Money, Money, Money. . .

CASE STUDY:This month's case study features a software development firm at an impasse: faced with a bank that's refusing to fund what it sees as a potentially risky development, it is unable to move forward without instigating serious changes

FOR MANY years Bob Fitzsimons had been in awe of his older neighbour Jimmy Murnihan. The Professor, as he was affectionately known, was a bit of a legend in his home village in Leitrim.

An excellent sportsman, he had captained both his local football and hurling teams with distinction and become a very successful cross-country runner who subsequently represented his university internationally in the sport. He was also a born inventor and, as a young teenager, would disappear for hours at a time into the run-down cattle shed behind his family home, only to emerge with some new gadget.

Murnihan built his own battery-powered bicycle years before the "green revolution" began; he had designed a go-kart that was the envy of his peers; and everyone said the lightweight portable cattle crush he designed for his father when just 16 years old should have made his fortune. He was a whizz kid when it came to computers and was already writing simple programmes by the time he went to university to study electronics.

At university he was a gifted student who graduated top of his class. He was snapped up by a campus-based technology company and spent five years there working on research projects while completing his PhD. He then took up a post in the university itself and, by the time Fitzsimons arrived to study for his master's degree at the college, Murnihan was an assistant professor.

Fitzsimons made contact with Murnihan and the pair met regularly over lunch to discuss the progress of Fitzsimons's research. Fitzsimons's main area of interest was mathematical algorithms and how they could be applied in the field of banking. He completed his MA around this topic and, having read his research, Murnihan was convinced that the software Fitzsimons had developed could be used as the basis on which to build a commercially viable product.

Murnihan began working with Fitzsimons on developing the product and, three months later, they pitched their idea to the head of the college's business school, who had a reputation for spotting good ideas with strong growth potential. Impressed, he put them in touch with an acquaintance who ran a trading operation in the International Financial Services Centre in Dublin's Docklands. Having reviewed the research, he too agreed that the product was unique and worth backing. Murnihan and Fitzsimons then worked, flat-out, for almost a year to prepare the product for its commercial launch.

Their software was designed to support back-office administrative activity in the then-burgeoning financial derivatives market.

The main competition was from in-house software developers in the larger banks. But their new Windows-based system was generally more user-friendly, more powerful and overall represented better value. It was a tailor-made solution for a specific, demanding application, and IT managers liked it.

That was 10 years ago and, since then, things have gone well. The new software found widespread acceptance in the industry and has been widely adopted in the UK and Europe and, to a lesser extent, in the Asia and the US. This commercial success has seen the company expand progressively, and it now employs a team of 30 people.

As a highly specialised company which is driven by R&D, close to half the people on its payroll are software specialists with postgraduate qualifications. Many have doctorates, and all have been attracted by the prospect of working in a stimulating research-driven environment. However, recent events in the world's financial markets have resulted in a significant contraction in sales opportunities.

The release of the company's updated and improved product early last year did not enjoy the commercial success of previous updates, because many existing users were already scaling back their operations. Furthermore, new leads in geographic areas hitherto untapped started drying up. What little money was being spent on software was primarily going to local suppliers to maintain existing applications.

Riding out a recession is a challenge, even for companies with good reserves. But over the past two years, Murnihan and Fitzsimons have spent heavily on researching a new strategic direction for the company. The pair had long recognised that many of the key aspects of their existing software product could be reconfigured for a variety of applications in other sectors, and they had identified insurance and logistics as their two new target markets.

They were just about ready for an initial foray into the insurance industry when the economic meltdown began. The dilemma they face now is whether to proceed with their new strategy or to batten down the hatches until the storm has passed. Strategic direction is now a burning question for the company. The other is finance.

If the founders decide to push ahead into new markets they will need to raise additional funds. The company's bankers, who had been encouraging supporters of its development up to now, have begun to be less co-operative in recent months. Claiming that "it's us not you", they have been displaying all the signs of a waning enthusiasm for the relationship. Murnihan attributed this to their lack of understanding of the product and spent hours trying to convince them that the new product would fly.

Despite his efforts, the bank remained unmoved. A letter followed in which their manager said the bank would only be willing to continue to provide existing overdraft facilities and to leave undrawn loan facilities in place if the company showed it could manage itself in difficult times. The company's financial controller translated this for Murnihan and Fitzsimons to mean, "we have to make big cuts or forget about further borrowings from them".

In particular, the bank disagreed vehemently with Murnihan's view that the wage bill, which is by far the company's single biggest cost, should be sacrosanct. Murnihan argued that breaking up the team would be detrimental to the future of the company. The bank viewed this as melodramatic.

With their credit line from the bank in question the partners turned to their main investor, who indicated that, while he is willing to put more money into the business, his price would be a substantial increase in his equity stake. Neither Murnihan nor Fitzsimons are happy about this.

The company's HR manager has suggested one possible cost-cutting solution. Many of the staff have been recruited on one- and two-year contracts, and she believes it may be possible to renegotiate these. A number of staff still have teaching links with academic institutions, and asking them to cut back on their working hours would retain their skills, while reducing the wages bill. Such an approach might slow down development of new software products, she says, but they would still come to market and possibly at a better time from a sales perspective.

The financial controller's view is that the recession has put an otherwise sound and exciting business in jeopardy. He favours a careful balancing act between cutting costs, keeping the banks on side and trying to get fresh equity into the business, possibly from new sources, to reduce its dependence on bank borrowings.

The big issue for the founders is how to pursue their chosen strategy of growing the business, while at the same time containing costs and finding a way to fund it.

How can Fitzsimons and Murnihan move forward? Read the expert's advice.