A focus on growing the top line in any business may seem axiomatic, but for IFS it is a step that follows many months of rethinking and restructuring its business. Grappling with declining revenues and losses in a market undergoing significant consolidation, IFS about two years ago began to change its sales strategy to rely more on channel and partner sales. One of Jaudon's key objectives after becoming head of North American operations in late 2004 was to build out that strategy during 2005.
In its third-quarter January to September 2005 report, parent IFS said that the change in sales strategy had resulted in partners generating 25% of new license sales for all of IFS during the preceding 12 months, up eight percentage points compared to the like period a year before. In North America, Jaudon says, results were even better -- 35% of new business came from the channel, compared with low single digits before.
In North America, Jaudon says, IFS now has three master distributors, which target companies with revenues of $150 million and below, and contracts with nine value-added resellers. "We're still in the build-out stage on the VAR level," Jaudon said in a briefing with MA. "We're in negotiations with three or four more."
IFS's change in how it goes to market is fundamental to its financial turnaround plan. The Sweden-based company has posted five years of consecutive losses since 2000. Measured in millions of Swedish Krona (SKr), net sales peaked at 3,044 in 2001 and declined each year after that, to 2,178 in 2004. By the same measure, losses soared to -740 in 2002, dropped to -151 in 2003, and climbed again to -243 in 2004. Employee ranks dropped from a high of 3,669 in 2000 to 2,583 in 2004. In March of 2004, NEC acquired about 10% of IFS.
But the restructurings, cost cutting, sales strategy change, and continued investment in IFS's componentized application suite began to turn things around for the company in the fourth quarter of 2004 and into 2005. In the January to September 2005 period, the company returned to the black, reporting earnings before interest and taxes of SKr 55 million, compared with a loss of 84 million in the like period a year before. Net revenues in the North American market fell during this period to SKr 256 million from 270, but Jaudon did achieve positive operating earnings.
The change in sales strategy had both positive and negative effects, notes Steve Andrew, IFS North American marketing director. During 2005, 35% of transactions that would have been sold directly by IFS were sold through the channel, he said. This switch had what Andrew calls a "short-term negative impact on license revenue," but it also had a positive impact on profitability. "From January to September 2005, our operating margin has increased by over 200%," Andrew says. "The plan is working. We have achieved sustained profitability for the past four quarters."
For Jaudon, these achievements have laid a foundation on which to grow. "We believe we've got our financial house in order," she says. "Now, our pipelines are growing."
As a result, Jaudon says that she's looking for a 20-25% growth in license and license-related revenues for 2006, particularly from project-focused industries such as industrial manufacturing, high tech, automotive, and aerospace and defense. "We have systems in the top 10 defense contractors,"she notes. "I'm looking for a significant increase in market share in this area."
Jaudon says her plan to focus on top line growth includes a continued focus on all seven vertical industries IFS has targeted -- automotive, high tech and medical devices, industrial manufacturing, process industries, service and facilities management, utilities and telecom, and aerospace and defense. In fact, Jaudon says that pipeline growth this past year has mapped very closely to this strategy.
"This year our pipeline is nearly 100% within the seven targeted industries," she says. "Last year, this wasn't the case. As a result, the quality of the pipeline has significantly improved."
IFS will report preliminary fourth quarter and full year 2005 results this month. If the company achieves full-year profitability, it will represent a major milestone and strong evidence that its turnaround plan is succeeding. That plan was directed by CEO Michael Hallén, who is leaving the company after three years in that post. Succeeding Hallén is Alastair Sorbie, an eight-year IFS veteran who previously directed the company's EMEA operations, which account for 70% of the company's revenues.
This article originally appeared in the February 2006 issue of Managing Automation magazine.