PeopleSoft Building Muscles To Overcome The Rough Patch Part 2: Market Impact

PeopleSoft Building Muscles To Overcome The Rough Patch

Part 2: Market Impact

P.J. Jakovljevic - June 20, 2002

Event Summary

At the beginning of 2001, PeopleSoft Inc. (NASDAQ: PSFT), one of the largest enterprise applications providers, ebulliently indicated its continued interest in rounding out its product portfolio through favorably priced acquisitions. Instead, the company recently unveiled a number of new products developed either internally or via alliances. It is likely its recently tamed new revenue generation has played a part in the company backpedaling its bullish attitude on acquisitions.

Recent announcements include:

New Products

• PeopleSoft eSettlements Part of PeopleSoft's Finanacial Management Solution
  
  
• General availability of PeopleSoft Enterprise Service Automation (ESA) 8.4
  
  
• Expansion of Human Capital Management (HCM) solutions
  
  
• Supply Chain Management Solutions Strategic Sourcing and Trading Partner Management (TPM)
  
  
• Next generation Enterprise Portal
  
  
• CRM solutions for Government, Insurance, Energy, and High Technology

Alliances

• Vigilance Supply Chain Event Management
  
  
• Agile Software Company Comprehensive Product Life Cycle Management

Financial Results

This is Part Two of a four-part report on recent PeopleSoft announcements. Parts One detailed the announcements. This part and Part Three will discuss the Market Impact of these announcements and Part Four will make User Recommendations.

Market Impact

PeopleSoft might have become the victim of its own success, since the year 2001 was an exceptional year of its financial performance, including record total revenue, record profit, and more than $500 million of generated cash. The 19% growth was far and away better than the estimated dismal applications market growth (if not a steep decline) in 2001.

During 2001, PeopleSoft was perceived to have the purest Internet-based product architecture. With improved international market penetration and brand recognition (nearly 40% of revenues coming from outside the US), one could conclude that 2001 was a year during which PeopleSoft has promoted itself into a formidable applications competitor. It was a picture of growth matched only by SAP, Siebel Systems, Oracle, and i2 Technologies during their happiest years in the big league. It certainly bucked the trend across most of the enterprise IT sector.

It would be a tall order for the company to repeat the feat in 2002, given its current position and size. PeopleSoft, while number one in the HR applications market (with ~60% of the market share) is ranked number three behind SAP and Oracle for enterprise applications generally. For financials applications with its customers representing more than 60% of Fortune 1000 companies, it has been in a neck-to-neck contest with Oracle for a No. 2 position behind SAP. In the CRM market, while in a dispute with SAP for the second position behind Siebel, PeopleSoft is possibly the only one amongst several dozens of ERP vendors able to sell seriously beyond its base with stand-alone CRM applications.

Given that PeopleSoft had been able to weather the storm for so long, where did the abrupt slump in Q1 2002 revenues came from and why was its stock was so punitively thrashed afterwards? The overall continued slowdown in IT spending did not happen overnight, but it certainly contributed. It comes as no surprise the fact that users have for some significant time been penny-pinching their IT budgets to implement and/or upgrade software they already own (from those happy days when they were buying even what they did not need at the time

In addition to promoting its collaboration-centric architecture, PeopleSoft has also been successful in up-selling new modules to its customer base, which bought on average three additional modules when upgrading to PeopleSoft 8 (many customers would use the upgrade also as an opportunity to add new ERP modules and new extended-ERP applications, most frequently portals, e-procurement, CRM, and employee self-service (ESS)). Therefore, it is quite possible that PeopleSoft has exhausted all the early adopters in its customer base, or that there is really a temporary lull in upgrades due to the overall spending anxiety.

Still, reportedly, only a third of PeopleSoft customers have licensed PeopleSoft 8 so far, leaving a large group of customers that will probably license version 8 before support for version 7.5 ends in 2003. Although that seems a promising revenues booster, one would rather want customers to jump on an upgrade due to their infatuation with new functionality and clear return on investment (ROI) opportunities, rather than for feeling blackmailed and held over a barrel with an impending product support discontinuation.

Further, as PeopleSoft's Q1 2002 revenue miss of over $30 million represents the loss of many sales, based on its average sales price/contract size of over $0.7 million in 2001, there may be some concerns that sales execution has also entered the picture on top of the soft market. Time only will tell whether this was a short-term bump, soon be rectified (although the company expects flat results in Q2 2002 as well), or the start of a protracted period of declining revenues resembling Oracle's current predicament (see Stalled Oracle Fumbling For A Jump-Start Kit). Yet, given the large population of customers still willing to upgrade, and given a number of enticing new applications and the install base's tendency to purchase additional modules, and given PeopleSoft's cash position and strong, tight-fisted management, it should be able to weather another quarter of flat earnings and to be well-prepared for the supposedly more promising second half of the year.

Pure Internet Architecture Software

With a differentiation in mind, PeopleSoft has been since 2000 a pure Internet architecture software evangelist, which is an achievement that took over $500 million and 2,000 developers per year resources. The result is a wide-ranging collaborative enterprise system with no client software to maintain and very good visibility of real-time information and data for anyone anywhere, with the ability to maintain multiple data models and distributed databases.

With a large investment in architecture made early, PeopleSoft has so far resisted the downturn in the market and has gained ground by making its core applications a compelling choice. However, the company has somewhat tempted the fate with touting that its product architecture would make it bulletproof to the weak economy, making the market reward it at that stage for being the poster child of a success in the tough environment. One should not be surprised with the market's harsh knee-jerk reprisal once the pure-Internet magic was dented with the latest tamed results.

To illustrate the point that the pure-Internet' architecture might no longer be the selling panacea, here is an anecdotal recent event. While attending an annual user conference of a prominent manufacturing ERP vendor (not PeopleSoft, for interest sake), a vendor that is also a big proponent of harnessing Internet and collaboration, I shared a cab with that vendor's power user, a material management executive within her user firm. During the trip from the airport, she proudly mentioned that this product has been the umpteenth ERP product she has used in her impressively long career of over 20 years. On my question which one of them she liked/enjoyed the most, she said, to my slight dismay and disbelief, the product that the pundits would regard as a dinosaur of the ERP. Why? Because the ancient green-screen application would provide her with a wealth of information on the same screen with only one key combination (ctrl/alt + xyz'), whereas the new cool & sexy application requires dozens of frustrating to-and-fro hyper-linked screen navigations only for the fragments of same information.

Would anybody out there like to volunteer to debate with her about the pure-Internet return on investment (ROI) rationale and users' buy-in? It all comes to back-to-basics logic of doing the job effectively and of business processes' improvement; the IP-based technology might be a solution enabler to accelerate customer's productivity (as well as the vendor's product development productivity), but not the goal in itself.

To that end, PeopleSoft's move from transactional to process-centric orientation, to balancing technology with customers' business imperatives, and to making attempts to prove its ROI supremacy as the order winner might be just what the doctor ordered. However, collaborative business is awfully complex and what business scenarios are well supported will depend on the application area intimate expertise of the vendor, where PeopleSoft might have some catching up to do compared to SAP and Oracle. Even without any potential functional inferiorities, progressing software transactional to business-process management (BPM) within heterogeneous intra-enterprise environments is quite intricate and a time-consuming exercise for any vendor.

A Modular Approach

To be fair, with a snazzy user interface (UI) keeping with PeopleSoft's long tradition of having one of the most compelling UIs, a completely redesigned Internet product architecture, and expanded functionality footprint, PeopleSoft has taken a leading position in the next generation of enterprise systems. PeopleSoft 8.4 is a suite of more than 160 applications and with many of them featuring 'best of breed' traits.

On scope, the product portfolio covers:

• e-business (PeopleSoft Portal, eProcurement, eStore, and Marketplace) CRM (following now the proverbial Vantive acquisition of over two years ago, and with new CRM Mobile Sales and CRM Mobile Field Service applications featuring compelling synchronization features in release 8.4) enterprise service automation (ESA) (for resource automation with traditional services procurement, from sourcing to settlements, and for project automation addressing visibility, administrative, and workflow issues around projects such as time & attendance, expenses, staffing, pay/bill management, workforce and financial analytic information, etc.)
  
  
• supply chain management (SCM)
  
  
• HRMS evolving into above-mentioned HCM (with a view towards true employee empowerment by integrating services such as knowledge management (KM), business intelligence (BI), and e-learning that are outside the scope of traditional HR such as benefits, personnel administration or payroll)
  
  
• financial management (financial and project management, treasury management, MarketPay, etc.)
  
  
• enterprise performance management (EPM) and analytics (for supplier relationship management (SRM) with links to quality management, customer profitability, workforce analytics, supply chain analytics, and balanced scorecard) to name some.

There are now also 26 individual applications within SCM and manufacturing, and the supply chain product modules can be combined in several ways for different sectors and their requirements. The more prominent would be:

• Accelerated SCM (with front- and back-office applications demand planning being linked straight with materials requirements planning (MRP))
  
  
• eProcurement Solutions (featuring auctions, reverse auctions, supplier analysis, purchase order management, purchase requests, requests for quote (RFQs), etc)
  
  
• Manufacturing (with configurable product and process design)
  
  
• Sales and Logistics; Supplier Relationship Management (SRM) (from design collaboration to strategic sourcing)
  
  
• Supply Chain Planning (SCP) (from planning and design to proactive forecast development tools and execution, although still far from the level of strategic network design provided by i2 and Manugistics it is rather at the level of operational supply chain demand and inventory planning and enterprise production).

This concludes Part Two of a four-part report on recent PeopleSoft announcements. Part One discussed the announcements. Part Three continues the discussion of the Market Impact of these announcements and Part Four will make User Recommendations.