Paylocity's Steve Sarowitz Spent $1 Million Building Flawed Software.

His dilemma: fix it, or start over?

You make a big, bold bet. You bet wrong. You mess up. Now what? Figuring out when it's time to cut your losses is never easy. When it involves pushing aside your handpicked team, the decision is all the harder. That's exactly the bind Steve Sarowitz, the CEO of Paylocity, was dealing with.

Sarowitz's story began one chilly spring morning in 2003. This was to be the day that saw the transformation of his company from a mere supplier of payroll services to one that sells its own proprietary software. When he left his office in suburban Chicago the night before, he was confident that his new software would be up and running for one of his company's biggest customers, a company with more than 1,000 employees.

What Sarowitz woke to instead was disaster. The data had never fully loaded overnight. As a result, his customer's employees couldn't see their pay stubs when they logged on. "I was spontaneously combusting," says Sarowitz. Soon, he was huddling with his project development chief, Roey Ben-Yoseph. "Roey, what's going on?" he asked. "I've got a thousand people who won't be able to see their paychecks like I promised." Ben-Yoseph, both men recall, quickly replied, "Steve, we only tested it for a maximum of 100 people."

Sarowitz couldn't believe his ears. OK, he hadn't specified the scale he wanted. But wasn't it obvious that Paylocity's new software program would need to handle more than 100 employees? The company already had several customers with more than 1,000 employees. Why on earth would his development chief have created software that could handle only 100?

When Sarowitz set out to create his online payroll software in 2002, he was sure that he and his team could provide a cutting-edge, money-saving new service for his customers. The idea was to nibble away at the giants in the industry, notably ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX), which were pulling in billions of dollars in revenue but hadn't yet succeeded in offering a strong Web-based product.

Sarowitz, then 37, had taught himself how to customize software he was reselling for another company called MPAY and figured he had the tech know-how to spearhead his own software project. Plus, he could tap the expertise of Ben-Yoseph, a friend since college days at the University of Illinois whose programming skills had helped Paylocity build a Web service that worked with MPAY's system.

As 2003 progressed, however, it became clear that Sarowitz was asking his development team to produce a product far more ambitious than it had anticipated. Sarowitz found himself butting heads with the programmers over nearly every detail. "One of the developers wanted to give direct deposit accounts friendly little names, like My Checking Account, and I said that's going to complicate the program," says Sarowitz. " 'Well, I like my idea better,' " Sarowitz recalls the developer's saying. Sarowitz shot back, "You're a developer! You know nothing about this industry!" Ben-Yoseph, looking back on the experience, says Sarowitz had unrealistic expectations and frequently demanded more than the team could deliver. Says Ben-Yoseph: "Steve kept changing directions."

About the only thing Sarowitz felt he could control was his morning running routine, which he used to clear his head and confide in his running partner, Tim Hendershot, a trust officer at a Chicago bank. "If I asked for a peanut butter and jelly sandwich for lunch, they'd say they couldn't do it," Sarowitz complained to Hendershot at one point. Says Hendershot: "He vents, and I just run along."

As summer turned into fall, Sarowitz began to face the facts: He had made some bad calls by betting that programmers with limited Web experience could create an advanced Web-based program. He knew, too, that he had been wrong to assume he was skilled enough to oversee a full-scale software development project while running the rest of the business.

Sarowitz knew he needed to make some big changes in staffing and strategy. He deeply wanted his Web strategy to succeed, but his gut was telling him the project was off course. He had just spent 18 months and more than $1 million on the project. He didn't want to see all that effort and money go down the drain. Could he replace his team with new software developers to patch up the problems? Or was it time to cut his losses and pull the plug?

The Decision As it turned out, Ben-Yoseph, too, wanted to make changes. In early October, he came to Sarowitz to tell him he wanted out of the project. The two agreed that Ben-Yoseph would help find his replacement, then step down to a programming job to help with the transition.

This time, Sarowitz wasn't going to make another hiring mistake. He retained two recruiting firms and put ads on technology job sites like Dice.com. He spent three weeks interviewing dozens of candidates. He ended up choosing the second person he interviewed: Chuck Cooper, who had 17 years of experience running major software projects at software vendors and at large companies like Washington Mutual. Cooper came on board in December 2003.

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