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

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"I messed up," Sarowitz told Cooper on his first day on the job. "And I want you to fix it." Cooper soon discovered the six-person development team was split down the middle over how to get the program back on track. "Both camps were wrong," he says. Just as troublesome was the lack of any real process. Feature lists were often written down on whiteboards or on napkins, only to be erased or lost before anyone had a chance to implement them.

Everywhere Cooper looked, he saw problems. The system often crashed, and the design left no possibility for creating the simplest of new features, like buttons that allow users to choose from a list of options. His conclusion: Junk it all, and start over again. Sarowitz was relieved. Deep down, he knew it was the right decision. "It was exciting to realize we could have a fresh start," Sarowitz says.

That fresh start included replacing most of the software development team, including Ben-Yoseph, who departed on friendly terms and now works as a software architect for a Chicago technology firm. The five new hires, each with plentiful Web programming experience, soon paid off: Code development went reasonably smoothly this time. Cooper's team, without being asked by Sarowitz, designed the new system to work for companies with as many as 10,000 employees, far larger than Paylocity's biggest customer. It took another year and nearly another $1 million to develop the new program. Profits from Paylocity's existing payroll processing service continued to foot the bill.

In late 2004, Paylocity started rolling out the new software. The first version, later named WebPay, had the usual kinks, but Cooper's team was able to fix them. Even for its 1,000-employee customers, data transfers took about two to three minutes, a whole lot better than the eight hours they took on that dreadful night in 2003.

Sarowitz says about 75 percent of Paylocity's customers now use its WebPay systems; the rest have stayed with MPAY's product, which Sarowitz continues to resell and support. Sales, growing at 35 percent a year, are now about $20 million a year. (One of Paylocity's 3,700 customers is Mansueto Ventures, parent of Inc. magazine.) Of course, that's still tiny compared with ADP and Paychex. The recession, moreover, could quickly cast a shadow over Paylocity's future.

Still, the company's success has recently attracted $10 million in expansion capital from VC firm Adams Street Partners. If Paylocity had not developed its own technology, the firm wouldn't have been interested, says Adams Street partner Jeff Diehl. "It tells you a lot about someone when they can admit a mistake, recognize a sunk cost, and restart."

The Experts Weigh In

Watch for red flags

People often fall victim to what I call the sin of arrogance. They don't take the necessary steps to make their software project go well, and in particular, they don't look at whether the people they have are capable of doing a good job. You can't just assume they will grow into it. There are clear red flags. One such flag is failing to set up metrics so you can measure progress. A great way to break this pattern is to establish steppingstones, smaller pieces of the project that can be done rapidly to force communication about the project.

Jim Johnson
Chairman
The Standish Group
Boston

Letting go is never easy

The decision to kill a project is very difficult. Psychologists tell us about "escalation of commitment." People think something is fixable, and that makes it hard for them to kill a project. It's easier to rationalize continuing something than killing something. You think about the sunk costs not only in terms of money but in terms of time -- success is right around the corner, and companies throw good money after bad money. So to pull the plug on it, even though it was a costly decision, speaks a lot of Steve Sarowitz as an entrepreneur.

Julio De Castro
Management Professor
Babson College
Wellesley, Massachusetts

Hire slowly, fire fast

When you are building software, it's harder than other kinds of goods, because it all builds on the same foundation. If your base isn't good, you have blown it. You not only have to redo the product, but you have to figure out how to migrate customers to your rewrite. It's excruciating. The biggest lesson you could learn from this is that all the good intentions, all the "I can do it, boss" energy -- all that doesn't matter if you don't have quality people. You have to hire slowly and fire fast. Sarowitz learned that the hard way.

Michael Braun
CEO
Intacct
San Jose, California

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