Integral Systems recovers its orbit

The sudden departure of a company'sfounder and chief executive officer canunsettle or destroy a business, even onewith years of profitability and successbehind it. But companies that have executivesuccession plans may be able to weathersuch storms and emerge even stronger.That appears to be the case at IntegralSystems Inc., a Lanham, Md., maker ofsatellite ground systems software for governmentagencies and commercial customers.One year ago this month, ISI'schairman and CEO, Steve Chamberlain,was arrested and indicted on two felonycharges involving sexual misconduct. Hepromptly resigned from the company. LastMay, Chamberlain was sentenced to fiveyears' probation and mental health counselingafter a plea bargain reduced the chargesto a misdemeanor sexual offense.ISI officials say it was fortunate that, formore than a year, Chamberlain had beengrooming his second-in-command, ChiefOperating Officer Pete Gaffney, to replacehim when Chamberlain chose to step down.Gaffney had worked at the company for morethan 20 years and had run the governmentand commercial divisions. Chamberlain'sarrest, however, hastened Gaffney's promotionto CEO."Steve and Pete ... had worked on a transition,"said Jim Schuetzle, executive vicepresident of the government division atIntegral. "Pete was getting more and moreday-to-day responsibilities. ... Steve was takinga little less of a hands-on approach."Nevertheless, Chamberlain's arrest "createda fair amount of speculation and turmoilas to what was to become of the company,"said Dick Ryan, an analyst at Feltland Company in Minneapolis who followsIntegral Systems. "But I don't think thenews in and of itself dampened the fundamentaloutlook" of the company, he added.Gaffney said the transition has had noadverse effects. "If you just look at our fiscalperformance in fiscal 2006, we knocked allour financial records out of the park," hesaid. "We had record revenues, record operatingincomes, record net income."The company recorded $116 million inrevenue in fiscal 2006, up from $97 millionthe year before. Moreover, Gaffney said, 80percent of that revenue came from governmentcontracts, with the Air Force accountingfor more than half."I think it's a very strong company," Ryansaid. "It's been around since the early '80sand showed its dominance in the commercialsatellite space during the mid to late '90s,and moved into the government space in theearly 2000s. We've seen them win a couple ofvery key government contracts. I think therelationship with the Air Force is strong. Thecommercial space is small but a very importantmarket for them, and I think fundamentallythe company is doing very well."Schuetzle said the planned turnover ofcommand was a great help in the periodimmediately following Chamberlain's departure.He called Chamberlain a capable andengaged CEO who made Gaffney's transitionvirtually seamless. "It was a tremendousbenefit to hit the ground running whenSteve did step down," he said. "Of course, wedidn't expect it to happen the way it did."When news of Chamberlain's indictmentbroke, Schuetzle said, the mood was a mixtureof disappointment and wounded pride.ISI employees were concerned more abouthow clients would react and less about theirown future, he said."I was kind of pleasantly surprised as amanager that there wasn't a lot of discussionabout, 'Gee, Steve is gone so the company isgoing to go to heck in a hand basket,'"Schuetzle said. "It was more, 'How do wemove forward?'"Gaffney said he and other executivesknew about Chamberlain's legal troubles forabout six months before he resigned, soGaffney was mentally prepared to take overif necessary. As soon as he did, he met withemployees to reassure them of the company'scontinuity. Nobody was surprised aboutwho was going to take over the company,Gaffney said, "and then when I did takeover, everybody knew me.""I wanted the employees to focus on thebusiness and on the financials of the business,to not have any hiccups there," he said."And I wanted us to continue our push intothe classified market."ISI won its first classified ground systemsdevelopment contract for the intelligencecommunity in October 2006. Gaffneydeclined to divulge details.In the wake of Chamberlain's arrest, thetop managers did something that had neverbeen done before at ISI. They sat down andanalyzed the company's mission, productsand the strategies that had made the companysuccessful, Schuetzle said. Then theycommunicated that to the employees."Having a company focused instills a lotof pride in people," he said. "Anything thatconfronts or assaults that pride and reputationis really upsetting to employees."The managers also met promptly withmany of their customers, especially in theDefense Department. "They were veryaware of the situation, or at least what theyhad read in the press," Schuetzle said. "Theirconcern was similar to that of the employees:How are we going to move forward?What is going to be the effect on the company?Are people going to leave? Are yougoing to change your strategies?"The briefings helped assuage those concerns."It didn't hurt us getting new businessgoing forward, either," Gaffney said.In February, ISI announced it won a $4.5million cost-plus award from the Air Forcefor modifications to the Command andControl System-Consolidated program,part of the Wideband Global SatelliteCommunications system.Stuart Daughtridge, executive vice presidentof ISI's commercial division, saidChamberlain's departure had little effect onISI's commercial sales and marketingbecause he was no longer involved much inthat sector's day-to-day operations.Daughtridge said ISI's executives andsales force were well-known in the business,so Chamberlain's personal problems did nothave a negative effect on commercial salesand marketing efforts. "Those relationshipsallowed a lot more open communicationswith customers," he added. "They knewpretty much what we knew."Daughtridge said he believes Gaffney'sprevious experience heading ISI's governmentand commercial sectors creates newopportunities to extend some of its commercialtechnologies ? particularly in thefield of satellite signal command and control? into the government sector.