Selling Software in a Lousy Market
NEWSMAKER Q&A:TECHNOLOGY
Selling Software in a Lousy Market
PeopleSoft CEO Craig Conway says growth will come mainly from stealing market share from weaker competitors
PeopleSoft (PSFT ) is unusual among business-software outfits -- it hasn't taken a major tumble over the last 18 months. True, quarterly revenues and earnings are off about 10% from their peak at the end of 2001, and its stock has dropped some 50% over the last year. But when compared to the kind of year peers such as Oracle (ORCL ) and Siebel Systems (SEBL ) have had, 2002 for PeopleSoft has been pleasantly uneventful.
In a conversation with BusinessWeek Correspondent Jim Kerstetter on Dec. 18, Craig Conway, CEO of the Pleasanton (Calif.) company, discussed issues ranging from the economy and his plan for the coming year to the future of the software industry. Edited excerpts from the interview follow:
Q: You haven't done any layoffs, have you?
A: None.
Q: How have you managed to be one of the only software companies around here to do that?
A: The short answer is that our business model continues to be on plan. The revenue is tracking where our projections were at the beginning of the year. And we've been able to cut costs dramatically without doing any layoffs. Layoffs are the category that most companies turn to when they reduce costs. But we were able to reduce costs $157 million in 2002 without turning to reducing headcount.
The $157 million was through making the company's systems more global, connecting the business processes together. We're down to one data center in the company.... Also, every procurement done by PeopleSoft worldwide is done by an online procurement system.
Q: So no claims of $1 billion in savings?
A: No. We actually try to tell the truth here.
Q: How is the software marketplace? Are there any signs of improvement?
A: The economy isn't getting any worse. I think that's probably a universally defensible statement. Where you start to get a divergence of opinion is whether it's getting any better. There's some data and some analytics that come out of the government periodically that would purport to show things are improving. But there's no question that companies are budgeting for a flat year.
Companies need to see an improving financial performance before they have the confidence to actually increase their budgets. They didn't see that by the time they actually sat down to do their budgets....and it became a self-fulfilling prophecy. I don't have a single instance of a company that's budgeting for an up year.
Q: How do you drive growth in such a lousy market?
A: Growth in a flat market comes through gaining market share. Growth through market share comes through small companies going out of business [and their customers] coming to you. There's a huge consolidation in the software industry that's claiming a whole segment of victims, and those companies' customers need to go somewhere. And, of course, [growth comes from] the ability to gain market share at the expense of your traditional competitors.
Q: You're talking about the small fry. But what happens to companies that are a little bit bigger, like Commerce One (CMRC ) or E.piphany (EPNY )?
A: With the kind of economy we have today, plus the consolidation among software companies, there's an entirely new layer of companies facing mortality that you wouldn't have expected to face mortality, and they're midsize software and technology companies -- i2 (ITWO ), Manugistics (MANU ), Commerce One, Ariba (ARBA ), E.piphany. These aren't tiny companies.
Q: Is this a sign that the software industry is finally growing up?
A: I always felt the software industry was late in maturing. Mature industries always come down to a few trusted, financially sure, well-managed companies. It's why there are three main hardware companies today. It's why there are three database companies -- Oracle, Microsoft (MSFT ), and IBM (IBM ). It's why there are three operating systems. There used to be dozens of those as well.
Q: Have customer buying patterns changed permanently from multimillion-dollar contracts to smaller, buy-as- you-go sales?
A: Either way, there are large, multimillion-dollar projects. I think the only change is they [used to be] approved in one large budget outlay. [But] now, they're approved piecemeal, one step at a time.
Q: What's next for your company?
A: For more than a year now, we've been evangelizing something we call the "real-time enterprise."
It's the ability to put business processes online and connect them. To this point, technology has been about automation, but mostly on a department-to-department basis. Now, there's an awareness that everything is online and available over a common network, that the business processes can actually run right into each other. They can be connected.
Q: Can you give me an example?
A: Think of order-to-cash. Most manufacturing companies think [of the process] in terms of getting an order and taking it all the way through [to] getting the cash. Well, it's a long process. It starts with marketing automation, marketing programs, sales automation. Then it goes to order entry. Well, that's supply chain. Then it goes off to shipping, billing. Hey, now you're getting into financial applications, and accounts receivable.
Pretty soon, you're all the way back to customer service. That's the way companies run, but that's not the way they've used technology to this point. They've just automated the little pieces.
Q: What are the implications for selling your software?
A: Never again would a financial system be reviewed only by the finance department because the sales organization needs to have a say in the financial system. And so does the manufacturing organization. And so does the customer-support group. All of these applications of technology can be thought of as in the company domain.
Q: Sounds like something only suite companies like you or SAP (SAP ) could do.
A: To a point. It's a factor that's accelerating the consolidation in the software industry. There are no large companies that are trying to increase the number of suppliers. They're trying to decrease so there are fewer moving parts, less [need for] integration between different vendors.
Q: So what's the role for small companies?
A: What emerges is a picture where a provider of multiple suites of products is more appealing to a public-sector or private- sector customer. But there will be a role for companies focused on particular vertical business sectors.
Q: But there's always a bigger fish to the bigger fish. Do you worry about Microsoft and IBM ultimately moving into your market?
A: I think the best attitude to have in this industry is to think that everyone is a threat. At the same time, I think the best way to understand the likely long-term competitors is to extrapolate what they're good at today. What Microsoft is good at today and has always been good at is providing products in high-volume, low-dollar, third-party distribution, third-party support. That has been a model that has been the core expertise of Microsoft.
If you extrapolate into the future, their expertise is not likely to intersect enterprise software sold to General Motors. It's likely to intersect enterprise software sold to small businesses.
Edited by Patricia O'Connell
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