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Time to reflect

This month's case study looks at a computer systems company that is struggling in a slowing economy but with an owner who may be too tired to save it.

At 57 years of age, he knew his energy was flagging and he was not as quick on the uptake with new technology as he used to be.

'It's always like this coming up to time off," managing director John Redmond remarked to his PA. "You think that if you had to work one more day without a break, you'd collapse from exhaustion."

"Have a good rest," she said as he gathered up his bag and jacket. "I hope you get some decent weather in St Lucia."

"Me too. See you Monday week," added John as he left the office of Personnel Systems Ltd on Baggot Street, Dublin. In truth it wasn't so much a rest he wanted, as time to reflect on the major problems facing him and the company.

He found it hard to believe that it was well over 20 years since he had started the company with Richard Colton and Paul Clarke. An idea that was first batted about during after-work drinks in Searsons on a Friday night had evolved into a highly successful, market leader in computer systems for human resources (HR).

Back in 1978, the three of them had worked in the head office of a large insurance company. John was in the personnel department, Richard and Paul were on the computer systems team.

In his department, which was responsible for all aspects of recruitment, employee appraisal, salary discussions, training and employee discipline, John sometimes felt he was drowning in paperwork. Staff were employed simply to keep the hundreds of employee files up-to-date. Not only was a huge amount of time spent filing pieces of paper, but then hours were also being wasted searching through files for basic information.

He began to think about how computerisation of the records would transform the department. After sharing the idea in the pub, John started working with Richard and Paul at weekends to develop a computerised personnel system. They came up with one which covered six key procedures: recruitment; staff performance appraisal; career progression; salary and remuneration details; training records and disciplinary procedures.

John proposed to the personnel manager that they introduce it on a pilot basis. Picking a relatively small department of 30 people, John and his colleagues looked at what information was needed and loaded all the data from the relevant employee files onto the system. The pilot was a great success, and the three of them were asked to implement it throughout the company.

After that, such was John's confidence in the new system that he persuaded Richard and Paul to join him in setting up their own business, Personnel Systems Ltd, in 1981 to sell it to other companies.

During the 1980s, Ireland became the world's second largest computer software exporter. Personnel Systems thrived as more and more Irish-based companies looked for computerised systems to improve efficiency. The development of employee-related legislation, driven mainly by the EU, also boosted business. As case law concerning employees' rights developed, companies saw the importance courts placed on HR processes. Employers needed to be able to prove they had followed correct procedures.

Personnel Systems enjoyed over two decades of growth and profitability, with continuous enhancement and development of services. The company branched out into producing disaster recovery plans, and offered this to clients, along with a HR records archiving and a backup facility. This was followed by a database management toolkit, an IT governance review and enhanced security systems. In addition, the company produced modules of its systems to sell into the small and medium enterprise (SME) sector.

But then in the 1990s large conglomerates started to centralise "back-office" operations to increase efficiencies and reduce costs. Initially many of these shared service centres focused on finance operations, such as payroll and accounts. But it was not long before businesses began to centralise personnel administration.

Many of these shared service centres developed their own database management and IT governance systems, as well as in-house backup and disaster recovery systems. As shared service centres became popular, Personnel Systems found its services contracts with some major customers were only partially renewed. In addition, as a client concentrated its system in one place, the number of sites that Personnel Systems was maintaining were reduced, and so maintenance revenues also began to fall.

John and his colleagues realised that their business strategy had to change. For the first time, revenues from their key, corporate customers were falling, not only from services being taken in-house, but also because the new shared service centres were seeking to drive prices down. This situation was masked to some extent by continued growth in the SME sector, though it would take the recruitment of many SME clients to compensate for the loss of a single large corporate client. However competition here was coming from specialist providers who were offering bureau services - effectively an outsourced shared service.

Last but not least, John knew the company would have to embrace the internet if it was to remain a market leader. However, it would be difficult to develop a long-term internet solution as web application servers were still relatively new and untested, and there was a confusing barrage of offerings in the marketplace. Selecting the best internet-related solution for the company's needs would be a huge challenge.

In recent weeks, John had had very frank discussions with Richard and Paul about the state of the company. His colleagues agreed that they faced three major questions:

1. What could they do to counter the loss of revenue from their large corporate clients?

2. How should they safeguard their SME business?

3. How should they adapt to the potential and the threat of internet-based solutions?

But John had kept quiet about another, more personal dilemma. He had earned a very good living from the business over the years and had invested sufficiently to provide for a reasonably comfortable retirement. He had occasionally thought about selling his interests, but had always put it off, the company was going too well.

He knew that if he tried to sell his shares now, it was unlikely he would receive what he believed should be a true value for them.

Also, "jumping ship" at this stage did not appeal to John, as he felt he owed something to his partners and the loyal staff.

However, at 57 years of age, he knew his energy was flagging and that he was not as quick on the uptake with new technology as he used to be.

Although he was the majority owner, John was beginning to concede, to himself at least, that he might not be the best person to lead the company into the future.

These were the issues on his mind as he lay on the beach. He had nine days to decide what to do next.

John and his company are in trouble, says Philip McNamara , founder of Inspire Nation.  Not only is he unsure of his personal role in the company for the future, but things are looking grim on the software side too. John and his company are battling a huge change in the way in which human resources administration are dealt with, and it will be very hard to compete unless they radically change their business model.

It's easy to understand why companies are beginning to move services such as HR administration to outsourced companies. It lowers costs, and there are efficiencies of scale as processes are automated and data can be accessed easily online. One of the biggest companies in this field is Oracle/Peoplesoft, who cater to large and small companies.

However, there are ways in which John and his company can safeguard the future of the business. One of the first things the company needs to do is understand where the market is heading when it comes to online software for human resources. There are a host of companies offering similar services to what Personnel Systems is producing, but John has an advantage which is decades of experience and a wealth of clients. If John's company was to start a drive to change all of his software so that it would be accessible on the web, then this would be a step in the right direction.

John and his company needs to understand the nature of the market, how things are changing, and who the main players are. A visit to Silicon Valley, meeting with venture capitalists, leading software companies and online software producers would shed a lot of light on where John's company should be heading, as well as giving the team a good understanding of how they can start competing on a level playing field. This could also lead to potential partnerships with other leading players in the US.

Personnel Systems also needs to understand what kind of software the HR outsourcing firms are using. As more and more companies begin to use these types of firms, they will begin to migrate from using their own in-house systems (such as that produced by John's company) to a central back office system. The key here is to begin to create software that can be used by the big outsourcing companies. If bureau services are being used to deliver outsourced HR management, then that is another potential client for a new suite of online software that Personnel Systems should deliver.

With regard to how John should take on the challenge of the future, and who should lead the company, it would seem like a mistake to leave the company now. John needs to learn quickly how the market is changing, who is leading the change and what's going to happen over the next five years. A lot of this can be learned in Silicon Valley, where some the world's leading companies, both large and small, are located. If John and his team were to take four days away to learn about the future of the industry, this would go a long to way to filling the gaps in his knowledge about the future of technology side of the industry.

John has to stay on as managing director for the next few years to oversee the changes necessary in the company, and at the same time, he needs to choose a successor that is internet savvy, younger and who is able to adapt as the marketplace changes. When the necessary changes are made, the value of his shares should rise, and he can retire in the knowledge that his company is on the right path.

John and his management team need to understand that the shift to online software is like a tidal wave that will not stop.

Personnel Systems need to start making the changes to their suite of products now, before bigger competitors start eating into their profit margins.