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Denver, Colorado


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.


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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