From Merger to Acquisition
JD Edwards fades away.
Prologue
Some weeks ago, a JD Edwards account executive whom I've known
for many years called.
"I'm with a new company."
"Huh? Did they can you?."
"No. I'd decided to go in January. Every year
we make less money in sales, here; it was time.
"OK. But did it get better after the merger?"
"Worse. No question. I'll give you an example.
I had a lead, perfect JD Edwards. 1200 seats; a new
CIO, who knew a fair amount about JD Edwards."
"Sounds good. Why didn't you wait to make the sale before
jumping?"
The PeopleSoft guys took it away from me. The CIO wanted
JD Edwards, but it became a PeopleSoft sale. I could
have fought them, but why bother. I'm happier where I am.
PeopleSoft Analyst Day
At a moderately well-attended analyst day in New York yesterday,
PeopleSoft had the courage to set the bar high. In a very unusual,
but quite appropriate move, they gave guidance on all key figures
for Q3 and Q4, 2003 and all of 2004.
At the end of 2004, they plan on having $2.8 billion to $2.9 billion
in revenue, an operating margin of 17%, and pro forma EPS of $.90-.95,
(minus some acquisition costs). The revenue numbers assume 5% growth in the
revenues of the core businesses (PSFT and JDEC), plus another $30-40 million
in cross-selling opportunities. The margin comes from some $167-200 million
cost savings coming from running one company, rather than two.
They will have spent roughly $2 billion to achieve this.
The JD Edwards products will become two more product "pillars" within
the PeopleSoft organization. Each will have a general manager, who
is responsible for the product, product development, and marketing.
The old OneWorld product, now named PeopleSoft
Enterprise One, will be run by Les Wyatt. The old World product, now named
PeopleSoft World, will be run by Dave Siebert. The sales and consulting
organizations will be folded into the PeopleSoft sales and consulting organizations.
Like the five current PeopleSoft pillar general managers, the two new general managers
will report to Ram Gupta. Bob Dutkowsky will stay on for a while to
help.
In June, when this deal was announced, it was described as a merger of
equals that leaves both stronger than before. Yesterday, the language had
changed. The deal had become an "acquisition."
If PeopleSoft succeeds in meeting these goals, it will be (reasonably)
good for PeopleSoft shareholders (who are currently benefitting from
price supports, courtesy of Oracle). It will be neutral to slightly negative
for PeopleSoft customers. And it will be bad for JD Edwards customers, though
perhaps not much worse than it would have been had JD Edwards continued
down the slow path of destruction that it was following.
Over time, apparently, PeopleSoft will do to the JD Edwards product
line what Oracle ought to do to PeopleSoft if that acquisition goes
through: it will sunset the product(s), but in a slow and reasonably
humane way. (In fact, Oracle should watch and take notes, since
PeopleSoft's approach is both a model of public relations and quite
pragmatic.) Look for gradually slowing innovation in the JD Edwards
product line, gradually increasing prices, and the gradual promulgation
of PeopleSoft Enterprise as the preferred product for more and more
customers.
The Road Map
Is PeopleSoft likely to make their numbers? No. But I still think
it's an excellent strategy. First of all, it's good internal strategy;
it gives people a clear goal and a chance to be a hero if you make
the goal. For the next year, everyone at PeopleSoft/JD Edwards will
be as motivated as football players at the beginning of training
camp. Second, there's always a chance that a rising tide will simply
lift the boats. If the applications market suddenly starts to grow
once again, the numbers will be relatively easy. Will this happen?
Well, we're seeing a new round of government spending on applications,
for instance, that should allow everyone to meet their quarter in
the US. Third, there's always some chance that a large, complex
plan will actually work out. In most battles, for instance, the
plan is waste paper as soon as the battle starts, but sometimes,
it actually turns out the way you think it will.
What of this plan? Well, if you're going to rise in any organization,
you've got to have the ability to shut your eyes and hope. Yes, there
may be some obvious, even fatal problems looming, but if you get
deterred by those, management is not likely to keep you around. There
are a lot of elements to this plan, and each one seems to have one
or two obvious flaws that I would consider fatal. But who am I to say?
Here are some examples:
Consulting. Much was made of
the opportunity to improve the JD Edwards consulting group, using
the strategies that turned around PeopleSoft's consulting. PeopleSoft
now has, according to PeopleSoft, the highest utilization rate and
the highest consulting fees in the industry, whereas JD Edwards'
numbers, it was said, are more like PeopleSoft's three years ago.
And there is room for improvement. PeopleSoft rightly points out that
the JD Edwards consulting group was focused on new business, did not
do much upgrade work, and did not make sure that at least some JD
Edwards people were assigned to every implementation. But according
to the figures I got at Focus, the utilization numbers are not actually
well below PeopleSoft's; they are roughly
comparable, at least in the US. The real problem at JD Edwards consulting
is that consulting rates for JD Edwards have dropped
precipitously. As far as the upgrade business is concerned, a) if you're
already well utilized, you don't necessarily want that busienss and b)
for historical reasons,
there is nowhere near as much upgrade business with JD Edwards as there is
with PeopleSoft.
It appears, therefore, that it would be quite difficult to get significant
new margin from consulting by applying PeopleSoft's management techniques. What
you'd really have to do is increase demand for JD Edwards consulting, so
that you can get premium rates. Possible? Perhaps, but not for a product
line whose future is dim.
Go to Market. PeopleSoft says
that it will be able to grow both product lines (it's actually three,
but don't tell anybody) while increasing margin. It will do this
by increasing the span of control of managers and by giving salespeople
more products to sell. JD Edwards and PeopleSoft salespeople will
sell all available products, but continue to be assigned their natural
customers. JD Edwards will be sold to mid-market, asset-intensive
(it used to be manufacturing) customers, and PeopleSoft will be
sold to large customers. There will also be cross-selling opportunities.
Well, OK. If there is very little overlap between the product lines, and
the needs of any customer are clearly filled by one product or the other,
maybe the increased number of leads brought by being #2 will
allow significant growth. But if there is overlap, there will be
cannibalization (as we saw in the story above), and if there is cannibalization,
four things will happen: customers will pay more, customer satisfaction will go
down, sales forces will get more unmanageable, and close rates will
suffer.
In my experience, and I have plenty of it, there are many situations where
either PeopleSoft or JD Edwards could be the best solution for a company,
and getting to the right answer requires hard work, not the "algorithm"
that PeopleSoft uses. Under the road map, PeopleSoft
will make that decision for its potential customers. This is
a positive disservice to the customer. Most of the time, the
"right" answer will be the one that makes the most money for PeopleSoft and
the PeopleSoft salesperson, and not the one that returns the most value to the
customer.
Cross-Selling. The plan calls
for a rather moderate increase of $30 million from cross-selling
opportunities. This is about 20 fair-sized deals a quarter, not
too bad.
The question, of course, is what you cross-sell? Here, PeopleSoft
doesn't seem to be on very firm ground. The plan is now to integrate
the unique products from one product line with the other product line.
The example "demo'ed" was PeopleSoft's "industry-leading" (NOT!) SRM product
with JD Edwards' procurement. The full list included the aforementioned
real estate module, plant maufacturing, advanced planning, and EAM. The best
of these products, by far, and the most integratable, is the JD Edwards
planning product, but little mention was made of it.
Well, with that lineup, you can see why the number is so modest.
With each one of these products, more than a little effort will
be required before you can sell it with any consistency or regularity
into the "other" product line. The JDE real estate module, for instance, used
to be designed for real estate management companies (I haven't seen
the new version) and was tightly integrated with the rest of JD Edwards
financials. Not something you sell, as PeopleSoft said, into
corporations that have PeopleSoft HR and, because they have
employees, also have to manage real estate. Facilities management
software is a different beast altogether.
What Is Likely to Happen
One of the few "laws" of economics that really seems to work is something
called Gresham's Law, "Bad currency drives out good." From the point
of view of the JD Edwards customer, Gresham's Law almost certainly will
operate. The bad currency is PeopleSoft, an application and a company
that are very good, but not a great fit for their needs and a price
that is not exactly mid-market.
However sincere PeopleSoft is about keeping and even growing the two
JD Edwards product lines, when push comes to shove, it will be PeopleSoft
first, JD Edwards second. The JD Edwards product lines will be treated
as a cash cow, grown just enough to satisfy customers who have committed
to them, and left to decay.
You saw this at the cocktail party after the analyst day. There was
the thinly veiled disdain for JD Edwards' management style. ("Craig
is a good manager and will find ways to make them work just a bit harder.")
There was the occasional blurring of nominal lines of responsibility
when a general manager talked about some piece of JD Edwards functionality.
You saw this, too, in the demotion of JD Edwards within the organizational
hierarchy; what had been a full-service suite with its own financials,
HR, etc., is now a product line, like PeopleSoft's financials or
PeopleSoft's HR.
You also saw it (no offense, Les) in the appointment of Les Wyatt
as the head of the pillar. Les has had his effect at JD Edwards
and is a logical choice. But he is not by experience or
temperament an ERP guy; he will not be a person whose vision
drives the JD Edwards product line onward. You saw it, too,
in the general assumption that there will be no JD Edwards
user conference (borne out by a quick scan of the promised savings).
I will be interested to see what the reaction of JD Edwards' independent
user group will be when they find this out.
Personally, I shed a tear for a company and product I used to like very much.
But objectively, it's probably the best thing that can happen. JD Edwards
is now an aging product; the people who gave it life and sustained its
vision are now gone, gone mostly because their performance was inadequate.
At my age (52), you can't
criticize too much when someone settles into a comfortable and active
retirement.
Making the Most of It
The challenge for PeopleSoft is to make the most of the JD Edwards product
lines that they've acquired. So far, they're doing OK, particularly in
the public relations end of things. Remember, they don't have to grow
by growing that JD Edwards product line. All they have to do is mine
the lead stream and sell a lot of PeopleSoft to people who thought they
wanted JD Edwards. If the market were
rational, as I've noted above, it will be hard, since
for many JD Edwards customers, PeopleSoft is not only a more expensive
solution, but one that delivers less value.
At the same time, those potential customers don't have many alternatives.
The objections to SAP and Oracle are the same as to PeopleSoft (though
Oracle and SAP have a better fit with core JD Edwards customers).
Will be turn more to Baan (in Europe), SSA, and QAD? Perhaps. Or
maybe they will simply accept the fact that the number of options
have shrunk and make the best of it.
Certainly, PeopleSoft will have to challenge them as much as they
can. Expect to see a change in the JD Edwards pricing structure
to the PeopleSoft model and expect to see that used as an excuse
to raise prices. PeopleSoft succeeded in raising its maintenance
prices a few years ago; why not follow such a good lead with JD
Edwards.
So far, the JD Edwards customer base has been cautiously optimistic.
There will be unhappiness when they figure out what is happening.
But what are they going to do?
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