IT Analysis - PeopleSoft announces new ERP era

Last week, 15,000 customers of US enterprise resource planning software company PeopleSoft made their way to San Francisco to hear chief executive officer Dave Duffield announce a new era in IT.

Instead of hailing the company’s next big software release, Duffield announced that, due to customer pressure, PeopleSoft would delay Release 8 of its product family until the first quarter of 2000. He was warmly applauded.

Duffield has constructed a ‘Gee-shucks, we’re just here to help folks’ persona for himself and his company.

But in its own, self-deprecating way, PeopleSoft has overturned IT’s culture of instant obsolescence.

The year-2000 problem triggered PeopleSoft’s decision to extend its product life cycle, but it coincides with a difficult transition period for the ERP industry. The Californian company and rivals such as SAP, Oracle and Baan have all experienced slumps in new licence sales and spectacular falls in their share prices.

‘Reality is beginning to hit ERP vendors,’ explained PeopleSoft European marketing director Mark Lane. ‘Historically, we produced a new release a year. But that cycle is inappropriate for 1999 – and probably inappropriate full stop. Customers just can’t keep pace.’

Cut-throat rivalry

Moving to a two-year product cycle will save customers money, continued Lane. PeopleSoft is constantly adding to its 45-plus portfolio of application modules, which means its ability to add new functions across the range was getting narrower and narrower within the 12-month cycle.

The same applies to the company’s two main rivals, Lane added. ‘Oracle is getting into a perpetual cycle with Release 11, and SAP software is starting to ship late. The others are doing it by chance. We’ve been more direct.’

Customer satisfaction is Duffield’s personal mantra, but he acknowledged: ‘We have to provide things for prospective customers, too.’

While Release 8 all but vanished from the San Francisco user conference agenda, PeopleSoft announced a new electronic business venture (see box, right) and emphasised ‘off-cycle’ projects.

These included specific industry modules, notably three financial services applications developed with Andersen Consulting, and a suite of analytic applications.

The first of these to emerge in the new year will be Enterprise Performance Management, an activity-based management program put together by KPMG.

A complete balanced scorecard product is scheduled to appear before the end of next year.

The joint developments with Big Five consultants highlight another balancing act for the ERP vendor. PeopleSoft cannot do everything itself. It needs to keep all five sweet so they continue to promote its applications. As a result, it cannot be seen to favour any of the practices in its joint ventures.

Chief technology officer Rick Bergquist harked back to Deloitte & Touche’s help to build ‘Latin’ accounting practices into the current product so that it could sell in France, Italy and other European markets. PeopleSoft’s policy was to seek out the ‘best knowledge capital’, Bergquist explained.

Chief finance officer Ron Codd was a little more blunt. ‘We like being the same as Switzerland: whether it’s hardware, software or services, we stay neutral.’

As new sales dry up, PeopleSoft has turned its attention to new delivery mechanisms, such as outsourcing and a fast implementation package for the mid-market.

Mid-size companies in the US can buy PeopleSoft Select, a 90-day ‘lite’ implementation based on Microsoft’s SQL Server database. PeopleSoft’s general manager for international operations, Howard Gwin, said the company will iron out kinks in service in the US before taking it international some time next year.

Competition in the IT industry is cut-throat. As all the ERP vendors found, capital for expansion and new product development can dry up faster than the analysts can say ‘disappointing quarter’. And hiccups on NASDAQ transmit very quickly to potential clients, who want to feel they are committing their company to a viable supplier.

Duffield pointed to the company’s $750m (#445m) cash reserves and the reciprocal warm feelings of its US customers, which should insulate the company from the worst effects of a downturn in its home market.

The European market continued to be ‘solid’ for PeopleSoft, said Codd, but currently only between 15% and 16% of PeopleSoft’s revenues come from outside the US. He explained to analysts the real figure was higher because, for tax purposes, the company recognises revenues in the country where a deal is signed. If Ford buys software from its Detroit head office, PeopleSoft’s US wing banks the cheque.

The accounting anomaly highlights yet another about-turn in computing trends.

In ERP, Europeans set the pace. If PeopleSoft is going to genuinely take on SAP and Baan in the years to come, it is going to have to beat them on their home turf.

RON CODD, CFO: THE COMPANY HAWK

Being CFO for a publicly listed hi-tech company in the US is not for the faint-hearted, but with his Clint Eastwood looks and demeanour, Ron Codd plays the part with relish.

Codd styles himself as the conservative ‘hawk’ in a company staffed by ‘liberal’ programmers, and singlehandedly took on a gang of analysts who wanted explanations for the first quarter-on-quarter drop in licence revenues in the company’s history.

‘We did have a tough quarter and have been very forthright about it,’ he said, and pointed to several deals that failed to close at the end of September. He predicted the company would achieve between 25% and 35% growth in 1999, but deliberately avoided giving any guidance on the likely margins, to avoid creating over-optimistic expectations.

While margins for new licence sales are very high, consulting and implementation services typically generate profits of between 16% and 18%.

The previous quarter had seen a shift in the balance, which Codd explained was an inevitable feature of a maturing industry. ‘It’s a mathematical inevitability as services are drawn from the installed base. The mix change has been fairly linear, but accelerated somewhat because of the slowdown,’ he said.

As income slows from licence revenues, PeopleSoft is investigating new revenue sources, such as hiring out its applications over the Web and forming outsourcing alliances with the likes of PricewaterhouseCoopers.

‘Outsourcing is a great business for us,’ said Codd. ‘Instead of an upfront licence fee and maintenance, we get a much larger annuity.

Building up annuity revenues means we don’t have to sign a big deal to make a good quarter.’

With the share price dropping from over $50 earlier in the year and recovering to the low-20s last week, analysts were concerned about the impact on share options, a vital ingredient in Silicon Valley compensation packages.

‘Most of our executives have been around for a long time and a lot of our options have been vested,’ he said. ‘We’ve got one major grant underwater, which we did at $46 in April, but we have more options in our pool which we can do at the new price.’

Codd’s conservatism can be gauged by the $750m cash mountain PeopleSoft has amassed. Codd is described by his CEO Dave Duffield as a ‘CFO who likes cash’. Rather than splashing it out on acquisitions, he has convinced the board to keep it aside in case the economy worsens. Although the cash could be particularly useful while other companies’ share prices are depressed to grow PeopleSoft’s market share or to colonise vertical markets through acquisition, Codd argued they would come with baggage in the shape of ‘sizeable goodwill charges’.

He added that the company was evaluating a couple of prospects. ‘In spite of the fall in its price, our currency isn’t much different. We have the ability to make acquisitions with stock and our firepower is unchanged.’

Because of the industry’s sensitivity to Wall Street, the CFO needs to be adept at PR. Codd even managed to turn a general report on administration into a sales pitch. ‘We run a very mean organisation and keep our general and administrative costs to around 4% to 5% of revenues. How do we do it? We are very aggressive and ambitious users of our own products.’

MULTIMEDIA MEETS ERP

The Moscone Centre is a giant underground bunker carved into the SoMa (South of Market Street) district of San Francisco – home of the city’s burgeoning multimedia industry. It was an appropriate setting for PeopleSoft to announce a new electronic business initiative.

The company is treating ‘eBusiness’ as an Internet start-up. Project leader Baer Tierkel said his team of 35 programmers has set up in a garage – actually the fifth floor of an office at PeopleSoft’s headquarters in Pleasanton, CA. They have been given the freedom to create a new business paradigm without being held back by normal administrative constraints.

From demonstrations in San Francisco, it is apparent PeopleSoft has borrowed from the ideas and practice of SoMa digital designers and grafted them on the company’s business software.

The PeopleSoft Business Network is a Web-based ‘portal’ that it hopes will bring together an online community of 25 million people.

The ‘PSBN’ will be unveiled early in 1999 and will be accessed by pre-configured browsers that present accounts managers, supervisors and HR staff with automated ‘To Do’ and news lists, plus graphical ‘dashboards’ showing important measures, for example how much of their budget has been spent to date.

Once it completes the PSBN interface, PeopleSoft is planning to recruit merchants who would be able to sell their products to the online community.

The initiative is likely to move the company into a new arena, more akin to online publishing and financial services, where it would collect fees for transactions carried out over its network. According to CFO Ron Codd, ‘We’re building on the foundation of ERP and enhancing our business, not throwing out the old model.’ Like the Select rapid implementation service and other innovations, PSBN will be tested and refined in the US before being offered internationally.

PeopleSoft CEO Dave Duffield said: ‘I’m counting on enormous revenues from it.’ If the garage-style start-up takes off, the electronic business group will become an autonomous division, or PeopleSoft might consider floating it off, he added.