The Other, Older PSI

In a series of brilliant moves, PSI's savvy CEO helps the Beltway contractor break out of the mold and venture into new commercial markets

P> No, it's not that PSI -- the Internet access guys, the PSINet in Herndon, Va. Same name, different company. A lot different. This is a story about PSI International Inc., a Fairfax, Va.-based integrator and graduate of the Small Business Administration's 8(a) program, which emerged when the Internet was still a research project at the Pentagon.

In late February, the 300-employee company received $7 million for a division it bought just three years ago for "significantly less," says Elizabeth Pan, CEO. The deal also gives PSI stock, valued at about $3 million today, in the purchaser, Britain's Oxford Molecular, which has been on an acquisition binge in its own chosen market for automating the messy business of chemical analysis.

But the sale reflects a larger, more interesting story at PSI -- the story of how a services company, by dint of fiscal discipline and focus, broke out of the mold of the federal minority contractor and ventured successfully into new markets. It is the story of an immigrant mother who has a Ph.D. from Rutgers and manages one of the most respected small companies in the computer services business. Mention her name, and those who know her say things like, "She's really smart." "What a bright woman," and "Hell of a company she runs."

Consider the recent sale.

The sale of the chemical informatics business culminates a bet PSI's Pan placed three years ago when she decided to buy Baltimore-based Fein-Marquardt, a supplier of computer systems for the chemical industry. The operating premise of the supplier was to automate the dirty business of mixing chemicals to create new chemical compounds. What would take place on the wet bench would now be duplicated in silico.

But the company PSI bought had yet to translate this promise into profit, and the market for automating chemical wet benches fizzled when analysts predicted a sizzle. Why, one might ask, would a professional services company buy an unproven software provider in an alien market just as it was emerging from under the protective cover of the 8(a) program?

PSI's recent sale is all the answer one needs -- and it also makes Pan's bet appear downright brilliant.

To fully appreciate the significance of this sale, consider two things. First, Oxford approached PSI, not the other way around. (The actual deal was sketched out on paper ripped out from a toilet hand-drying roll at Le Canard in Vienna, Va.) Second, PSI has built a company with $30 million annual revenues -- with its own financial resources. Not a dollar of outside investment. All bootstrapped. This is the 8(a) program as it was meant to be. Pan and her vice president of finance, Prakash Mehta, have reputations with-in their companies as fiscal terrors -- stashing away cash like squirrels readying for the winter.

Following the recent sale, PSI has an additional $7 million to put behind its strategy.

That plan plots an expansion from services to products and from federal to new commercial, state and local markets. The transition requires a subtle management touch -- sort of like playing three-dimensional chess.

But PSI, like many services companies around the Beltway, may have no choice. Time was, federal customers could afford to fund systems development from scratch -- every time.

So there was no incentive for services companies to develop "repeatable" solutions from their work. If they wanted to grow, they simply focused on winning contracts at new agencies. Even though profit margins were relatively low, cranking up revenues would always compensate -- a viable approach as long as contract opportunities abounded.

An alternative model -- made more attractive in light of recent federal budget pressures -- would focus on developing products to increase overall profitability.

These products might include traffic parking systems, software to automate administrative functions for higher education, or logistics systems to help track large inventories. Ideally, contracts would be structured so the contractor would get a fee for each transaction -- every parking ticket collected or deadbeat dad fingered. This is PSI's game plan -- to become a services company with products.

To get there, Pan has hired an experienced management team. Carl O'Riley, a former senior executive with the Department of Education, heads efforts in public safety and criminal justice, while Alvin Savio, a former executive with Boeing Computer Services, is charging hard into the education market. Nazim Dhanani, also from Boeing, heads health efforts. Finally, Stephen Feinman, a longtime executive in the information technology industry, is vice president and general manager of government information systems -- federal, as well as state and local.

So will PSI succeed? One thing's for sure -- the company has a plan and financial strength.

It also has class. When Pan sold the chemical informatics division, employees of the division had every reason to be worried about their fate.

Pan addressed the issue head on, inviting affected employees to a reception attended by both the acquirer and acquiree. She gave her side of the story of how the company was sold -- noting that there are as many sides to a story as there are storytellers -- and she invited her counterpart from the acquirer to do likewise.

Thanks and envelopes were distributed to the affected employees, who will now switch bosses.

Employees smiled as they opened the envelopes containing checks -- Pan had distributed a percentage of the deal's proceeds to them.

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