Wednesday, April 20, 2005

Siebel: Up the Creek Without a Paddle

On April 13, Siebel Systems, a leading provider of customer relationship management (CRM) software that automates the sales and customer-service operations of large corporations, announced the resignation of its CEO, Michael Lawrie. Previously the head of global sales at IBM, Lawrie had been at Siebel for approximately eleven months. George Shaheen, a ten-year member of Siebel’s board, best known as the former CEO of consulting giant Accenture and the one-time head of the now-defunct online grocer Webvan, replaced the deposed CEO.

"After a comprehensive review of the company's operations and performance, the board determined a change was necessary," Siebel said in a conference call. "The board and Mike spoke and mutually agreed he should step down."

While the company was clearly struggling, few could have expected that Lawrie would be given less than a year to right the company. About a week earlier, Siebel had pre-announced that 1Q05 sales would miss expectations by 12%. Further, analysts had expected some shakeup among the management ranks after Lawrie attributed a substantial portion of the shortfall to poor execution.

"We knew a change was coming because Siebel missed its numbers so grossly," said Yankee Group analyst Sheryl Kingstone. "But I was shocked to hear that Lawrie was stepping down." Despite the fact that Wall Street no longer has the patience for long-term strategies to play out, she added, it was surprising that Lawrie is departing, rather than another executive. "To be honest, I would have thought it would be the head of sales that would go," said Kingstone. "They missed their numbers because deals didn't close, and they didn't forecast properly."

Siebel, which pioneered the market for CRM software, has seen its fortunes turn south since peaking in 2000: sales are off by more than 38%, and, even more indicative of the problems at the company, sales of licenses are off an incredible 79% since peaking in 4Q01. The company has offset some of the decline by eliminating thousands of jobs and paring its payroll down to approximately 5,000 employees. Despite the cutbacks, Siebel has lost a total of $128M over the past two years.

The new CEO will have little time to placate investors. During the call, analysts quickly expressed impatience with Shaheen’s unwillingness to detail the concrete changes he plans to make at the company. Expressing frustration at the lack of specifics provided, one analyst even commented that Siebel's stock had dropped $0.21 during the twenty minutes Shaheen had been talking.

In a recent Investor’s Business Daily article, Jamie Friedman of Fulcrum Global Partners said, "My initial reaction was that they went from the fireplace into the fire…This guy [Shaheen] is at least as [bad] as the prior guy." Unfortunately for Siebel, this sentiment appears to be shared by most industry analysts. Observers remark that Siebel’s strategy has been, and remains, far from clear.

To its credit, Siebel does indeed possess a strong product offering and large market share. However, the company has come under increasing competitive pressure over the past several years. Couple this with the continued sluggish technology spending environment, and it readily becomes apparent that Siebel is a troubled company.

So is the problem merely poor execution, or are there deeper strategic issues involved? The answer is unclear, although we would guess that it is a combination of both. Whatever the cause, Siebel’s poor performance and lack of leadership continuity have opened the door to several possible actions by its competitors e.g., larger software companies such as SAP, Oracle (PeopleSoft), and Microsoft.

Ostensibly, Siebel’s competitors have three options: pursue an acquisition of the beleaguered software company; do nothing and hope that Siebel will fail on its own; or aggressively attack Siebel’s existing customer base by exploiting its organizational unrest, the commensurate apprehension likely shared by many of Siebel’s current clients, and its failures in execution.

Regarding the rumored potential acquisition of Siebel, SAP CEO Henning Kagermann states that SAP, which is approximately ten-times larger than Siebel in terms of market capitalization, has no desire to acquire the company, citing significant overlap with SAP’s current offerings. However, according to TheDeal.com, SAP’s assertion that a merger does not make sense on the grounds of overlapping products is likely untrue: the two companies don’t really compete head-to-head because SAP’s customers are primarily in the manufacturing sector whereas Siebel’s focus has been in service-related industries.
However, given that the Company’s founder, Tom Siebel, is still actively involved in the business – and has a lot of sweat equity and ego tied-up in the Company – it seems unlikely that Siebel will actively court a suitor. Citing the $2.2 billion of cash on Siebel’s balance sheet, some industry analysts have speculated that Siebel would make an attractive buyout target.

Competitors already appear to be taking advantage of Siebel’s financial and strategic woes. "We are gaining market share," says Kagermann. While Siebel is under pressure to improve profitability, SAP is increasing its investments in the CRM segment, and is gaining success with selling its CRM software to its existing customers. Over the past several years, Siebel has struggled though difficult implementations of its CRM products and has had a tough time competing in emerging, competitive segments such as business intelligence and hosted applications.

Given Siebel’s concerted efforts to push into more competitive segments of the industry (in large part by extending its products to include Web-based versions of its software), and Tom Siebel’s likely apprehension over courting a deal, SAP/Oracle/Microsoft’s most effective strategy is to forgo an acquisition and the resource drain associated with pursuing a hostile takeover, and instead target customers in Siebel’s segments for poaching. Although these customers likely have high switching costs, SAP/Oracle/Microsoft may be able to introduce uncertainty into the purchase decision: customers are more likely to switch if they think that Siebel is on an inevitable downward trajectory. After all, more than one analyst has posited that the new Siebel CEO may find that he is presiding over a “…slow and steady decline.”

Given the recently reported operational and managerial woes at Siebel, it appears that the company is indeed “up the creek without a paddle.” Regardless of what strategies competitors decide to pursue, they will likely come at a cost to the once-high-flying pioneer of CRM; observers can only hope that Siebel employees and shareholders know how to swim.

By: Michael Barzyk, Paul Jan, and David Yong

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