PeopleSoft: No More a Humble Kid From a Rough Neighborhood?

PeopleSoft: No More a Humble Kid From a Rough Neighborhood?
P.J. Jakovljevic - September 5, 2000

Event Summary

As reported on a number of IT News Web sites during mid August, PeopleSoft Inc., a leading provider of business applications, has eliminated nearly 70% of outside consulting firms from its preferred-provider list in the past year and is instituting a new certification program for nearly 12,000 individual consultants because of customers complaints about bad service and improper handling of software installation and configuration. The company officials said only 34 of 96 firms remain on the vendor's preferred-partner list. PeopleSoft will require better training for individually certified third-party consultants beginning in October.

In addition, the vendor has bolstered its consulting division, PeopleSoft Consulting, to focus on helping customers deploy e-business systems. PeopleSoft Consulting's own 2,600 consultants currently handle only about 10% of all new business, but the staff will more than double to increase its share to 20% by year's end. In the past, PeopleSoft, Pleasanton, Calif., primarily relied on third-party consulting firms to implement and support its products. Apparently, the new e-business focus is prompted by the recent release of online PeopleSoft 8.

Earlier, on July 20, PeopleSoft Inc. announced its financial results for the second quarter ended June 30, 2000. Revenues, net income and net income per share from recurring operations for the second quarter of 2000 were $420.2 million, $15.9 million and $0.06, respectively. This compares with revenues, net income and net income per share from recurring operations of $360.7 million, $1.6 million and $0.01, respectively, for the second quarter of 1999 (See Figure 1).

Figure 1.

Revenues from software license fees for the second quarter of 2000 increased to $109.8 million, a 37% increase from the same quarter last year. PeopleSoft experienced significant growth compared with the same quarter last year in Human Resource Management and Financial applications - up 38%, and Supply Chain Management applications - up 44%. Customer Relationship Management (CRM) applications emerged as PeopleSoft's largest license revenue product line in the quarter. License revenues increased in all major geographic regions, with the United States growing 49% and International growing 31% assuming constant currency exchange rates.

Expenses were $404.0 million for the second quarter of 2000, compared with $365.7 million in the same quarter last year. The increases were primarily in product development, cost of development services and sales and marketing. Development costs increased due to the continuing costs associated with completing the development of PeopleSoft 8, the company's pure-Internet suite of eBusiness applications that was publicly launched at the beginning of July 2000. Sales and marketing expenses increased as the company invested in additional sales personnel and marketing campaigns to drive PeopleSoft 8.

"Demand for PeopleSoft was strong across every product line and geography," said PeopleSoft President and Chief Executive Officer Craig Conway. "It is a major milestone that license revenue exceeded the $100 million mark for the first time since 1998. This is especially significant coming in the quarter prior to the launch of PeopleSoft 8. This quarter marks the transformation of PeopleSoft to an eBusiness company. With the launch of PeopleSoft 8 in the third quarter, PeopleSoft expects to be a dominant competitor in the eBusiness applications market."

"In the last quarter we have dramatically increased our market position and visibility," said Executive Vice President of Worldwide Marketing and Strategy Baer Tierkel. "We are excited with the overwhelmingly positive initial reviews of PeopleSoft 8, our new pure Internet suite of eBusiness applications. In order to maximize the revenue opportunity presented by PeopleSoft 8, we are rapidly adding field sales resources and have launched the largest marketing campaign in PeopleSoft's history."

Earlier, on July 11, in a speech full of criticism of its rivals, PeopleSoft's CEO Craig Conway unveiled its latest product release, PeopleSoft 8, and gave an upbeat outlook for, until recently, the struggling company. He touted that PeopleSoft is well positioned with its new software to take on market leaders SAP and Oracle. PeopleSoft has traditionally been renowned for its congenial corporate culture as opposed to the swashbuckling ways of Oracle or the uptight rigor of SAP. Therefore, one can only picture the audience's astonishment when Conway took the stand and actually started lambasting the opposition in an uncharacteristically strident tone.

"Oracle has become a sociopathic company. It blatantly lies about things. Larry Ellison is maniacal," Conway roared. "In 1990, Dun & Bradstreet Software had 13,000 customers. Where is it now? By the way, SAP has about 13,000 customers too... We live in a tough neighborhood. Oracle spends 11% of its revenue on marketing. In 1999 we only spent 3.5% of our revenue on marketing. That will change. We have to be combative, confrontational, and competitive in our marketing and advertising from now on."

Market Impact

PeopleSoft has turned the corner. While most of its competitors have been faltering during the recent turbulent times, with the exception of Oracle and possibly SAP, PeopleSoft has returned to strong profits and revenue. The bleak days of 1999 and the possibility of being toppled by J.D. Edwards are a matter of the remote past.

The company has also improved its traditionally low international market penetration, with the international license revenue growing 31% year over year. Furthermore, these upbeat results coincide with the winding down of its ambitious R&D endeavors. PeopleSoft invested an exorbitant 27% of total revenue in R&D. That investment is paying off with new product releases that indicate the company is in sync with market trends.

We believe that PeopleSoft may also be in a good position to be a strong contender in a number of industries. While this may not be the case in complex manufacturing until the market witnesses the proven capabilities of its forthcoming PeopleSoft 8 release, it certainly can compete in traditional service industries with its human resources, financial, and recently added CRM and e-business modules. It may also compete in distribution industries like Consumer Packaged Goods (CPG) with its supply chain and logistics functionality resulting from the 1996 Red Pepper acquisition.

While PeopleSoft has so far poorly exploited its purchase of Red Pepper, its new tack of addressing manufacturers' needs may result in far greater success. Namely, PeopleSoft has focused its manufacturing solutions on only consumer packaged goods, high tech/electronics, and wholesale distribution industries. It already has a strong customer base within these industries, primarily with its financial and human resource management systems, but also to a degree with its manufacturing and supply chain modules.

Nevertheless, PeopleSoft faces a number of notable challenges. Despite an impressive growth of license revenue in the last quarter, things do not appear to be quite rosy after a more prodding look. Namely, Vantive products have been the major license revenue contributor (~26%), which means that PeopleSoft traditional breadwinners' (HR and financial systems) revenues have grown much below the ERP market average growth rate, year over year. Moreover, the overwhelming impression is that Vantive has not been utilized to its full potential either despite the fact that the CRM market has been experiencing stellar annual growth. While PeopleSoft now has strong management with an invigorated stance and is running a profitable business, it may be short-lived without sustaining license revenue. The company has a reputation of squandering very promising acquisitions away - the Red Pepper being one. A similar slip-up with Vantive could be disastrous, particularly since CRM, a main driver of the new economy, gives PeopleSoft a golden opportunity.

The company's biggest challenge, without doubt, lies in creating marketing awareness, promoting its new image, products, and the Web architecture as well as in crisp sales execution. While PeopleSoft has more than tripled its marketing budgets and is on the quest to beef up and focus its sales organization, a poor market acceptance of PeopleSoft 8 could be very detrimental to the company's future. We are afraid that betting mainly on enterprise performance management (EPM) analytics and new product architecture, on top of its embellished traditional product offering, will not suffice in the long run. While the number of additionally released applications is impressive, the product portfolio still shows serious functional holes, particularly in its proverbial bogey areas like manufacturing and supply chain management, where its competitive position is not going to improve dramatically very soon.

As for its new image, some might concur that when Larry Ellison ordered private detectives to forage in his competitors' dustbins, PeopleSoft had no choice but to play it tough to survive. While the new stance may initially impress some, how attractive and plausible would be a movie story where Tom Hanks or Michael J. Fox would portray a tough guy winning over bullying characters like Nicolas Cage or Bruce Willis? Nevertheless, all of them may still be eligible for Oscar nomination playing the roles that completely suit them.

Therefore, PeopleSoft should rather focus on delivering PeopleSoft 8 on time, adhering to stringent training of its sales and customer support forces, and on preempting any dissatisfaction of early adopters and subsequent bad publicity. To that end, we approve the company's move to radically improve its customer service & support. The ERP market has traditionally been plagued by a number of dodgy consulting practices or third-party system integrators. Sifting through its partner program and enforcing much tighter control over awarding certifications is definitely a right move, although somewhat belated in PeopleSoft's case.

User Recommendations

Existing PeopleSoft customers should certainly consider the new offering, but avoid selecting it without looking at what the other vendors have to offer. We recommend identifying your clear e-business strategy and conducting a thorough comparison-shopping, at least for the negotiation leverage sake. Contact a PeopleSoft sales representative for more information on PeopleSoft 8 and request a list of recent customers and ask them about the product. Existing users of PeopleSoft client/server-based products may want to inquire about PeopleSoft's future product support and/or migration strategy. Beware of the potentially hidden costs of a migration, particularly for heavily customized installations.

As for potential customers, PeopleSoft remains a very strong contender in enterprise application selection processes within the following industries: utilities, healthcare, service providers, financial institutions, public sector, insurance, higher education and consumer packaged goods. It should be on a short list in any selection where HRMS system, financial modules, and e-business/self-service are the main pillars of an enterprise application. However, since the company has been touting the significant manufacturing and supply chain product enhancements within its new release, which is due later this year, current and potential users are advised to inform themselves about these, particularly in the above-mentioned industries.

Furthermore, companies in other industries may benefit from evaluating PeopleSoft's product components on a stand-alone basis for their e-business needs and leverage that information against other vendors in the selection. Organizations considering extended ERP applications (both web based and network dependent) should consider all options, although PeopleSoft's activities are promising. The notion of a full Internet based solution could save time and money on the integration. An additional consideration might be the complete outsourcing of the ERP application with an Application Service Provider (ASP). Future clients are also advised to request the company's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for recently announced offerings.

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