of $15.8 million that year, on revenues of $300 million. SRI’s president blamed the losses on recessionary cutbacks in research spending. He stanched expenses by reducing administrative staff, and reorganized the management consulting group so it worked only in industries like computing where SRI had a strong technical background.

New Directions in the 1990s

Despite Tietjen’s changes, SRI continued to lose money. A new chairman, Paul Cook, took over SRI’s board in 1993, and he installed a new president, William P. Sommers. Sommers and Cook cut costs much more deeply than Tietjen had, and by 1994, SRI earned a slim surplus of $6 million on revenues of $312 million. Sarnoff took an additional year to get out of the red, but it too was financially sound by 1995. Cook’s short-term goal had been to get SRI out of debt. Over the long term, he wanted SRI to find more commercial applications for its technology. SRI had a storehouse of unique inventions, particularly in technologies originally developed for the military. In 1994 SRI funded a start-up company that used speech-recognition technology SRI had developed for the Department of Defense. This was called Nuance Communications, and it soon had major clients such as United Parcel Service and Charles Schwab & Co. SRI also had a stable of biomedical technology that it could turn to consumer uses. In 1994 SRI also launched Genetrace Systems, a company that sold laboratory tools for genetic analysis. The next year it spun off Intuitive Surgical Devices, which marketed a new device for microsurgery.

The wave of spinoff companies continued through the late 1990s into the 2000s. For every company SRI launched, it estimated there were 20 more ventures waiting to go forward. SRI shared profits from these start-ups generously with its employees, so that its best researchers had an incentive to stay with the parent company. Sarnoff, too, operated in a similar manner. By 2002, SRI and Sarnoff between them had launched 20 new companies. SRI continued to do contract work for the military into the 2000s. It developed a unique material called artificial muscle for the Department of Defense. This had many military applications, including use in a flying robot, and as a generator that tucked into soldiers’ boots. At the same time, SRI also licensed the technology to a consumer shoe manufacturer, and other potential commercial clients included car makers, furniture makers, and medical device companies. In the 2000s SRI also worked on strengthening the capabilities of the Internet. SRI had been one of the first four nodes on the Internet as it was developed in the 1960s. SRI’s work in the 2000s focused on small wireless networks, another project that had military uses plus a host of potential commercial applications. By the early 2000s, SRI seemed to be flourishing in this new vein, where its advanced and esoteric research quickly found real-world applications.