While the start-up phase of a company’s life can be make or break, the next step in the evolution of a growing business can be even tougher. GrowthBusiness’ Breakthrough Clinic gives one company at a crossroads of expansion the chance to gain free advice from an expert business adviser on the possibilities for growth.

Company history

Gary Woodward, co-founder of Panacea, a traditional IT solutions business, was seeking a fresh challenge and launched Pasporte in 2000, one of the first application service providers (ASP). The company’s ethos is based on the principle of making leading IT applications available to everyone and provides strategic outsourcing solutions, focusing on managed applications, managed hosting and managed networks.

Unfortunately, almost immediately after commencing trading, Pasporte faced a number of unforeseen challenges. The internet bubble burst, the cost of internet access was still prohibitive to many businesses and, with the exception of very large companies, businesses had not picked up on the benefits of outsourcing. There were technology challenges too, such as some software applications not working in a hosted internet model and resistance from many software authors to the ASP concept.

As the company began to eat up its initial investment, Woodward was quick to recognise the importance of changing strategy, focusing on building profitable revenue growth and partnering with IBM and Equant to access larger corporate customers. The new approach has proved successful, with turnover growing steadily year-on-year to reach £2.9 million last year, when the group reached breakeven. Woodward expects the current year to be even better with sales hitting £5.5 million and profits nudging £670,000.

This success has not gone unrecognised and in early 2005 Pasporte won the IBM Partner World Beacon Award for consultants and integrators, for combining their skill and local presence with IBM to deliver an important service for small and medium-sized businesses.

Blue-chip companies like RHM, Eurotunnel, Safeways, Jurys Doyle Hotels and National Grid Transco have chosen to outsource with Pasporte and the company’s future looks very bright .

Current business challenges

However, Pasporte is facing a number of challenges as it tries to manage its growth. Woodward wants the company to develop its own sales and marketing function, to enable it to win major new accounts directly. Historically, in common with many smaller IT businesses, large corporates have been out of reach unless it has partnered with one of the major IT providers, although Pasporte is transparent in all its dealings and customers are aware of exactly what the firm is providing and its service levels.

Woodward is still enjoying his role as CEO, although he has been more involved this year than in recent years as the company looks to build on its success. He is heavily invested in analysing its progress and working with a marketing agency to update Pasporte’s corporate brochure and plan its future marketing approach. The group makes extensive use of case studies and, given their success in attracting a blue-chip portfolio of clients, opportunities for direct client relationships should open up.

To date, Pasporte has grown organically, reinvesting in its business as it has become profitable. The existing funders have been enthused by its success and have indicated their willingness to finance growth by acquisition, if management identify suitable opportunities.

Breakthrough Clinic’s Advice

Philip Atkinson, a partner at PKF (UK) LLP, discussed with Gary Woodward the challenges facing Pasporte going forward. Here, he offers his observations and advice on possible strategies, plus some suggestions on what the management team needs to do next.

Strategy of growth

Pasporte is a tribute to good management, a flexible strategy, and belief in a marketplace. Not only has it survived the fallout from the end of the dotcom bubble, but prospered and proved its business model. Its real challenge is to now build upon that success. To this end, Pasporte is at a crossroads. Woodward is undecided whether to continue with the organic growth strategy which has served the company so well, to acquire suitable businesses to gain critical mass, to float on the stock market, or, and only if it is right for customers and staff, exit the company.

Woodward’s enthusiasm for the business remains undiminished and he clearly sees great opportunities ahead. Indeed, industry commentators expect that, within a decade, all businesses will outsource the bulk of their technology services. Return on investment is just over 300 per cent and payback on investment is just 121 days. While the timing of any sale is crucial, there is clearly still plenty of growth in the market, giving management time to build further value and demonstrate sustainability of the model and profits. The management team may need strengthening to enable Woodward to realise his ambition of standing back, to ease the pressure on the other directors and to enable a cohesive strategy of managed growth to be developed and implemented.

It is tempting to grow quickly, and Pasporte has felt the need to partner with leading IT providers to access large corporate accounts. Study after study of past mergers in the UK market has shown that two out of three deals fail to work; the only winners are the shareholders of the acquired firm who sell their company for more than it is really worth (Source: The Economist January 1999). The difficulties are often attributed to cultural and de-motivational problems among key personnel. However, acquisitions and mergers can, and often do, work and may be the best option for Pasporte. The management needs to have a clear vision of what the ideal target would deliver and a strong project team to handle the integration. The keys to success are:

• Mergers are likely to be more successful when management seeks targets in its core markets.
• The more both companies know about each other, the higher the probability of success.
• Consider joint venturing or working together on a series of projects before cementing the relationship.
• Get as much information on the other organisation and don’t rush.
• Be sensitive to change management.
• Communicate.
• Think about how the consideration will be paid. Share-for-share exchanges spread the risk across two shareholder bases. Also consider aligning senior managers’ interests with those of the company through share incentive schemes.

Pasporte does not have a history of acquisition and integration. An already busy management team will almost certainly require strengthening if it is to make a success of future acquisitions. However, the company does understand the benefits of partnering and this may provide the perfect short-to-medium-term solution to delivering growth but not jeopardising their hard-earned commercial position.