Siebel's summer swoon

It has been a rocky summer for Siebel's new CEO. So, is the CRM behemoth in for a rough ride or is this just a bump in the road?

The summer of 2004 hasn't been easy for the incoming CEO of Siebel Systems Inc.

After Mike Lawrie took over the top post from founder Tom Siebel in May, Siebel reported a 16% drop in second-quarter profits. For the second time, the Securities and Exchange Commission charged the San Mateo, Calif.-based company with improperly discussing company business. Plus, AMR Research Inc. in Boston predicted that Siebel soon would lose its perch as the market leader in revenue.

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But is this summer a sign of the downward spiral of an organization that in many ways created and defined the CRM market or is it just a bump in the road?

"The second quarter isn't a trend," said Scott Nelson, a vice president and distinguished analyst with Stamford, Conn.-based Gartner Inc. "It doesn't necessarily reflect what goes on. I think they got caught by a couple of things. With Tom stepping down and Mike stepping in, they took their eye off the ball. That caused a rocky summer."

Take the recent earnings news. While profits dropped, Siebel wasn't the only business software maker to fare poorly. Companies like competitor PeopleSoft Inc., of Pleasanton, Calif., and storage giant Veritas Software Corp., of Mountain View, Calif., also had less-than-stellar quarters. Yet, Siebel's biggest competitor in the enterprise CRM space, Germany's SAP AG, bucked the trend by boosting U.S. license sales by 63%.

In last month's earnings call with financial analysts, Lawrie said he was disappointed and promised to cut expenses and bolster revenue.

Zeroing in on SMBs, verticals

Siebel will be looking to the small and medium-sized business market for growth. Lawrie announced the formation of a new SMB group that will report directly to him and will break out its profits and losses. Siebel's hosted OnDemand offering will target the space.

With OnDemand, Siebel has reentered a market where competitor Salesforce.com is well established, as evidenced by the San Francisco-based company's recent public stock offering.

"Salesforce.com has such a head start, with more credibility, that it will really be a big hurdle for Siebel to clear," said Laura Preslan, research director with AMR.

One thing Lawrie made clear in the earnings conference call is that Siebel is bringing in new leaders. Lawrie said that Bruce Cleveland will return from AT&T to head the SMB group. He also named new senior vice presidents for global services and the manufacturing and automotive division. Lawrie anticipated more executive changes later this summer.

In addition to pushing its SMB commitment, Siebel plans to emphasize analytics and vertical-specific software, Lawrie said.

Its recent acquisition of Dublin-based Eontech, a banking software specialist, will bolster Siebel's push into the retail banking vertical, Lawrie said. He also pledged to increase resources to retail banking by as much as 45%.

This vertical focus is a sound strategy to bring Siebel back to profitability, and "retrenching on some of the core verticals is a good idea for them." Preslan said.

Siebel has a lead in the financial services and communications verticals and enough cash to make acquisitions, enabling it to exploit those markets to its advantage. However, Preslan said the company should realize that manufacturing is SAP's bread and butter.

Fending off the feds and the competition

On the regulatory front, Siebel is accused of violating a 2001 rule that says market-moving news must be disclosed equally to all investors. The latest charges center around statements allegedly made in April 2003 by chief financial officer, Kenneth Goldman, and former investor relations director, Mark Hanson, at private meetings in New York. Siebel has pledged to fight the charges. Siebel paid a $250,000 civil penalty to the SEC in November 2002 to settle similar charges, though it didn't admit wrongdoing.

In the meantime, Siebel may be hearing footsteps. According to a recent AMR report, SAP is poised to take over as the market leader in CRM revenue in the next year.

Some analysts, however, have questioned how SAP assigns CRM revenue. For instance, Gartner analyst Ed Thompson said only 19% of companies that bought the mySAP Business Suite are actually using CRM functionality. Siebel contends that its experience and vast number of users are real signs of its leadership in the market.

"There's always a lot of interesting accounting that goes on at many of these firms to book revenues," Gartner's Nelson said. "It doesn't correspond to live users; Siebel is still dominant in live users."

Some users were even surprised by details emerging from the ongoing saga of Redwood Shores, Calif.-based Oracle Corp.'s quest to acquire PeopleSoft. Nelson said some of his clients got scared when they read that Oracle CEO Larry Ellison considered purchasing Siebel. Additionally, Nelson said the case gave some customers new insight into the way that business software vendors discount their wares.

Overall, however, Nelson is confident that Siebel will rebound.

"I don't see this as a sign of a bigger problem," Nelson said. "I think the planets aligned badly for [Siebel] in the second quarter."

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