The case of the dismal quarter

It all started quietly one Monday afternoon. After eight consecutive quarters of growth, San Jose, Calif.-based Callidus Software, a major player in incentive and compensation management, announced that it would not meet its first quarter financial targets. And then, one by one, a string of CRM vendors followed suit. Three days later, Menlo Park, Calif.-based Kana, a service and marketing software provider, told investors that it anticipated first quarter revenue of $13 million (compared to $18 million on the first day of 2003) and to expect a loss. Four days later, San Mateo, Calif.-based E.piphany announced a shortfall and a loss. Monrovia, Calif.-based SeeBeyond did also. So whodunnit? Was it the economy, the competition, or the market?

The first clue: All these companies missed their numbers at a time when most economists agree that the United States has finally entered into a period of economic expansion. Logically, it would follow that this economic upturn might prompt an increase in information technology (IT) spending.

In fact, IDC predicts a "tech resurrection" in 2004 with IT spending to increase 6% to 8%. While most other analyst firms are not so sanguine, few are predicting IT spending will fall. So if it was not the economy, why the shortfall?

The second clue: The explanations for earnings shortfalls presented by each vendor's management team were depressingly similar.

• Reed Taussig, CEO, Callidus:
  "Callidus Software, like many enterprise software companies, transacts a significant portion of its quarterly business at the end of each quarter. In this quarter, we failed to close several transactions."
  
• Tom Doyle, president, Kana:
  "In this quarter, Kana had several anticipated multi-million dollar sales which failed to close."
  
• Karen Richardson, chief executive officer, E.piphany:
  "Like many enterprise software companies, we transact a significant portion of our business at the end of each quarter. A number of large transactions were delayed this quarter."
  
• Barry Plaga, chief financial officer of SeeBeyond:
  "Unfortunately, there were several large license deals that the new sales force in North America was not able to close in the first quarter."

In each case, the executives maintain that the sales pipeline looked solid at the beginning of the quarter. It was only at the very end that things began to go wrong. Could a competitor be the guilty party?

Which leads to…the third clue: San Mateo, Calif.-based Siebel Systems pre-announced positive results for the first quarter of 2004. It expects to report license revenues of $127 million, a 13% increase over the first quarter of 2003.

In Siebel's annual report, it is estimated that 2003 license revenue from analytics products increased 10%, while UAN license revenue increased 50% and now represents about 4% of total license revenue (or $20.7 million). Employee Relationship Management (ERM) is also estimated to contribute about 4% of total revenue. So, Siebel is growing in areas that do not compete directly with Callidus, Kana, E.piphany, and SeeBeyond.

A final clue: For better or worse, all of these companies (with the possible exception of E.piphany) market themselves as providers of best-of-breed solutions rather than a suite of pre-integrated products.

In order to truly present a single view of the customer, CRM systems need data from multiple sources within the enterprise and from their business eco-system of suppliers and partners. Some vendors advocate buying the best tool for each business process and then tying the tools together. Others suggest integrating sales and customer systems with financial systems, product development, and supply chain as a suite of products.

Although the mystery is not completely solved, the CRM market is beginning to look like the guilty party. Perhaps the fact that some companies still didn't fare well in spite of a better economy suggests that what customers most value in CRM has changed.

Siebel's mix of products would suggest that the company is moving away from a best-of-breed strategy towards more of a suite approach. That may explain why it was successful in the quarter.