Sell PSFT
The surprise news this morning: PSFT is buying JDEC. On the
surface, it makes some sense. The products and customer bases
are somewhat complementary. But the odds are against PSFT.
The price was high, and the the cost of integrating
these two companies will probably be
too high.
First Thoughts
We all know the old saw: there's no such thing
as a bad deal, just a bad price. So what line going
forward justifies $1.6
billion?
Here's one line. PSFT has hit the limits
for what is essentially
a very large niche product.
With the purchase, it gets access to a customer
base that had largely eluded it: mid-size, manufacturing-oriented
companies. It will sell HR (and financials?) into
these new customers and gradually integrate
the two code bases. In the short-term, JDEC continues
forward, but PSFT's
leadership and marketing know-how help the company, which has been
sorely lacking in these areas.
This is a good deal if it boosts PeopleSoft product sales and allows
some infrastructure leverage.
Here's another line. Eviscerate JDEC. Put the product
and customer base into maintenance mode as quickly as possible.
Add the good parts of JDEC to the PSFT code base. Build
migration tools. Then let the JDEC customer base gradually convert
to PSFT. This is a good deal a) if you can drop costs
quickly and cleanly and b) if you can create an
attractive migration product.
I wish both companies well, but I don't see it. Either idea is
superficialy attractive (the latter one is probably
more practical over the short term). But when you
look deeper, the water gets murkier. I wish both
companies well (and for that reason hope they decide
on the first), but I don't see them working it out.
The problem is two-fold. First, the superficial
complementarity may be an artifact of oversimplification.
Second, even if the complementarity were there, the
execution problems are so enormous that you have
to bet against them on general principles.
Complementary?
The current market characterization of JDEC--a mid-market
manufacturing product--is more an artifact of marketing
than an accurate description. JDEC actually got its
start with strong mid-market financials in the energy
industries. With industrial products, it has a good,
not great product, with real strength in many niche
areas (beverages, construction, real estate,
process industry planning).
JDEC didn't play well in the top tier players for
several reasons. Most important, it didn't sell
effectively there. Far less important: certain
design decisions effectively limited them from
serving highly complex, centrally
organized companies.
Their basic appeal historically was to conservative
companies that didn't want to invest a lot
in software. They were a trustworthy provider of software
with a real commitment to getting the software in and
working. (For many years, salespeople were not compensated
until the product went live, which may be one reason why
top-flight salespeople went elsewhere.)
Another way of describing it is to say that their
customer base was the AS/400 customer, the customer
who wanted a product that could be put in and run without
a lot of management overhead.
Most of what's good about the JDEC product and about
the JDEC company comes out of this focus on these customers.
From a sheer functionality point of view, especially today,
there's not much edge. But there's a lot of ability
to put things together in a fairly simple and straightforward
way. As I said in an earlier piece, it's software that a guy
like Guido, who would be a bicycle mechanic in an earlier life,
just loves.
Particularly important to an understanding of this point
is that the integrated financials work pretty well with
the rest of the system. You buy this system partly because
the fairly rough and ready financial modules do provide the
reporting and control that you need when you're managing
operations.
Look back at this description. Where is the complementarity?
Well, JDEC has always had an HR module that wasn't exactly to
die for. But customers who wanted PSFT could always have bought
PSFT HR. Most don't need much from HR, so they used JDEC.
What about manufacturing, inventory control, purchasing, and
sales? Well, it turns out that the current modules in PSFT
are roughly comparable to those in JDEC. They don't have as
much practical experience built into them, but they're not
too bad.
Why, then, does JDEC appeal more to small(er) companies that want a
practical solution. Yes, there are any number of
design details that favor JDEC. But there's also the company
history and culture: its commitment to customers, its
reliability (really), its white-tie, nice-guy image. And
all that appeal disappears unless JDEC is maintained as
a separate operating division and code base.
Bottom line. I don't think a lot of JDEC customers will be
celebrating because now they can have PSFT's great interface
and 110% Internet architecture. I think they'll be worried,
because a partner they've stuck with through thick and thicker
is finally disappearing. And they'll be right.
For a while, PSFT will be able to exploit the idea of
complementarity, because it sounds plausible. They've
certainly made a lot of hay with some very meager ideas
in the recent past. But at some point or another,
reality has to push its way forward. And it's at that
point where I foresee problems.
Merging the Companies
So what if (perish the thought) I'm wrong. What if there
is an intrinsic complementarity that I'm missing. PSFT
still has to execute.
Their record in this area has historically been deplorable.
Does anybody remember Intrepid? Red Pepper? These
are companies for which PSFT grossly overpaid, and they
sank like a stone in that wonderful California, PSFT
culture.
Of course this is the new PSFT, whose president wears ties.
The recent purchase of Vantive under his aegis has been somewhat more
successful. But note and note duly that when PSFT bought
Vantive and rewrote it in PeopleTools that they only
rewrote about 60% of the product and thereby left a good
part of the customer base behind. Not what you want
to do here.
Put the past aside, for a moment. PSFT is clearly
capable of learning, if not from Vantive, then
from a relatively successful merger like HP/Compaq.
So what do they have to do right this time?
You can think of software companies as a huge
infrastructure
that's trailing behind a code base. To get leverage,
PSFT seems to
have two basic choices: integrate the code base, then
pull the infrastructure in behind it or integrate the
companies, but keep two separate code bases.
They'll have to tell us which it is going to be, but either is a
big gamble.
The first option, integrating the code
bases, is the more likely one. But it's a
nightmare. What do you do? Again, two choices.
Rewrite the underlying
application in People Tools, but keep the functionality? Then,
you've got the same old code base, expensively rewritten.
Do a merge and purge? (Where functionalities overlap,
pick the best?) Now you've got a huge upgrade problem
for both installed bases.
Whichever way you integrate, you've still got
to preserve some kind of revenue stream. But
any integration strategy you choose will
be throwing chum in the water
for Oracle and SAP. Whatever happens, it won't
happen quickly (these code bases are big!).
And in the meantime, the bad guys are
sowing fear, uncertainty and doubt. And you
know what, they'll be right.
Yes, you can justify some of that $1.6 billion
by selling hard into the JDEC installed base
and keeping maintenance up. But while you do that,
you need to keep the infrastructure. So you effectively
keep the costs the same, incur new costs of integration,
and reduce revenues.
So what if you keep the two separate code bases for the
foreseeable future, but try to combine the organizations.
Okay. But you'll have to accept considerable short-term
disruption. (Remember, all those people in the JDEC
infrastructure are doing something.)
And if, in the desire to keep financial
performance even semi-plausibe, you short-circuit things,
you really run some risks. For my money, a lot of
the problem may end up being cultural. The JDEC customer
is not the PSFT customer, and it's not clear that
suddenly handing them people brought up in the PSFT
culture will have the salubrious effect that I fear
Conway thinks it will have.
I'm not in love, for instance, with the rather plodding JDEC
marketing group--corporate marketing is by the numbers
and product marketing needs a strategic vision that
has been entirely lacking since Travis White left--but
I fear that the rather light, feel-good
PSFT marketing corps could easily tick Guido off.
These guys who build valves in the English Midlands or
run big construction jobs in Louisiana
don't have a lot of patience with guff.
Yes, there is much that could be done with that JDEC
organization, much fat to be trimmed, more buns to be
prodded podiacally. But it will take a very deft hand, one
with real understanding of JDEC, to cut the right things
and kick the right bedoingies.
Well, we'll all have to see. If you're betting, you
have to bet against them: hence the title. Most mergers don't
work anyway; the complementarity just isn't all that
clear; the price is high. But they are both companies
that I wish the very best for. Both have treated me
very well, in circumstances where they have clearly been
tempted to do otherwise. Both have returned real value
to customers for a long time. Let's hope that the
merger enables them both to continue doing so.
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