Nortel and Clarify: Was There Ever Synergy Enough to Support this Marriage?

The Nortel and Clarify Marriage   

On October 18, 1999, Nortel Networks, proclaimed that it was entering into a definitive merger agreement with the CRM vendor Clarify Inc., at the time the world's second largest provider of "front office [read: "CRM"] solutions for eBusiness." Nortel was buying all the common shares of Clarify for US$2.1 billion in its common shares. The deal closed on March 16, 2000.

Clarify, in 1998, reported revenues of $130 million and net income of $7.3 million. In the third quarter of 1999, the last quarter that Clarify independently reported its financials, it reported $63 million in revenues and net income of $5.9 million, with net assets of $98 million.

At the time of the acquisition, my colleagues and I were scratching our heads in disbelief and confusion. $2.1 billion seemed an outrageous price to pay for a company doing $250 million in revenues and net income of a miserly $5.9 million, but we must remember the timing. In 1999, there were many billion-dollar payments for million dollar companies by large companies seemingly frantic to grab that piece of e-Business technology they didn't have and believed they needed to have to compete in the dot-com world and in an effort to "grab the land" before it was gone. What about the corporate strategy for acquiring a CRM vendor? The best that we could come up with was that Nortel expected to be able to bundle Clarify's CRM Call Center and eBusiness functionality with Nortel's telephony and access technologies to provide hardware and software bundles to small and medium size enterprises looking for one-stop shopping.

This view was supported by reading part of a May 20, 2000 announcement, which focused on Nortel and SAP's agreement to use Clarify technology in SAP's mySAP.com offering (more on that below). In the footer section of the press release, Nortel stated:

"The Nortel Networks Clarify eBusiness Applications unit is ushering in the second wave of eBusiness, delivering complete solutions that leverage the high-performance Optical Internet, CRM and multimedia contact centers to enable seamless, personalized customer experiences. Current offerings include Clarify eFrontOffice, Periphonics' leading speech recognition technologies, and Nortel Networks' contact center solutions, providing companies with a single view of all aspects of the customer life cycle."

OK, sounds plausible, but was Nortel delivering on that vision?

The Discarded Housewife   

Though it may have been Nortel's intent to give at least some emphasis to its vision of delivering complete contact center solutions, its actions since the Clarify acquisition don't bear this out. Nortel went on to make several additional acquisitions, including Otera (optical networking systems) in January of 2000, CoreTek (optical components maker) in March of 2000, Architel (IP services) in April of 2000, Xros (photonic switching) in June of 2000, Epicon (ASP distribution software) and CoreTek (tunable laser for the optical market) in June of 2000, Alteon WebSystems (content-aware switching) in July of 2000, and Sonoma Systems (high speed integrated communications) in October of 2000.

Nortel, even as recently as February of this year, laid down $3 billion for a unit of JDS Uniphase involved in optical networking. Nortel's core business was in server switches, voice services, IP, Optical networking, Wireless technologies, and ATM devices. There were no significant integration efforts conducted between Nortel technologies and Clarify, and very little interesting news in the Press. Among the slim pickings:

• Nortel did announce in May of 2000 that it had entered into an agreement with SAP, the well-known ERP vendor looking for a front-office solution, to develop and integrate industry-specific "customer interaction solutions" to extend the scope of "collaborative CRM." As part of the agreement, SAP embedded within mySAP.com customer interaction applications from the Nortel Networks Clarify eBusiness Applications. It included plans to integrate Clarify's capability to accept multi-channel customer inquiries (such as Web, phone, and fax), and tailored initially to several verticals, namely, banking, insurance, high-tech, and communications. SAP was also hoping to create what they called "virtual communities of vendors" to provide the customer who had purchased from several collaborating vendors, one interface point. Yet, according to John Geralds writing in an article for VNUNet.com recently, "a reseller agreement with SAP, in which SAP was to resell Clarify call center software [mySAP.com], did not amount to any sales during its ten-month tenure." Any.
  
  
• Also in May of 2000, IBM's consulting division announced a new practice in support of the Clarify eBusiness Applications suite, adding native DB2 support into Clarify's technology mix.
  
  
• In January of this year, Nortel announced the release of Clarify 10.0 eFrontOffice, which essentially upgraded users on a Unix backend server with functionality to match users on a Windows backend server. Initial support is for Solaris on Oracle, with planned HP-UX/Oracle and AIX/UDB support. Yawn.
  
  
• There was one tantalizing headline just last month. On June 4, IBM and Nortel jointly released a Press Release entitled: "IBM, Nortel Networks Build Relationship to Provide eBusiness Solutions to Service Providers, Enterprises." Sadly, however, in reading the press release, one quickly understood the relationships intent: joining Nortel's Optical Internet and Ethernet solutions with IBM's server components, including the WebSpere application server software and network management tools. It was purely a network integration solution. Clarify was not mentioned in the announcement.

Other telling notes of disillusionment: not only did Clarify's chief exective Tony Zingale leave the company last year, but his replacement, William Conner, left after only a few months for the President and CEO post at Entrust Technologies. This is in addition to a raft of other Clarify executive defections.

Finally, at the national CRM Conference held in Boston in June of this year, all of the players in the CRM space, big and small, were in attendance and showing their wares at the Vendor Exposition all except Nortel's Clarify. Clarify's notable absence was explained away by a presenter whose simple observation was that "Nortel was bleeding money and this was probably a cost-saving move and nothing more." We're not so sure.

Nortel in Trouble   

On the surface, the calendar year 2000 was a good one for Nortel. They consistently saw record growth looking at it year over year (US$7.82 billion in sales in the June quarter; $7.3 billion in sales in the September quarter, and $8.7 billion in sales in the December quarter). Share price peaked at $89 on September 25. But the writing was on the wall. If you were to look closer, you would see trouble. By the end of the year, Nortel had recorded a total of $30 billion in revenues for the year, but a total net loss of $3.4 billion. By December, its share price was chopped over half, down from its peak of $86/share on July 26, to end the year at $32/share. The financial slide was on.

In the first quarter of 2001, Nortel reported revenues of $6.2 billion and a net loss of $2.6 billion. They ended the quarter with their share price down to $14/share.

In June, John Roth, President and CEO commented that it was Nortel's plan: "to streamline our business around our core growth areas of Metro Optical, Optical Long Haul, Wireless Internet, Core IP/Intelligent Internet and Internet Telephony; and to focus our investments to deliver the key next generation networking solutions." They announced plans to cut 30,000 jobs by September, and to end their share dividends distribution program.

After the close of trading on July 19, Nortel announced its June Quarter, 2001 earnings, declaring $4.61 billion in revenues, with a net loss of $1.6B. With restructuring and write-off charges associated with acquisitions, they declared a total net loss for the quarter of $19.4 billion, $6.08 per share. It is one of the largest corporate losses in history. Roth said the company could not give any financial guidance for the rest of this year, and he doesn't see the company's business turning around until the middle of 2002. Its stock opened on July 20 at $7.68, a 91% drop from its high about a year ago. Ouch.

What Now, Clarify?   

It seems clear to us that Clarify is on the block. They were not mentioned in any of John Roth's re-structuring statements as being core to the company, and in restructuring times, companies must focus solely on their core and most profitable businesses. Also, in the sixteen months that the two companies have been joined, Nortel has failed to show any compelling symbiosis between its technologies and those of Clarify, simply doing one significant re-sell deal with SAP and one alliance deal with IBM. Both moves Clarify could have conducted without the benefit of Nortel incorporate. It's time for Clarify to move on.

Where will they go? One possibility is SAP, who already has a large investment in time and technology in Clarify through their OEM deal to create mySAP.com. This makes sense, too, in the technology consolidation and integration environment that we currently find ourselves in. Vendors believe that customers are tired of having to both implement multiple, disparate systems, and tie those systems together with a gooey layer of EAI (Enterprise Application Integration) to get more meaningful information between departments and to consolidate reporting and analysis.

Witness integration within the CRM space: Kana Communications must be the poster child for integration within the CRM space. They started out as a simple Email-handling software vendor for support organizations, and through the acquisition of Silknet (online self-service), Connectify (EDM, or electronic direct marketing), ServiceSoft (integrated web communications), Broadbase (data warehousing and business intelligence), and Business Evolution and NetDialog (both web-based customer service tools companies) and through multiple key alliances, they have turned themselves into a self-proclaimed vendor of "complete eCRM solutions." In the world of Back Office and Front Office integration, Oracle is a primary example. After having a suite of Back Office applications for years, they're now going through the rocky development of an integrated Front Office offering called simply the Oracle E-Business Suite.

Maybe IBM will want Clarify, since IBM announced consulting support for Clarify and also helped Clarify add native DB2 support to the platform. But this solution might be less sensible, since IBM consultants might be wary of losing consulting dollars from other CRM implementations.

User Recommendations   

User and potential buyer beware. Morale at the Clarify division out in California is low, and they're waiting as anxiously as its current and potential customers are concerning where the next stop will be. Wherever that stop is, realize that the acquiring company will want to, at the very least, tilt the software towards their platform, and more likely fully integrate the Clarify solution with their own, which might very well leave current customers feeling cold, and potential customers asking whether the new combination will work for them. This is a good time to be wary about the Clarify CRM solution and Clarify's very viability in the fast-moving space of CRM software.