Blackbaud’s recession recipe: Preserve jobs, maintain clients, invest for the upturn

Charleston Post and Courier
John McDermott
November 16, 2009

The strain of the longest recession in modern times isn’t blatantly obvious in the corridors and cubicles at Blackbaud Inc.

On a recent afternoon, the sun was teeming through the expansive atrium perched atop the software company’s headquarters, bathing the airy tree-lined lobby in natural light. Down one hallway, instructors trained workers and clients in separate classrooms on how to sell and use Blackbaud’s products.

Not far away, a handful of colleagues commiserated around a table in the cafeteria while, in the background, a few youthful employees blew off some steam at a foosball table.

But it’s hardly been all fun and games at Blackbaud since the recession bared its fangs nearly two years ago.

Profit margins have been squeezed at this home-grown cornerstone of the region’s high-technology industry. Many of the 22,000 nonprofit groups that buy Blackbaud’s specialized software and services are being pummeled as donations go down and needs go up. Attendance will be noticeably thinner at the company’s annual industry conference in Charleston this week.

Hardly recession-proof, Blackbaud isn’t panicking or hunkering down. Instead, it’s taking a contrarian approach and is looking past the churn, said Marc Chardon, president and chief executive officer.

Rather than slash head count and keep its powder dry, the company has made several select acquisitions to diversify its product mix and add to its industry-leading market share. It also has poured more money into research and development efforts.

At the same time, Blackbaud has held onto customers and hacked away at expenses without eliminating jobs.

Chardon said in an Oct. 28 call with investors and industry analysts that the company can’t predict when the “economy will turn for the better, but we are optimistic that Blackbaud will be a substantial beneficiary when that time comes.”

Ross MacMillan, who tracks Blackbaud for New York-based investment firm Jefferies & Co., said the software company so far has buffered itself against the full brunt of the recession.

For the first nine months of the year, the company’s profit is down 12 percent to $20.5 million compared to the same period of 2008, while revenue is up about 4 percent to $230 million. Third quarter results beat expectations, as two large software deals boosted earnings by more than one-third to $9.8 million.

Now trading in the low-$20 range, Blackbaud’s stock has more than doubled in the past year.

“They have protected earnings very well in a very difficult market,” MacMillan said last week.

Storm? Or hurricane?

It was a year ago this month that Blackbaud unveiled its recession battle plan to employees, who, like most workers, were becoming increasingly distressed over the fallout of the global financial crisis.

“We sat down and said, ‘This is how we’re going to weather this. We don’t know how long it’s going to last. We don’t know if it’s a hurricane or a big storm,’ ” Chardon said.

The top priority was to do “what we can to preserve employment. That was job one,” Chardon said.

That objective was driven partly by Blackbaud’s changing revenue stream, which increasingly relies more on annual software subscriptions and less on big upfront purchases. Under the new model, hanging onto existing business is critical, especially in tough times.

“The way you do that? It’s our people. It’s the relationship. It’s the individual,” Chardon said. “People have a hard time focusing on the customer if they’re worrying about themselves. So if you can focus on employees, you also get to focus on retaining the customer.”

He noted that Blackbaud’s subscriber retention rate has remained above 95 percent through the recession and that customer satisfaction has edged up.

Snip, snip
On other fronts, Blackbaud has plowed more cash into research efforts that it hopes will yield big dividends when the market turns around. And it has increased its philanthropic giving.

Another priority was to seek out what Chardon called “judicious” acquisitions, culminating in all-cash purchases of three diverse niche software businesses in The Netherlands, Indiana and California since 2007.

“So we now have a portfolio of products and solutions that I think we need for the next three to five years,” he said.

Addressing overhead expenses was the final piece of the puzzle, Chardon said. In all, Blackbaud has taken measures to cut costs by $20 million a year.

Part of that is credited to ” ‘B’ the Difference,” a typical Blackbaud “bottom-up” project, according to Chardon.

The campaign solicited employees for savings ideas to supplement standard mandated cost cuts, such as reduced travel budgets and salary freezes. About 300 proposals were submitted over nine months, squeezing out about $2 million in annual savings, all without any layoffs.

“It surprised me how much opportunity there was to, say, renegotiate the lawn contract,” Chardon said.

He also said the self-empowerment aspect of the campaign might have even put workers at ease in difficult times.

“By engaging them, people get a sense that they control more of their destiny if they can say to themselves, ‘Gee, if I can reduce costs, my chances of job security goes up,’ ” Chardon said.

Show of hands
While Blackbaud’s urbane CEO hopes the worst of the recession has passed, the dismal scientist within him is not entirely convinced.

An economics major at Harvard, Chardon still employs a rudimentary tool of the trade to gauge business conditions. He now regularly seeks a show of hands at his quarterly employee meetings by asking how many in the audience are spending more, less or the same as a year earlier.

“If I’ve got 800 or 900 people in a room and the vast majority are saying they’re spending less, they all get this gut feeling that the downturn is not over, no matter what the people in Washington are saying,” he said.

Still wearing his economist hat, Chardon noted that some two-thirds of the U.S. economy is fueled by individual consumption, which, indirectly at least, affects Blackbaud’s bottom line.

“So when you see people saying, ‘I’m spending less,’ we still have to pay attention to weathering the storm. And it’s getting better. The percentage who are spending less in my employee base and the rest of the world is getting smaller. But it’s still the majority.”

Blackbaud bio
Business: Develops fund-raising and financial software and related services, such as training and maintenance, for nonprofit organizations of all sizes. Flagship product is called The Raiser’s Edge.

Customers: 22,000 worldwide.

Employees: 2,000 in eight locations. About 1,200 are based in Charleston.

Revenue: $302.5 million in 2008, up 18 percent from the previous year. Profit fell about 6 percent to $29.9 million.

Offices: Charleston, London, Glasgow and Sydney. Subsidiaries are in Boston (Target Analytics and Target Software), Indianapolis (eTapestry), San Diego (Kintera) and The Netherlands (RLC).

World ranking: Software Magazine ranks Blackbaud at No. 133 among the largest software and service providers in the world based on sales.

Perk: Employees earn an extra vacation day for every two days they volunteer with a nonprofit group.

Tech tock
Late 1970s: Tony Bakker helps a New York school develop a computerized billing program. The seeds of Blackbaud are planted in Long Island, N.Y. The name is a play on the word “blackboard,” a nod to the school gig. “Baud” is a telecommunications term referring to the speed of electronic data.

1982: Bakker incorporates Blackbaud.

1989: Bakker relocates the business to Mount Pleasant. It has 43 employees.

1992: Blackbaud moves to North Charleston. Also, Bakker gets involved in efforts to bring professional soccer to the area, and the Charleston Battery plays its first match in 1993. He is now majority owner.

1994: Bakker bets correctly that Windows 95 will be the dominant operating system for computers and commits to converting his software to the Microsoft product.

1999: Hellman & Friedman buys the lion’s share of Blackbaud, which at this point has 700 employees and $85 million in annual sales. The deal sets the stage for an initial public offering.

2000: Robert J. Sywolski succeeds Bakker as CEO. Blackbaud moves into its newly built 235,000-square-foot headquarters on Daniel Island.

2004: Blackbaud’s IPO raises $65 million.

2005: Sywolski step downs. Former Microsoft executive Marc Chardon is named CEO.

2007: Blackbaud pays $60 million cash to buy Cambridge, Mass.-based Target Software and Target Analysis Group. Also buys eTapestry, an Indiana-based firm that targets small nonprofits, for $26.3 million in cash.

2008: Blackbaud acquires San Diego-based rival Kintera Inc. for $46 million in cash.

2009: Blackbaud buys RLC of The Netherlands for $2.3 million, giving it a Dutch-language software product.

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