“2009 was one of the most transformational years in the company’s long history. It marks a massive departure from our traditional ways of working.”

Introduction

Psion delivered average annual reported revenue growth of 10% in the five financial years from 2004 to 2008. However, gross margins were an average 43% over the same period, and have been on a general downward trend. This is indicative of the increased portion of revenue from third party product, and of an increasing fixed cost element within cost of sales. Average operating expenses in the same period were 39% of revenues, and have been on an upward trend in recent years. Operating margins have been an average of 3.8% over the period, and we have delivered unacceptable levels of progress against our 10% adjusted operating margin target (which excludes exceptional operating costs, share-based payment expenses, and net capitalisation of research and development expenses).

During the latter part of 2008 and throughout 2009, significant restructuring activities were undertaken by the Group. The majority of this restructuring activity and related cost reductions affected our employee base, with a specific emphasis on discretionary employee-related expenditure. This programme has now been completed enabling the business to make the investments to implement its strategy and deliver profitable growth in the medium term.

Psion undertook a project in the second half of 2009 focused on its legal structure in Europe. This project will be substantially completed by the end of March 2010, and has been undertaken to ensure our legal structure better reflects our simplified operating structure in Europe.

Change Programme

The executive team, with strong support from operational management, implemented a wide array of restructuring and operational improvement actions beginning in late 2008 and throughout 2009 to drive improved operating results in spite of the recessionary economic environment. Our goal has been to create significant positive operating leverage in our business model.

These actions included, but were not limited to:

• Moving from a country oriented operating structure to a more centralised functional structure
• Enhancing the quality of the Psion management team
• Assigning clear responsibilities and accountabilities for key aspects of operating performance
• Increased control over discretionary expenditures
• Revision of remuneration policies to ensure that only good performance delivers incentive pay
• Initiating over 70 supply chain improvement projects to ensure that we were easier to do business with and reduced our costs, including:
  • Implementation of a global lean manufacturing programme
  • Consolidation of manufacturing resource planning systems
  • Reorganisation of production facilities to reduce inventory and improve quality
  • ISO-9000 registration of the French production facility
  • Implementation of an enhanced new product introduction process to reduce cost and quality issues
  • Development and global roll out of an expedited quotation tool
  • Creation and deployment of “smart” part numbers across all major product lines to make ordering easier for customers and partners
  • Centralisation of European order entry resource and creation of a shared service centre in the UK
  • Freight expense reduced like for like over 2008 by c. £1.1m
  • Significant reduction in inventory globally coupled with consolidation of inventory in fewer locations
  • Easy to do business with projects:
    • Deployment of a “Quick Ship” programme to improve customer lead times
    • Deployment of inventory rotation policy for distributors
    • New improved and super clear “Smart Number” product labels
    • New improved box labels for shipments
    • New formats for all customer facing documentation
    • Automatic emailing of order acknowledgements and estimated ship date changes
  • Implementation of a more channel-oriented distribution strategy with clearer coordination of direct sales efforts
  • Signing a distribution agreement with Ingram Micro for North America significantly reducing the complexity of dealing with lower-volume customers
  • Consultation with value-added resellers in preparation for an enhanced channel programme designed to deliver around three quarters of product revenues in the medium-term future
  • Better alignment in sales incentives to drive incremental revenue at higher gross margins
  • Closure of direct sales organisations in more remote, lower value geographies that were loss making, and replacement with indirect channel partners
• Implementation of shorter working hours on a temporary basis for certain personnel to reflect variable activity levels in 2009
• Marked reduction in professional fees through reduced use and renegotiation of fee rates
• Reduction in headcount of over 350 personnel, a decision not taken lightly, but implemented quickly to minimise disruption and enable the business to begin to focus on improved competitiveness

Other operational improvement activities have also been undertaken throughout 2009 as we seek to simplify the way we do business, reduce cost and improve our service levels to customers.

We have increased the focus on our service business which has performed well in spite of the recessionary environment. Our service offer is being enhanced, we have restructured reporting lines to ensure improved coordination with our sales activities, and have implemented revised incentive schemes to deliver further improvements in service revenues.

There has been an extensive review undertaken on the costs of quality-related issues. A new team was recruited in late 2009 to implement a number of actions that will deliver improved quality beginning in 2010. We have amended our new product introduction processes to ensure lower cost, on-time product launches to higher standards of quality. We have enhanced our sales and operations planning processes, leading to lower inventory levels and an improved ability to meet fluctuating customer demand. We piloted new sales management tools in the second half of 2009 and will implement these across the business in 2010 to deliver further improvements in sales and operations planning. We recruited new marketing personnel with specific expertise in pricing of technical products and services.

We have implemented changes to our sales structure and incentives to ensure that our higher gross margin service business continues to deliver improved operating profitability and recurring revenue streams.

Further investments have been made throughout the second half of 2009 to develop a modular design process. The core platform that will be delivered by this will reduce product cost, reduce invested capital, and create product and service revenue growth opportunities, underpinning our ongoing commercial strategy for Psion (see OSM section below). The Board has concluded that each of these investments is critical to our ability to deliver progress against our operating margin target. We believe that the Change Programme now implemented creates significant positive operating leverage in our business model and we are confident that it gives us a solid base for continued improvement.

Open Source Mobility

Open Source Mobility (OSM) is our term for the innovation of our business model which will make us more competitive in the long term. It is comprised of three fundamental elements: a highly modular product platform, an open and collaborative online community fully engaging the potential of the Web 2.0 world, and highly customisable products, services and programmes. The value of an open platform approach, a partner ecosystem and our ability to deliver profitably has already been seen with the Workabout Pro. With OSM, we are taking this core competency and evolving it in such a way that the market for our products is more open, larger, stronger and more collaborative.

Our highly modular product platform will generate many opportunities to improve return on capital employed. For instance, the ability to reduce time to market, and launch more products, ought to increase revenues. No longer will each new product be designed from scratch. At the core of each new product will be a modular platform. New product development will therefore only have to focus on combining existing modules or designing further modules, and this will take less time than traditional development activity. As modules are tested iteratively through the design process, quality is improved earlier and many of the costs endemic in the older, more monolithic design approach, are avoided.

Modularity enables us to benefit from economies of scale in component procurement and outsourced assembly. Much of the final assembly can now reside with our channel partners, creating profitable opportunities for them to add value to their customer relationships with limited investment. The impact on inventory turns, cash and liquidity will all be positive. Lower costs should create opportunities for more competitive pricing without sacrificing margin. The incidence of redundant technology built into monolithic products currently endemic in the market will be minimised. The effective life of our products in the field can be extended as defective or obsolescent modules can be replaced without scrapping the whole product, reducing the total cost of ownership for our customers. Modularity provides an attractive opportunity to offer an enhanced choice of services, and an extended set of contractual arrangements, potentially including the offer of “platform as a service”. In short, we foresee that we will derive the same operational benefits as those experienced by other leading businesses in other industries (such as Scania, the Swedish automotive business) when they have embraced modularity.

The open and collaborative nature of OSM creates a unique and powerful alignment between Psion, our partners and our customers. During 2009, we began the development of an open, online, community. This will become an ecosystem where Psion and its customers, resellers and developer partners will meet, collaborate and working together have the potential to create the most customer-specific solutions in the industry. This will extend the level of research and development resource we can harness to create customised offerings to our customers. This launched in March 2010 and the initial market reaction has been very positive.

By better understanding our customer needs through the open online community, combined with the modular product platform, we will be able to provide existing and new customers with highly customised products, services and programmes. What they need, they will get; creating cost reduction opportunities for them, and growth opportunities for Psion and its partners.