Due diligence

An early Kronos stock certificateI started what would turn out to be a nearly 25-year job at Kronos Incorporated in 1979, on Patriots' Day Note 1. Kronos had taken advantage of the development of the microprocessor to essentially put a computer inside a timeclock. Timeclocks had, prior to that time, been purely mechanical time stamps.

About three months after I reported for work, the company raised some money in a round of private financing. Convinced by then that I would be a long-term player, they offered me a chance to invest, with a smaller minimum than required from an outside investor. This would obviously strengthen my ties to the company. They made it clear that I was under no obligation to buy in. If I felt I couldn't afford it, or didn't want to take the risk for any reason, there would be no hard feelings about it. I discussed it with my wife, and we decided to invest in my new company, putting in an amount of money which was fairly substantial for us at the time.

As the financing round closed, all the potential investors attended the standard "due diligence" meeting, at which the company exposed all the risks inherent in the investment (and in a start-up company, these risks are substantial). The idea, of course, is to see to it that all the investors go in with their eyes open. As the meeting started, one of the early investors arrived with a flyer advertising a new electronic timeclock, called the "Step99", from Simplex.

The original Kronos list of criteria for founding a company contained the item, "Use the microprocessor to revolutionize a backward industry". It was an article of faith for us that the major US seller of timeclocks, Simplex, was a purely mechanically oriented company, unfamiliar with microprocessors and modern computer technology. I looked over the flyer, and immediately saw what appeared to be a competently designed electronic timeclock. It turned out that Simplex had a German development facility, which was quite well versed in microprocessor-based design. It had designed an electronic timeclock, primarily for the German market, and Simplex now intended to market it in the United States. Not only did Simplex appear to have a well designed product, but they had beaten us into the marketplace.

As I sat in the meeting, I thought to myself, "We're dead!". Simplex, after all, was the "500 pound gorilla" of the timeclock business. Most of the timeclocks in the United States had stickers on them saying, "If you need to replace this timeclock, call Simplex", followed by their telephone number. They had thousands of sales people across the United States. If they had a well-designed product, it seemed to me, we had absolutely no chance.

This put me in a rather ticklish position. If this information had been available before I was offered the opportunity to invest, I could have easily declined, and nobody would've given it a second thought. But having already accepted the invitation to invest, I thought that to back out at this late point in the process might be interpreted as a lack of confidence in the company's prospects. If I pulled out at that juncture, I wasn't sure I would have much of a future with Kronos.

Furthermore, none of the other investors seemed too perturbed by this news. One of them commented, "Well, we always knew there would be competition." For all I know, they were feeling the same way I was -- nervous, but too embarrassed to pull out. To my knowledge, nobody backed out of their investment based on this late news, despite the fact that a potential investor is certainly free to withdraw after the due diligence meeting. After all, that's what the due diligence meeting is for. But I felt as a new employee, I was in a somewhat different position, so I just swallowed hard, signed the documents, and handed over my check.

To jump ahead, what happened? Why didn't Simplex wipe us out? The fact is, they should have. The German designed product did indeed prove to be quite well done, and it was reasonably successful in Europe, where about 10,000 units were sold. Note 2 But it had one small problem in the American market: it had buttons on it. When clocking IN or OUT, these buttons had to be pressed to tell the timeclock what you were doing. The four buttons indicated "Entering for the day", "Leaving for a break", "Returning from a break", or "Leaving for the day". That enabled the timeclock to total the cards properly.

When Kronos had designed its clock, our New York dealer, Interboro Timeclock, had insisted, "No buttons". Interboro had firmly stated that American employees would never push the buttons properly. Apparently, when you tell German employees what they need to do, they say "Jawohl", and do as they are told. When you tell American employees which buttons to push, they promptly push the wrong button, sometimes deliberately, to see how much chaos they can cause. After all, not every employee considers the timeclock to be his best friend. The Step99, with its buttons, did not work well in the United States.

This hardly should have been a major setback for Simplex. All they needed to do was to have their German subsidiary make a slight change in the design of the product for the American market. After all, Kronos had designed its product without buttons. In the Kronos product, the timeclock used some simple rules to determine what a punch represented. If a punch was misinterpreted, it could be edited at the end of the day or at the end of the week to straighten it out. After I joined Kronos, I worked on improving this feature, but the patent application on the use of these punch interpretation rules Note 3 had not yet been filed when our product first came out. Simplex just needed to fix their product for the American market. But they didn't do it.

Simplex had another problem: their sales force. That may seem to be a strange statement, since their sales force was one of Simplex's greatest strengths. They had thousands of salespeople, all over the United States. Kronos, at that point, basically had Interboro, in the New York area only. How could the Simplex sales force be a liability?

Easy: the Simplex sales force was highly proficient at selling mechanical timeclocks. They were not knowledgeable about electronics, and this microprocessor-based, German designed unit scared them. Of course, it didn't help any that, like all microprocessor-based units at the time, it was much more expensive than mechanical timeclocks. And even without these barriers, it can be very hard to move a sales force into selling a new product. Salesmen like to sell what they know. As many in business have painfully learned, your greatest strength can sometimes be your greatest liability.

It's possible that the Simplex management's lack of familiarity with microprocessor technology did also play a role, as Kronos had originally hoped. "Moore's Law" Note 4 had been articulated in 1965, 14 years earlier, and the electronically-savvy Kronos management had confidence that the price of microprocessors would decline sharply over the next few years. If the Simplex management was less informed in such areas, they might have assumed that electronic timeclocks would remain as overpriced compared to their purely mechanical brothers as they were in 1979.

For all the above-mentioned reasons, and perhaps also because there was a bit of turmoil within the Simplex management at that particular time, Simplex did not move aggressively with their well-designed "Step99" electronic timeclock. It didn't sell well, and after a while, Simplex decided that the United States was not interested in electronic timeclocks. It withdrew the Step99 from the American market, and sold its German subsidiary. And over the next few years, Kronos rolled over Simplex in the electronic timeclock market.

Jumping way ahead, 24 years later, in 2003, Kronos purchased what was left of the Simplex timeclock group, and moved them from the Simplex headquarters in Gardner, Massachusetts to what by then had become a sprawling Kronos complex in Chelmsford, Massachusetts. And in 2007, Kronos was sold to San Francisco-based Hellman & Friedman LLC, a private equity investment firm, for $1.8 billion.

Thank you, Kronos, thank you, Interboro, ... and thank you, Simplex.

The story of my early days at Kronos was told in entry #0005, Coming to Kronos.

#0014   *CAREER   *KRONOS

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© 2010 Lawrence J. Krakauer   Click here to send me e-mail.
Originally posted February 3, 2010, and slightly modified April 1, 2010

Footnotes (click [return to text] to go back to the footnote link)

Note 1:   "Patriots' Day" commemorates the ride of Paul Revere on April 19, 1775, which warned the citizens in Lexington and Concord of a contingent of British soldiers marching west to confiscate arms held by the colonists. The resulting battles in those towns marked the start of the American revolutionary war. This holiday is celebrated only in the Commonwealth of Massachusetts, and in the state of Maine (which was once part of Massachusetts). As a result, we always returned to work the next day to find a bunch of messages asking why we had been closed the day before, and "What the heck is 'Patriots' Day'?".

Although Revere's ride was on April 19, since 1969 the holiday has been celebrated on the third Monday in April. Thus, my starting day at Kronos in 1979 was actually Monday, April 16. The Boston Marathon is traditionally run on that day. Mark Ain, the president of Kronos, dropped by at one point to see how I was doing, and we went out for a brief excursion to watch some of the runners pass by.  [return to text]

Note 2:   Reference: http://www.kontrolluhren.de/firmen.html#STRCI (in German). This page, which lists people and firms involved in the manufacture of timeclocks, says of Simplex:

Simplex Time Recorder Co. Inc., Gardner, MA, USA, wird 1901 von Edward G. Watkins gegründet. Anfangs stellt Simplex eine Anwesenheits-Kontrolluhr her, bei der die Registrierung durch Einstich in einen Papierzylinder erfolgt. Simplex übernimmt 1916 die W.H. Bundy Co., Syracuse, N.Y. und erweitert das Programm um Kartenapparate. Die IBM verkauft 1958 ihren gesamten Uhrenbereich an Simplex. In Europa stellt Simplex 1978 den elektronischen Kartenapparat Step 99 vor, von dem etwa 10.000 Geräte verkauft werden.   [return to text]

Note 3:   This patent application was filed on September 18, 1982, and U.S. Patent number 4,524,266 was issued on June 18, 1985. It has the catchy title, "Method of and apparatus for discriminating between various types of check-out periods in employee time-recording systems and the like", and the inventors are Lawrence Krakauer and Lawrence Bliss.  [return to text]

Note 4:   Empirically observed by Intel co-founder Gordon E. Moore, "Moore's Law" stated that, "The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every year" (although he later revised this to every two years, and others have compromised at 18 months).  [return to text]