Outlook

"The Accountant who became a successful UK Software Entrepreneur - from counting it to making it"
By John O'Connell

Synopsis of a talk given to the Chairman's Network London October 20th 2005 by one of our Investors, John O'Connell

How I got started and early day survival challenges for Staffware

1. Being there- floating on AIM, dot com era, profit warnings
2. Selling up -sale for £123 million last year.
3. Post Executive Life - Current activities
4. Lessons learnt/ Comments on current events.

You need to figure how much, if any, is relevant or even interesting to you.

I seem to have focused more on the warts rather than the all, per Caroline's brief! Not an entirely pleasant experience for me to re-live some of this - the rose tint came off the glasses at several points! However it has played to my Catholic background as I am using this session a bit like a confessional so I am quite prepared to say my twenty hail Mary's at the end if you so decide.

By the way I am sure you are familiar with the saying 'There are only two challenges in business, getting there and staying there.' But is this true? What about the third challenge; not staying there, but moving into and enjoying the post executive life?' Note I do not use the dreaded 'r' word - retirement! This is because I pity those poor boring old sods - they spend half of their free time on the golf course and the other half talking about it!

No sour grapes here you understand, just because I am no good at the silly game. Joking aside, about a year ago, when I was about to leave Tibco, I was lectured by a wizened old neighbour of mine in Majorca - an ex-surgeon who had been kidnapped in South America, when it was all the rage - about planning my third life, by which he meant the one after business, which in turn was the one after childhood and adolescence. I will return to this aspect at the end.

For now back to the main thrust of my talk, the business aspects.

Philosophy

'Learnt' competitiveness and will-to-win, (do you learn this or is it in the genes I wonder?) as well as acceptance of defeat (reluctantly, from playing soccer at school and then captaining my School Old Boys Team to their only trophy winning successes). This is the first of my two philosophical points, which is that

1. Success in business and team sport requires similar characteristics. Selecting the right players in the right position, ensuring they have a game plan and that they can play together to execute on it and above all us inspiring them to achieve exceptional goals. Interestingly, there is no need to be the best player personally, so long as you surround yourself with the best. In fact, as you know, the best captains are often not the best players. It might actually help if they are not as they can concentrate on getting the best from everyone else.
2. My second philosophical point is that being an outsider and starting with nothing is a definite help to being an entrepreneur! It makes you hungry and you have no one to live up to. In fact you can only exceed expectations if they are modest or non-existent at the beginning.

Having said that you will not be surprised to know that my Background was from the School of Hard Knocks - I am the son of Irish immigrants. "No Irish" signs were common in the early 1950s. This has a familiar ring to the 'Illegal Asylum Seeker' scare-mongering in some parts of the media today.

The English Grammar school system was my route to success, but it meant I had to be a traitor to my Irish roots- at least, in the eyes of some of my family. I still remember going to school on first day, wearing brown girls' sandals which my mother had got by way off cast-offs. Girls' shoes ok - but brown! It took some time to achieve any semblance of street credibility after that!

Anyway, moving on rapidly into the Early 60's to early 70's. My business career started when I was 16. I had had to leave school after three months in the sixth form, for family break-up reasons. Fortunately I qualified within 4 years as an accountant -I have to say it was a real grind doing it through an accountancy correspondence course, evenings and weekends, with zero time off for study leave. I worked as an accountant for a variety of firms, large and small, commercial and professional, learning about working with all types of people as I went. However, I was not a great accountant - I wasn't really committed to it - I guess I was coasting along wondering where it might lead.

Incidentally, I count myself fortunate enough to be around in the 'swinging sixties' with one of my most memorable moments watching England win the World Cup of 1966 at Wembley. (Likewise, I was in Sydney in November 2003 to see a repeat performance by the English Rugby team.) Less positively, I regret I never really sampled the free love of the sixties, unwisely getting married at the then tender age of 22.

In the mid-1970s, luck gave me the chance to move into Computers with the Bunzl Paper Group, even though I knew nothing about computers. As the just-appointed Group Financial Accountant, I had been co-opted onto the newly formed computer committee, whose specific terms included not being allowed to recommend any computer costing more than £10,000. It appeared I was the only one on the committee who was understood on the subject of computers by the 'venerable' board of directors, to whom we reported. This experience taught me the value of good, clear communications when talking about technology, especially to business people such as investors - not a core competence of many in the IT Industry, and still a problem to-day, in my opinion.

So I was asked to set-up internal asp like computer service, called timesharing in those days, for the hard bitten local MDs, who disliked any head office activity or spending money -so I learnt everything from the art of selling at board level to corporate politics and diplomacy. I knew nothing technically about computing - I still don't, many people would say - but I hired excellent people who did (back to my team philosophy). However, I was the familiar and acceptable business face to the management. We expanded the service into a commercial offer and then started selling complete turnkey systems, mini-computers and software - 3rd-party and self developed - to become the largest DEC commercial reseller in the UK in the late 1970s. The commercial tail, selling to companies outside the group, was of course far more interesting than looking after the often ungrateful and begrudging internal customers. Inevitably, the commercial business became the tail that wagged the internal dog, with the consequent loss of focus on group computing needs. We made virtually every mistake possible in business, hiring the wrong people, buying the wrong hardware and software, not adding sufficient IPR of our own, providing a poor quality service, creative accounting; having competing board members and strategies, allegations of fraud; growing too fast and believing our own hype were the ones I am now prepared to recall. This had to be the best management education someone else's money could buy and so it was a fantastic learning stage for me (with someone else's money!). Given my lack of a college education or a business school degree, I would heartily recommend it. In fact I would recommend it even if you had such qualifications.

By now it was 1980 and the Bunzl group had fired all of the members of computer board apart from me, for reasons not entirely clear to me I must say. They'd had enough and decided quite rightly to close down the commercial part of the business. The company had observed fabulous sales growth, but with equally fabulous growing losses.

Rather than revert to an internal DP type role, taking voluntary redundancy, I lurched into setting up a business with two brilliant techies who had written a Financial Modelling package (the pre-cursor of spreadsheets) at a time when some large organisations were spending £1 million per annum on timesharing services! Based upon 16 bit mini computer technology, there was no doubt that we had disruptive technology, reducing the cost by at least a factor of 20, often more! The company was called Financial and Corporate Modelling Consultancy - FCMC - erroneously listed in Yellow Pages under 'Modelling Agencies', which meant we received letters from mothers promoting their daughters as models , enclosing photos and requesting interviews. We were tempted on more than one occasion to take up these offers, but resisted, damn it.

I went from the corporate executive life style to the harsh reality of 'sell or die' - the remuneration package was very simple! I drew no salary but got to keep 50% of the sales proceeds from any license sales, so long as the company could afford it - which was rare by the way.

Anyway, puffing up my chest to look bigger, we had a determination to be no.1 in a niche market - which we did become. This happened despite micro software coming along to reduce the cost of competitive software by another factor of 20! At this time I discovered the truth of added value by building applications, rather than simply selling a toolkit, for Accounts consolidation. I also learnt the notion of selling off a specification, getting the first customer to fund our development costs. So we became no.1 in that field with around 50 or so HQ offices of typically large groups using our software.

Nevertheless, with no external funding, these were tough years. Just as finances started to get more stable, we destabilised the business ourselves by diversifying far too soon into what we initially called 'Procedure Processing,' i.e. workflow. We were ten years (at least) too early with this clever concept, positioned in those early days as intelligent rules based e-mail, when e-mail was still novel.

Nevertheless by 1984 we got our first external funding from a City institution, about £500k net of costs!

My two co-founders, by now in Denver, Colorado - strategically well located they said - for not much else but skiing I felt as it was pig of a place to fly into and was often snowbound.

We signed up some equally naïve, or far-sighted OEMs - Unisys, ICL, Wang UK, IBM UK and Panasonic.

We lived off reseller sign-up fees; advance royalties, which meant we were mortgaging the future and paid for OEM specific development. This was the software equivalent of pyramid selling, with little or no product being used by the ultimate consumer unfortunately. Development was being done in Denver. I don't recall any customer of our OEMs actually using the stuff seriously, though a lot of their marketing suggested otherwise. Dangerous phase - we again began to believe our own bullshit and their hype too.

Carrying on this indelicate metaphor if you don't mind, the shit hit the fan after I signed up a distribution deal in the UK, which nearly broke us. Claiming unstable software, unluckily for us, our client had gone out and found real customers. Worst still their customers were solicitors! They sued my company and me personally for £1 million. So my core developers left; my co-founders left and we effectively shut down our U.S. operations which had around 15 staff. This was the late 1980s. I found self-hypnosis helped - the motto 'Not if, but When' kept me going. I remember offering a friend, who had just sold his business for £20 million, 25% of my company for £50k- he turned me down! That 25%, undiluted, became worth £30 million last year.

Perversely our suing Distributor, realizing the company had no tangible assets, was persuaded by me to become a shareholder in the Round 2 re-funding in 1988, when I raised £200k from two Angel investors. This valued the company at £1 million. Sales were probably around £0.5 million at most and we were barely profitable accounting wise, bleeding cash because we couldn't collect debts from customers, who quite reasonably wanted working software.

The £200k barely kept us going and there was on-going Ducking and Diving with our friendly Bank Manager.

So apart from

• Workflow not yet being a market
• Few early adopters not being able to get it working anyway!
• Being grotesquely undercapitalised and probably trading whilst technically insolvent

Everything was plain sailing.

The first few user-meetings were fun, with customers enthusiastically supporting the charade (after all they couldn't tell their management it was a mess). Our newly acquired Japanese distributor then took the bullshit count to undreamt-of heights by forecasting revenues which translated into royalties of £20 million annually for us.

In the real world, it is difficult to get paid if your software doesn't work. Fortunately for us, the competitors were just as bad in terms of stability and scalability. But unfortunately, this severely blighted the market growth and workflow became unfashionable for some time. Looking back now, this was not a bad thing as we eventually stopped believing the hype and focused on getting real business applications working for our customers and partners.

R&D
Horrendous quality problems at the beginning In the early 1990s, the entire development team had to be replaced for various reasons. I brought development into the UK and 'acquired' the smallest development company to ever have achieved ISO 9000 status - manna from heaven indeed. Soon after, I segregated QA from development, both physically and organisationally and put as many people into QA as we had in development.

This meant we invested 18%-20% of sales each year, which we continued to do until last year's sale!

In due course, development evolved into two locations - UK and USA- managed by a very competent Development Director. All product development became subject to disciplined business justification (where feasible!). We maintained a highly effective radar, in terms of technology trends, via our 'guru like' CTO - who had zero responsibility for product development. In my experience, creativity and software engineering do not go had in glove

International Expansion
The OEM relationships gave us an international profile - a name check on the back page of their brochures was invaluable. We developed an international business - Europe, USA and Asia, through 'franchisees' of VARS, who bravely (naively) pioneered the workflow concept, using their money. Partner sign up fees, increasingly from international partners were still the main revenue source of the company. Having insulated ourselves from the cost of opening up international markets in this way, once they started to win some tangible business I bought most of our international vars out in 1996/7. This sounds very cynical and if it had been premeditated you would be right, but I evolved this approach opportunistically. That is my story and I am sticking to it. My conscience is clear because they all remained as country managers with share/options in Staffware and profited hugely from our future success. It was truly a win/win situation with people who had grown up together sharing the common vision of Staffware dominating the world of global workflow.

Accounting
From 1993 onwards we were starting to become profitable, albeit under-capitalised. Book profits were helped by being able to put software development on the balance sheet as an asset, which ignored the fact that it still had to be financed. I agree entirely with Richard Holway of Ovum on this point that the new IFRS accounting standard on this subject is a big retrograde step back to those dangerous practices, blinding everyone to real profitability of the business

AIM
With our financial software business withering through neglect, we changed names from FCMC to Staffware in 1994 - so no more modelling applications, either in the business sense or in the job sense! We floated on AIM in its first year of operation, 1996, when there were only 12 companies listed, compared to 1300 now. We went on AIM as a last resort, having been turned down everywhere else. Ironically, now I am a representative of some VCs when I have never benefited from their funding.

However, AIM made us, although it was very nearly the death of us also. For the first time in a long time we had to articulate what we were doing, why, competitors, market size and potential and detailed financials instead of simply trying to pay salaries at the end of the month and keep within the overdraft limit.

In 1995 we had 40 people, £4 million in sales and a small book profit, but a very volatile business model. We glossed over that and floated at a market cap of about £12 million! We raised £3 million at £2.25 per share.

Joy of joys I personally managed to get out some cash, mortgage and debt free at long last. Unfortunately, euphoria changed to despair when we missed forecast in first year of debut and shares plummeted to less than a £1, we (myself especially) took severe beatings from Nomad, shareholders, media, and family friends and staff. The earlier trials and tribulations I had weathered proved to be excellent preparation for these public beatings!

Anyway, as you would have expected by now we ploughed on regardless. We got used to the treadmill of half-yearly reporting, which then became quarterly, voluntarily. We did that so as to avoid a false market being created in the shares through rumour or innuendo, apart from those institutions who were constantly trying to get inside information at that time, quite illegally of course. We grew sales at nearly 40% CAGR in 10 years up to 2004 - 38% per annum to be exact.

Market cap went from £12 million to £640 million back to £12 million and then as you know we sold at £123 million! A couple of years ago Richard Holway congratulated me on leading the TechMark company with the most volatile share price! Well, I took it as a compliment.

In the crazy dot com days, I remember standing up in front of a city audience to announce our e-strategy. Whilst speaking, people were leaving the jam packed standing-room only session, not because they were unhappy with my presentation, but because they were placing buy orders for our stock! By the time I had sat down after going through a deliberately very conservative projection of our e-ambitions, the price had increased by another 25%. We spent the rest of the day in the wine bar watching it go up 25% more by the time the markets had closed! Fortunately, having been through the ups and downs of Staffware in the last few years, deep down I suspected it was all based on froth, still heady days, never to be repeated I would imagine.

Getting back to reality rather than stock markets, we were profitable for all but 6 months of our 8-year life on AIM/Main market - sometimes by the skin of the teeth, but never mind, we were not alone in that regard.

Our business model was too volatile. We had lumpy big ticket sales and Christmas was always a crap time with a 31st December year-end. I like a recurring subscription price model, but starting off with a conventional license model and switching to a pay-on-demand one is almost impossible in the public domain. Inevitably there were management issues, especially in sales and in the U.S., usually both at the same time. Stuffing the channel became an art form for one or two of our Sales directors. I was forced to embark on a regular process of 'improving the bloodstock.' However, there was great stability and unity of purpose at the core of the business and in the Chairman/CEO relationship, and a team with common values and goals.

We graduated onto the Main LSE Market in 2000, raising another £3 million for the company in the process, when we changed bankers.

In the first half of 2001, Staffware hit another wall when the post dot-com bonanza disappeared overnight and corporates closed the cheque books on any further big IT spending. I had the surreal experience of being in Australia in July 2001, celebrating the largest deal in the company's history (and celebrating the British Lions tour) whilst issuing a profits warning to the City. Our shares plummeted again to £1.80 a share from about £5.

We down sized by about 100 people from 470 to 370, rapidly, but carefully - for instance, we did not withdraw from any markets, geographically. By now we were directly in 23 countries. You cannot regain credibility in a market if you withdrew when the going got tough. However I closed down/amalgamated all of the eProcess dot com activities 'overnight'.

Most importantly, we pushed ahead with a big new product development, taking our technology to unheard of levels of performance and firmly establishing ourselves as the no.1 best-of-breed Business Process Management technology in the world. BPM had by now become the new workflow, embracing human and automatic process automation - the Independent Process Layer as we positioned it - potentially monitoring and controlling all end to end processes.

At £1.80 I seriously considered taking the group private. Miraculously, our share price started to recover, clearly helped by the subsequent and successive record years in 2002 and 2003 -£43 million revenue, £5 million profits; £25 million cash with no debt. We were now keeping a very tight grip on costs and cash, running the company as you would any other mature business; no exuberant investments in new sales people and no marketing initiatives (apart from sponsoring the Barbarians Rugby team!).

Our management team agreed a 3 year plan early in 2004 at our Away Day, which set an appropriately high bar, value wise, for the subsequent sale negotiations.

Acquisitions
Staffware bought a UK services company/reseller in 1994 and doubled the headcount to 30 - more credible for AIM listing later and made us a more fully formed business with services as well as software sales.

As mentioned, we bought out our international resellers in 1996/7 in Germany, Sweden, Australia and Holland. Staffware nearly bought an Austrian competitor in 1996/7 which failed my due diligence when their largest customer wanted their money back - 3 million Dmarks! In 2000, we acquired a Texas-based CRM company, which turned out to be a big mistake. Several other potential acquisitions failed due diligence or reaching acceptable terms, or both. My advice is to never get so emotionally committed to such transactions that you get blind to the logic of the case, or otherwise.

Tibco
Tibco approached us in spring 2004, just as we had announced record results for 2003 and we were in the final stages to buy a US competitor too. We were also in talks to acquire a small UK-based software business at the same time. This was along with two other unsolicited approaches to buy Staffware, at the same time. Not looking to sell gave us a far stronger negotiating position. We had the real option to stay independent or not, reinforced by our recently adopted 3-year plan.

Suspending any emotional feelings as the Founder, I took soundings with major shareholders - an offer of a 46% premium on the current share price was hard to refuse - and management, both groups were very much in favour. I think my decision to split my role of Chairman and CEO was perhaps a factor also, making the staying independent, less certain than otherwise.

The deal with a valuation of £123 million was announced in April 2004 and completed in June 2004. It was agreed to have two independent units initially, although, unfortunately, no one internally believed this would last, once I had left, which was expected at any time. This was an example of a self fulfilling prophecy, as it caused me to recommend to fully merge, although I also recommended making important changes to management style and leadership. So I happily danced 'off stage' in late 2004.

Incentives
Maintain transparency and set attainable goals. Lay out clear rules that are accepted up front. And pay your team!

Shares or share options are the no.1 incentive. Don't get hung up on dilution! Focus on making the reward big enough - 10% of something was better than 50% of nothing for me.

Management style/rewards
Quarterly prizes. Awards. Dinners. "Company of the quarter". "Person of the quarter." Jollies. Achiever's Trips. Napkin challenges etc. became the essence of the company ethos, "work hard play very hard," breaks down barriers. Annual formal appraisals became one of the most important techniques. Several management changes resulted at main board level/country manager level for instance.

Delegate not abdicate. Enforce rigorous sales processes, Miller Hyman or equivalent, so everyone speaks the same language; prospect qualification is logical and consistent.

The founder doing everything inhibits scalability. Home grown talent is the best if possible to nurture.

Reflections

• Empowerment inspires the right people and exposes the wrong people.
• We created an internal collegiate style, highly results-oriented, with transparent timely reporting. Keeping score proves you are not merely practicising, it's for real.
• Enjoining key people is vital when setting your visions and goals but also agree resources required up front, as part of the same process, as otherwise it is wishful thinking.
• Be constant in your vision, but highly adaptable in your tactics to get there, by constantly checking the' terrain'.
• Think global
• Want to be no.1 even if it is in a small niche market - being the best is important for all stakeholders, including your customers.
• Inexhaustible stamina and drinking capacity seemed to be prerequisites to bonding in many cultures. Bar talk was most valuable source of internal intelligence.
• Leaders have to be highly visible - e-mails/webinars are not enough, you have to 'go there' and regularly. Avoid flying visits if poss. Socializing tells people they are more than just components, but they really matter - they will go the extra mile for you in return.
• We created a family culture.
• Perhaps I was a little slow on the trigger in terms of firing people, though not all of my ex-colleagues would agree, until evidence was irrefutable and there was no other avenue left. Lose people with dignity , but be decisive and firm - even if 'tears' result, for the sake of the team/company
• Be fair and even handed. Don't tolerate mediocrity, laziness, dishonesty, disloyalty, disruptive elements; cliques
• Watch for 'Englishness' in an international English company, which creates a divide.
• Keep reporting to the absolute minimum needed; don't confuse reporting with helping - quite the reverse.
• Attitude and determination are everything - 'not if but when', was my personal watchword in the blackest days.

3rd life.
My wife says I retired for 4 weeks last autumn. I think she is wrong, it was at least 6 weeks! This short period was helped by a number of factors

• I found golf frustrating
• my wife's off-hand comment about not impacting her lifestyle just because I had more time on my hands
• looking around the local and seeing the regulars bemoaning things aren't what they used to be
• Finally, the waste paper basket incident, when I eventually purchased an apartment in South Kensington, as a response to not being able to be master of my own domain at home, including the waste paper basket - extreme reaction perhaps!

My days are now extremely full, though I do note that many meetings tend to revolve around breakfasts, lunches or dinners. I have not had a lot of non-eating meeting in recent times.

I am on the legal board of 5 companies, four in IT, two of which are AIM listed, where I am Chairman - Portrait Software plc and Clarity Commerce Solutions plc. I am also a Ned of InforSense an Imperial College offshoot and Columba systems Ltd. I am invested in two others in IT - Paoga, which is in Personal identity software and of course Ariadne Capital itself. I am on the advisory board of two other organisations, Fleming Family and Partners and Mantix Ltd., plus I have an active role still with the Prince's Trust, where I am a Patron and co-founder of the Technology Leadership Group, which has raised over £5 million for loans/grants to young disadvantaged people looking to set up in business. I should also mention that I am vice Chairman of London Wasps Rugby Club.

My life in the last 12 months has been peppered with some exotic trips and activities - for instance I have been sky diving ; flown a Microlite; Tiger watched in India; went to the Rugby Sevens World Cup in Hong Kong; travelled with my father in law to The Masters Golf in Augusta; taken over a castle for a weekend in Ireland for my birthday celebrations in June; with my wife, passed my ICC test and bought a speedboat, and most recently been on a 12 day guided tour of China. All of this is fitted in around my business commitments- or is it the other way around! I should also mention spending time with family , including two young grand children, ensures life is seldom unoccupied, which suits me fine.

Oh yes, I should also mention co-authorship of an up coming book, called "Mastering Business Processes" from Cambridge University Press. Destined to be a best seller, we were thinking about pricing it by weight, given its academic style.

Keeping control of your own diary is vital - I have resisted the temptation to get a personal assistant, although this has resulted in several admin cock-ups!

Briefly Business Activities

A common goal I have for all of my portfolio companies is to help them achieve their potential. To this end, apart from a direct investment I have made, I am trying to create a Silicon Valley style of cluster for software executives, VCs and advisors. We held an inaugural cocktails event recently which was successful and I plan to keep this concept going. Whether I decide to package it up into a separate business remains to be seen. One thing I do know is that I have no desire to revert to an executive role again!

Other Lessons learnt

• People - There is a direct relationship between quality of your people and the quality of your company's products and services.
• Money (Business) - Raise money when available, even if it is not needed.
• Money (personal) - Sell equity when in demand, even if it is not needed
• Ambition - Talking generalities, UK execs are better balanced and well rounded, compared with US counterparts, but have less drive and greed, and think in smaller incremental steps. This can translate into an obsession with being diluted to the detriment of growing the business.
• Alignment of board and shareholder interest is vital - Non-Exec Directors included. I don't understand the Higgs approach on this subject at all. Excessive corporate governance for smaller public companies is destroying shareholder value and making directors more risk adverse. Not to defend corporate malfeasance but there should be recognition that Portrait Software, for instance, is not in the same category as British Petroleum.

In conclusion, parallels of success in Business and Sport are all there to see

• team is the overriding unit; no individual, no matter how brilliant, can be tolerated for ever if they cannot gel in a team environment
• constantly appraise your team and be tough for the good of the overall team
• individuals , no matter how brilliant, need support and right positioning
• Attitude is as important as natural ability. Dealing with tough times defines a team's /company's qualities.
• sustained investment 'off the pitch, training etc' or in the software labs , or in people training , ultimately determines success and creates an ethos
• Leadership cannot be overestimated. It should be by example, unwavering, continuous and enjoining
• luck comes from constantly trying

Without Passion success is (very) unlikely!

Work hard, but look forward to your 3rd life too! It is the best thing I have ever done.