Keeping IRIS' eye on the ball

The IRIS Group accounts for 2008 have created some noise among web commentators recently. Were IRIS a listed company burdened with full listing disclosures and the repository of funds from major pension funds - those with no locus standi would at least be entitled to target fair game. As a private company, however, CEO Mr Leuw has been provoked into explaining what looks like a significant loss of £28m. Even by our reckoning it’s now a business of £113m sales and 46% underlying profitability and he must feel like a goalie hit by a coin thrown from his own terraces. We hold no brief for IRIS or any one else for that matter - but we like to see the facts as straight as they can be.

Times have certainly changed since the mid-year 2007 deal headlined at £500m. The ins and outs of the Hellman and Friedman funding package are no doubt intriguing to investors in their funds, but the core underlying position of the operating companies remains robust. Net operating cash has risen from £21m to £38m in the period – up by over 74% - and even allowing for the elision of CS Group and IRIS figures, these commercial fundamentals are solid – whatever the state of the financing wrangles.

Hands up who wouldn’t love to be in the position of dealing with leverage issues without having to renegotiate covenants with some teenager handcuffed to a spreadsheet model. Any hands not up yet? And who else would rather deal with investors who’ve actually made the money they are lending you and understand market vagaries better than many of the banks (who until recently were hanging on their coat tails)? God forbid - should IRIS financial activities unravel - the likelihood of their core assets and brands not being viable and indeed vibrant even so is extremely remote.

IRIS, in common with other recession resistant businesses, is also maintaining their acquisition activity – and so they should. It is time to not get distracted. Fundamentally we remain far from convinced, however, that IRIS’ legal teams inherited from the CS Group are either (a) the market leaders they claim, or (b) in any way enhanced by being in the same stable as the accountancy services. By the time the acquirer of these teams was sent on her way, no significant integration had been tackled. Forced integrations in professional services – and especially for those smaller regional professional firms – can be painful; ask Sage. At a time when High Street legal firms are having a rough time and the might of Lexis Nexis Butterworths/VisualFiles/Axxia is ploughing into legal software how IRIS manage their third division is pivotal. IRIS have added Alphalaw to the group last December showing a continuing appetite for consolidation of the market. Good on them, another £3m in sales is unlikely to hurt; but the point remains - can a core team in professional services best at grafting telesales operations onto owner developer specialists rise to the diverse challenges of the portfolio development?

Will the Mountain/Meridian/Laserform/MSS/Alphalaw/Aim Professional/Teamflow/Videss conglomerations be able to merge effectively – or indeed should they? IRIS is now a group of three main divisions, of which only £26m or so by 2008 numbers (including Alphalaw) relates directly to legal services. Whether they can maintain focus is the issue.

The US VC parents are grown ups and should deal with investing horizons a lot quicker and with less trouble in relative terms than the moribund UK retail banks. The hard yards remain to be covered in seeing whether IRIS take up the torch lit by CS Group. A legal software consolidator was always coming – it still remains to be seen whether IRIS, Lexis or Tikit make a better fist of it in a legal services market which has only just experienced leading the nation into a rcession instead of following it.