From Forbes:
From: Jack Hartmann Friday, Jan 18, 2002 3:15 PM
Respond to of 3429
Nice Siebel article from forbes
Tom Siebel used his own software to anticipate the recession months
ahead of rivals and economists, and braced for the worst in 2001. Now he's
betting on a comeback. A year ago Thomas M. Siebel was revving up for the best year of his life. Sales and profits at Siebel Systems, the sales-automation software shop he founded in 1993, had doubled for the seventh
straight year, to $1.8 billion and $258 million, respectively. Siebel had a 70% share of its core market, and its stock had shot up 50-fold since being offered to the public in 1996. He laid plans to
double yet again in 2001, to $4 billion in sales.
But in February, a month before the recession began, Tom Siebel saw
something that horrified him. At home in his sweats at 6 o'clock one morning,
he logged on to his company's internal Web site to begin his morning ritual: a
review of the sales force's forecasts for the quarter. For the first time, the
figures laid out before him in crystalline pixels of blue, red and black showed
that hundreds of potential deals, ranging in value from a few thousand dollars
to several million each, had suddenly stalled. The backlog of pending sales
had declined from just days before. Worst of all, individual sales reports were
laden with ominous phrases: "budget eliminated," "all IT spending frozen,"
"decision deferred to following quarter."
All of it could mean only one thing: a crash was coming. "The recession was
apparent. Here we were, pedal to the metal, and suddenly the pipeline looked
really bad," says Siebel, 49. Hours later he met with his six senior executives
and gave them the stunning news. He demanded an overhaul of the 2001
growth strategy, set in ink only weeks before. Then he dispatched them to visit
key customers and close pending deals before the rest of the world could
discover where the economy was headed. Siebel himself visited nine
accounts in the following few weeks.
And on Feb. 27 Tom Siebel warned Wall Street analysts, in a conference call,
of a possible tech "depression." He began bracing for pain, laying off 800
employees, cutting off three moneylosing business units, cutting budgets for
travel, marketing and hiring--and lopping 20% off the pay of the top brass.
"By week one of April, we turned a $4 billion company back into a $2.6 billion
company," Siebel says. "We turned this Titanic around." The first quarter of
2001 was bad, but not devastating, for Siebel, with license revenue coming in
at $335 million, off $30 million from the fourth quarter of 2000, its first-ever
such sequential decline--though still up 72% from the first quarter of 2000.
Wall Street pretty much took it in stride.
Economists took nine months to confirm that a recession had descended last
March. The software that gave Siebel an early jump on them and his rivals is
all the more compelling for what it shows today. Tom Siebel now says the
recession bottomed out at the end of November--and that one hell of a
comeback looms.
"I believe we will see the information technology market pick up in Q1 and Q2
and the economy at large by Q3 or Q4," Siebel declares.
What? Silicon Valley still reels from the starkest downturn in its four-decade
history. Hundreds of dot-coms have gone under. Some 600,000 tech workers
have been fired. Real estate prices are depressed, restaurants are empty and
luxury cars tool down the freeways with a sign of the times in the windows:
"For Sale by Owner." A trillion dollars has been lost in telecom stocks. Several
leading indicators, from chip orders to hardware sales, suggest things won't
improve soon. Some 55% of tech managers say spending will stay flat or
decline in 2002, says Goldman Sachs.
Not to worry, Tom Siebel says: "The door has opened." In November and
December Siebel reps hit clients with "far more product evaluations,
demonstrations and visits than in the entire third quarter, and the rate of deal
closings was much greater." All of which, of course, is meticulously tracked by
his software. Better yet, he says, Siebel is a good leading indicator for the rest
of tech. "Software is always the decision that is made first. The hardware and
services follow."
His forecast could presage a powerful rebound in the economy, if not the
stock market. The high-tech sector led the way in the wondrous economic
boom of the last decade, suffered the most in the 2000-01 bear market, and
by rights should lead the economy back up. With tech now accounting for half
of all business capital spending in the U.S., Silicon Valley must revive before a
recovery can take hold.
Others in high tech are betting with him. In telecom, entrepreneurs are buying
billion-dollar fiber networks for pennies on the dollar (see story, p. 80); in
e-tailing, founder Scott Blum just paid 17 cents a share to buy back Buy.com,
insisting it can turn a profit (see p. 86); in software, PeopleSoft is pulling off a
stunning turnaround (p. 90).
At Siebel the advertising budget for the first quarter will rise. The company is
recruiting again, and it is even expanding its backshop, buying up newly
vacated data centers in Utah. It doesn't occur to Tom Siebel to ask: Um, what if
I'm wrong? His software is talking to him, and he believes it.
"Tom instruments his business better than anyone I've ever seen, and he
manages accordingly," says Robert Austrian, a Banc of America Securities
analyst who throttled back his optimism on software firms after hearing Siebel
last February. "He was way ahead in seeing the downturn, and he put the
screeching brakes on."
If Siebel's forecast is premature, the risks to his company are high. This year
Oracle, SAP and PeopleSoft are all intensifying their push into Siebel's core
market. Worse still, license revenue in Siebel's market, once expected to grow
30% a year through 2005, now is forecast to expand just 6% annually in the
next four years, to $5 billion, says Gartner. If Tom Siebel gets crunched
between slow growth and competition, his shareholders will pay the price. So
will he: He still owns 15% of the company, worth $1.9 billion.
Blazing trails has been a hallmark of Tom Siebel's career. He was born in
1952 to an upper-middle-class family in the tony Chicago suburb of Wilmette,
Ill., the sixth of seven children. Tom's father, a corporate lawyer, must have
seen something special in him--or some special need. Tom, then age 15,
was the only one to be sent off to the Shattuck Military School in Faribault,
Minn.
"I wasn't an exceptional student," says Siebel, who still bears traces of a
military bent for order and discipline. "It was a great adventure. It forced me to
think and act independently at a young age."
He earned a bachelor's degree at the University of Illinois at
Urbana-Champaign in 1975, spent a few years baling hay and doing
construction work in Idaho, then returned to the campus in 1979. By 1983 he
had earned two master's degrees, one in business and one in computer
science. His master's thesis, which extolled the virtues of algorithms that
might make databases run faster, got him recruited to Larry Ellison's Oracle
Corp., then a young vendor of relational databases.
Siebel was 31 years old when he joined Oracle in 1984. A year later he was
named salesman of the year, vaulting past colleagues on the strength of his
deeper knowledge of the technical intricacies of the product. Siebel quickly
won fame as the highest-paid salesman in the Valley.
His greatest contribution came in 1987, when he showed that Oracle's
multimillion-dollar databases could be better sold over the phone than by reps
pressing the flesh. Siebel designed Oasis (Oracle Automated Sales
Information System), which streamlined lead-generation and accounting for
Oracle's sales force. Soon Siebel's call center, Oracle's first, was the largest
revenue unit. In 1988 Siebel was voted Oracle's Most Valuable Player.
But later, when Siebel proposed to Ellison that Oracle sell Oasis to its own
customers, Ellison balked. In 1990 Siebel walked with millions of dollars in
Oracle shares, but sold them shortly after. He's lucky he did: A year later
Oracle was blighted by an accounting scandal that shaved billions off its
market value and nearly bankrupted it.
Meanwhile Siebel and wife Stacey (herself a former Oracle rep) led a new life
of skiing and travel. It didn't last long. Just months into his sabbatical, Siebel
accepted an offer to run multimedia outfit Cayenne Systems. Another 18
months later, in 1992, Siebel sold newly renamed Gain Technology to Sybase
for $110 million, netting himself $10 million more.
It still wasn't enough. In July 1993, with the notion of an Oasis-like product still
gnawing at him, Siebel rented cheap offices in East Palo Alto and founded
Siebel Systems. He spurned offers of venture capital and funded it himself,
letting a few former Oracle pals and others put up to $100,000 each, including
lawyer James Gaither and brokerage titan Charles Schwab (both still sit on
the board). "I told them the only consolation was that [if we flopped] I would
lose more money than they would," says Siebel.
Siebel named the firm after himself not out of self-aggrandizement, he says
with a straight face, but because "I believed that my reputation would draw
talent." It did. Oracle marketer Patricia House, now 46, joined as a cofounder
(now retired, she still owns a 1.5% stake worth $190 million). David Schmaier,
37, left Oracle's struggling applications business to join Siebel in 1994. He
now heads all product divisions and is the de facto successor, though Siebel
says he will run the show for many more years.
From the beginning Siebel Systems would be different. "Serious and
professional," says Siebel. "No polo shirts, no dogs, no Frisbee in the halls."
No extravagances, either. Nearly every penny of the company's $1.4 million in
startup capital went to developing the software. For months Siebel, House,
Schmaier, four engineers and an office manager did their work at a set of $60
metal folding tables. Despite the spartan office setting, everyone wore
business suits. They placed calls to would-be clients like Ingram Micro, Wells
Fargo and Pfizer to solicit advice on their future product and found the interest
was huge. Siebel Systems was in the black from the day it sold its first product
in June 1995.
Siebel went public in June 1996. On their first day Siebel shares zoomed from
an offering price of $17 to $31, valuing the company at $477 million and Tom
Siebel's then-42% stake at $200 million. That year it had 213 employees, $39
million in sales and net income of $5 million.
For the next four years the company grew at a torrid pace. At the end of 2000
Siebel had 7,400 people in two three-building office complexes in San Mateo,
Calif. and 133 offices in 40 countries.
Then the bottom fell out. By early 2001 it looked as though Siebel's wild ride
was over. Last year its sales growth slowed from 121% to a comparatively
paltry 30%. Siebel missed First Call's earnings estimates in September, and
by then its stock price had plunged 60%. Shares now trade around $28, or 56
times trailing earnings. The company is expected to close 2001 with $2 billion
in revenue and net income of $235 million, off 9%.
That he saw the recession coming last February certainly gave Tom Siebel a
head start on his competitors, but that is only half the story. Siebel's ability to
redirect a then-$22 billion (market cap) global enterprise in weeks owes to a
sophisticated set of management tools, all engineered around one thing:
knowledge.
Using Siebel's own sales software, each of its 1,500 sales agents files
weekly progress reports on current deals. They handicap the odds of a "close"
in such meticulous terms as: "5%, opportunity qualified" or "15%, proposal
presented," all the way up to 100% when a contract is signed. The reports
include details like date of last contact with a buyer, known competitive
bidders and when a rival has been eliminated.
The data are funneled into a "Flash Report," which is what Tom Siebel was
reviewing on that fateful morning last February. Siebel found that "close"
handicaps, which had always increased quickly, hadn't budged for days.
Revenue targets for individual deals, which were usually steadfast (Siebel
does no discounting), had suddenly shrunk. The slowdown had begun.
The data tracking provides fast insight but also stokes performance. By day 7
of each quarter, Tom Siebel posts his three-month objectives for the company
on the Siebel intranet. By day 10, each of Siebel's 465 department heads is
required to post corresponding goals for his or her respective unit. By day 15,
Siebel employees--to a man--post their personal goals for the period on the
portal. There they can be viewed at whim by anyone, the founder included.
Fulfillment of these objectives figures into performance reviews. Every six
months the bottom 5% are given walking papers.
As soon as he saw the end coming last winter, Siebel jumped on the intranet,
retracted the 16 growth objectives he had placed there weeks earlier and
replaced them with 3 simple and devastatingly clear ones: Keep customers
happy, keep cash coming in and protect market share. Within six weeks all
8,000 employees tacked over to this new, bleaker outlook. "Everyone always
knows the goal and how they fit in," he says.
Siebel insists on meticulous product knowledge, too. While most software
companies train mainly their sales staffs, Siebel demands that every single
employee--including secretaries and security guards--complete at least five
Web-hosted tutorials on Siebel products, every quarter. Tutorials end in
exams. Workers must score 90% or higher to pass. The test results, logged
into digital personnel files, also figure into quarterly performance reviews.
Siebel is just as disciplined about his external relationships with customers.
He uses a rigorous third-party auditing service to let customers rate his
company's performance every quarter. In an industry known for hyping
"vaporware," Siebel Systems has an enviable 90% customer satisfaction
level. It had better. This stuff is expensive: typically $300,000 to $600,000 for a
license that might serve 100 sales reps.
Half of the $1 billion in license revenue that Siebel booked in 2001 came from
new customers. Not bad, considering IT spending across all industries sank
through the floor. The auditing service proved so effective, in fact, that Siebel
now resells the auditing system in its new software release, Siebel 7, which it
launched in November.
Customer love is nice, but it can't offset flagging demand. Even if the economy
picks up as Tom Siebel predicts, he will be hard pressed to show the rapid
growth to which his investors have grown accustomed. With $1.5 billion in
cash, Siebel could easily buy its way into new markets, acquiring, say,
PeopleSoft.
PeopleSoft, which dominates the market for personnel management
software, is run by Siebel's former Oracle colleague, Craig Conway (see p.
90), and is rumored to be on the block. Conway denies the company is for
sale, and Siebel scoffs at the idea that he needs to buy his growth.
"PeopleSoft has been offered to us," he says carefully. "We didn't consider it
very seriously. Why would I want to go into that business? It's a crummy
market that is not growing, and it is very competitive."
To prove his point, Siebel waves a graphic that illustrates how his
sector--software for sales automation and customer service--will grow faster
than software for personnel departments or software for enterprise-resource
planning, a market dominated by Germany's SAP.
"I will let the other guys beat each other's heads together in those markets
while I run in this one," he says dryly. Besides, he adds, the market for his
products is still a "green field." Siebel's internal research suggests that just
3% of companies with $1 billion or more in sales use sales automation or
customer service software today. (Verifying this unstintingly optimistic
estimate with any outside observer is difficult.)
But Tom Siebel is eyeing forays into new areas to keep the company growing.
The Siebel 7 release includes a new suite he has dubbed "employee
relationship management." It includes products like Siebel Learning and
Siebel Performance Management, based on the very tools that Siebel has
used to manage his own organization so effectively for years. "The market is
huge," Siebel argues. "Any enterprise that has employees is a potential
customer."
With his existing 3,000 accounts apparently happy, Siebel expects 90% of
them to upgrade to the new Siebel 7 suite within 12 months. If he is right
about that, Siebel Systems could very well return to thriving growth. And if Tom
Siebel is right about his software's role as a leading indicator for the rest of
tech, you can't blame even his bitterest enemies if they end up rooting for him.
Siebel knows: High tech is on a comeback. Remember you heard it here first.
forbes.com
Jack |
