Mature thinking

When software investor Jeff Tognoni acquired a public software company in 2003, he intended to take it private. After 20 years in the industry, including stints at Dunn and Bradstreet Software and Texas Instruments, Tognoni saw the need to manage software companies differently than they had been managed in the past.

“There are a lot of companies that went public which shouldn’t be public,” specifically those with annual sales of less than $500 million, says Tognoni.

In 2003, he put that philosophy to the test. He partnered with California-based Battery Software, an affiliate of venture capital firm Battery Ventures VI LP in June of that year to acquire Made2Manage Systems, a software development firm that made quality products and had strong customer and employee bases.

Tognoni became CEO of Made2Manage and began to run it his way, based on the fact that the software industry had become a mature market. And despite the mindset held by many large public companies — that they had to constantly prowl for new customers — Tognoni realized high growth was no longer a realistic expectation.

“We are oriented toward slow, steady growth instead of fast, high quarterly earnings,” he says.

But that doesn’t mean Made2Manage doesn’t make money. In fact, Tognoni says, the firm is making more money than it did when it was public. He credits that to a strategy of focusing on existing customer relationships and building upon those rather than trolling for new business.

Because the software industry is a mature one, he says, earnings and growth will stem from selling more products and services to existing customers. Accordingly, he has instructed his development team to focus on understanding current clients’ needs, then use that information to improve the quality of Made2Manage’s products and its customer satisfaction rating.

And instead of having several salespeople and few customer service representatives, Tognoni has reversed conventional wisdom. Today, the company employs only a few salespeople, while an army of customer service reps touches base with clients at least once a month.

By using these strategies, Tognoni says both employee and customer satisfaction numbers have increased dramatically.

“In the last three quarters, our performance levels are beyond anyone else in the industry.”

Smart Business spoke with the software veteran about his strategies for Made2Manage and the difference taking the company private has made.

What prompted the decision to take the company private?

The industry matured. When I started, it was young, but it is now rapidly maturing. We lived through its adolescence, and it has become mature in the last two to 2 1/2 years. We (Tognoni and other investors at Battery Ventures) focused on start-ups, but we decided that the industry had radically changed, so we wanted to change our approach.

We focused on high-growth start-ups but wanted to participate in the industry’s consolidation. The industry was restructuring, and growth was slowing. I partnered with Battery Ventures as my source of capital, and after analysis of the industry, I started looking for public companies that I could take private.

They (some public software companies) don’t have the size or scale to warrant being public. I was looking at public companies, in particular, orphans. With these companies, the stocks were falling, and they were not valued well. Institutional investors were not investing in them.

We looked at companies that had good quality products, good customer stats and a good employee base. Made2Manage was one of those companies. The board of directors was interested in selling, and we bought the company and took it private.

What are the pros and cons of being under private ownership versus a public company?

We like to operate in a private setting because we can operate in a different, more long-term way. We don’t have to deal with Wall Street and quarterly earnings. We can take a long-term approach. The company is making far more money now than it did as a public company, so earnings aren’t an issue.

But public investors have a bad habit that drives bad management. When it comes to the software industry, they ask, ‘How many new customers did the company land?’

While 90 percent of the industry is running incorrectly, searching for rapid growth opportunities, we are not. When we purchased the company, it had about 1,700 customers. Now, we have about 2,000 customers. So we are adding about 60 to 100 new customers a year. But previously, the company was spending a disproportionate amount of money and time focusing on those 60 to 100 new customers instead of focusing on existing ones.

We also wanted to own the whole company and run it how we want to run it. I don’t think there are any cons to the company being private. We are still interested in taking other good public companies private; it is a better model for companies that have less than $500 million in sales. It’s not worth being public unless you have more than that.

Your latest company initiatives are geared toward maintaining customer relationships. Which of these has proven most successful?

Some of the initiatives have taken longer to pay off. The most rapid payoff has been going from a reactive customer account management system to a proactive one. We focused on that right away and put more resources in improving customer relationships and profitability.

In the old days, we waited for our customers to call us. We didn’t have account managers. We hired them and now, on a monthly, sometimes even daily basis, we call and ask them how we can improve their service.

The industry, as a whole, didn’t used to do this. We are bringing back maintenance/support agreements that have brought dozens of customers back, so we must be getting the relationship right.

That is a huge change that had never been done, and now we are focusing on it. Customers are purchasing additional services, and we are offering services we didn’t before.

Another initiative is our acquisition strategy. We have acquired DTR Software and we plan on continuing that strategy. DTR focuses on plastics manufacturers. We focus on four or five types of manufacturers, including plastics, while DTR was focused on plastics. When you mix our customers with theirs, we are now the leader in the plastics industry.

All other initiatives are pretty much going as planned. We established the plan after studying the industry and company for several months, and we thought it had to be a good idea. The individuals involved had two decades of experience.

What we wanted to do was planned well. It is all going according to plan, and we have hit every quarterly goal and made money the first quarter we owned the company.

We are exceeding all public companies, and the employees are happy, according to our surveys and metrics. Employee satisfaction has improved, which is very important to us, and customer satisfaction has also improved.

Has your emphasis on maintaining current customers affected your marketing and sales strategies and budget?

Yes, pretty dramatically. We were spending an enormous amount of money on acquiring new customers and hardly anything on existing customers. We took a small amount to expand service to our current customers and cut the sales budget dramatically.

Now, we spend just as much time marketing and selling to existing customers as new ones. That strategy has paid off tremendously.

You say your focus on current customers differentiates you from the competition. Are there other differentiating factors?

There are other differentiators, but they all flow from that change of focus. Take product development, for example. How we build and maintain software is different now. Most companies out there tend to build software with the goal of acquiring new customers, mainly because investors are looking for that growth.

So they try and figure out the latest trends and what new customers care about or what the competitors are putt
ing in their products. They can put years into the development process.

Instead of finding out what the customers really need, they start putting in stuff they don’t need. But they buy because a salesperson convinced them they wanted it.

Companies will put in lists of features but don’t evaluate how well they work or how the company will support the new business. They don’t spend the time and money to make the new features work well because they are hung up in the whole game of getting new clients. Typical software companies spend 50 to 70 percent of their time and budgets in new customer sales.

We took that concept, which took years to build, and changed it rapidly, basically turning it upside down. We focus more deeply on functionality. We talk to existing customers because we still don’t know how well the software performs until after it is implemented.

We are automating entire manufacturing companies. The bottom line is that we decided not to play the game, ‘We have this feature, do you?’ Our customers don’t really benefit. Instead, we ask the customer, ‘What do you want it to look like?’

Yes, we care about new customers as well, but first we care about our technology with our current customers. We care about quality. There is a tradeoff when you choose leading edge — you often get poor quality. And if you talk to the customers, they could care less if what they have is leading edge as long as the system doesn’t go down — that what kills them.

We have to keep their business running smoothly. So we focus on building products the way our customers want them and producing quality, high levels of reliability and ease of use. Our customers love it and they are receiving higher quality products than ever before.

How do you plan to grow Made2Manage?

Mostly be through acquisitions, but we plan to grow in three ways — acquisitions, by adding services and selling them to customers we are not currently selling to, and the old-fashioned way of acquiring new customers. But we are not spending the money to acquire new customers that we used to.

We are mainly getting new customers by reference. We get a ton of references, and we are an established brand, so we don’t do a lot of advertising. We don’t think that is cost-effective.

How to reach: Made2Manage Systems, (800) 626-0220 or www.made2manage.com