Your costs have been falling sharply for quite a while. The downsizing of the services business is part of that?
Yes. Over the past three years, we’ve taken about $100 million of cost out of the business. We standardized a lot of processes and took a lot of complexity out, particularly in Europe. We introduced shared-services centers. We moved about 25% of our worldwide workforce offshore to Manila. We viewed that more as a strategic source of capacity than a cost-cutting tool, but it has that impact because a person in Manila is about one-fifth the cost of a person in Europe or the U.S.
What do you mean by “a strategic source of capacity”?
We spend about $80 million a year on research and development. While we’ve taken out the $100 million in costs, we have not diminished the spend committed to R&D. It has held roughly constant, between $82 million and $85 million a year. It still represents about 11% of our revenues, yet head count has grown by one-and-a-half times since 2007 and is now 20% of our worldwide head count. The reason is because half of that head count is Manila. So we’ve been able to increase our capacity and as a result roll out new products and service offerings, but at lower cost.
How did the economic downturn affect you?
We used to have about half of our business outside of the United States. Now it’s about 40%, because Europe has been hit very hard by the recession and is lagging the United States in recovery. We had a $96 million revenue decline in fiscal 2009, and $94 million of it was outside the United States. Of that $94 million, $45 million was due to foreign-currency exchange rates. Of the remainder, about $50 million, the great majority was due to the purposeful resizing of the services business.
But we’re actually generating the highest operating margins in the history of the company. In fiscal year 2007, we did $760 million in revenue and $56 million in operating profit. In 2008 our revenue was $854 million, but in 2009 it was back down to $760 million — and yet operating profit was $91 million. [Lawson's fiscal year ends May 31.]
Where do you see sustainable revenue growth occurring?
We see sustainable levels of growth in health care, where we’ve got 60% market share in the United States. A lot of the debate in health care is focused on making it more affordable. The reason large health-care organizations buy ERP systems is to take costs out of the supply chains.
There are also significant growth opportunities in the relatively new vertical that I described, equipment-service management and rental. The public sector has continued to grow this past year, and I’m not sure why. The other area that we view as having [the potential for] higher-than-average growth is human-capital management, where we’ve got customers like Wal-Mart and McDonald’s.
As an employer, how do you see the health-care debate looking from a cost perspective?
Our health-care costs represent about 8% of our total employee costs. Like any other employer, we’re concerned about the continuing escalation of the costs. And you wonder, although it’s nowhere near this point yet, whether if we don’t do something about changing the health-care system it could crowd out investment in other areas.