It's Siebel vs. the Rebels


By Sarah Lacy George Shaheen has been in his job for two months, and his hectic schedule is clearly reflected in the decor of his new office -- Spartan. One of the only things on the wall is an oversize world map that was there when he moved in. A 10-year board member, Shaheen took the top job at troubled Siebel Systems (SEBL) the day Chief Executive Mike Lawrie was axed.

Since then, he has spent much of his time on the road, meeting with skittish customers and concerned market researchers, and leading town hall meetings to calm worried employees. Siebel, a company that has been in a three-year tailspin, faces an outright shareholder revolt led by hedge funds that are pushing for it to be sold (for a Q&A with Shaheen, see "The Man in Siebel's Hot Seat").

At Siebel's annual meeting on June 8, investors are going to ratchet up the pressure on Shaheen. BusinessWeek Online has learned that some investors plan to withhold their votes for Chairman Tom Siebel. Dissidents claim that up to 30% of the shareholder base is unhappy with management, and this will be the first opportunity to send a message. But it'll only be a message -- by the time shareholders started organizing, it was too late to propose alternative board members.

Shaheen is trying to make peace with investors. In a letter to shareholders released just before the start of the annual meeting, the company announced its first-ever quarterly dividend, $.025 per share. Shaheen also told investors the company would appoint two additional independent directors. Shareholders have complained that the board is packed with people who have strong loyalties to founder Tom Siebel. The new CEO also vowed to be more communicative with investors, in part by reinstating a regular mid-quarter analyst call. "I wanted to share at the annual meeting that I've heard, listened, and am taking some action," Shaheen says.

ONE-TRICK PONY? The moves send a strong signal that Siebel is listening, and may buy Shaheen some time. But many shareholders will likely want more. Next year, if Siebel doesn't turn around, several shareholders say they'll wage a proxy battle. "They're basically on a clock," says Marc Lehmann, a partner at Jana Partners, a San Francisco hedge fund that owns 15 million shares, making it Siebel's sixth-largest shareholder. "If they think next year [will come] along without shareholders seeking alternative board members, they're out of their mind."

An angry investor base is just one of the issues making Siebel's turnaround an act Houdini would be proud of. Siebel is doubling down on its long-time focus on customer relationship management software (CRM), a strategy that critics say has allowed software companies such as SAP (SAP) and Oracle (ORCL) to steal customers by the thousands.

While these rivals provide huge software packages running everything from a company's accounting systems to its call centers, critics complain that Siebel is a one-trick pony -- making only software for managing salesforces and customer-service departments. "The market matured, and best-of-breed is withering away," says former Siebel exec Bill McDermott, now CEO of SAP Americas. "Siebel is the most dramatic example of that."

CUSTOMIZABLE FITS. That doesn't mean Siebel has been standing still. Next month, it'll unveil new software, code-named Nexus, that it has spent three years and more than $500 million to develop. It's a twist on Siebel's best-of-breed mantra: Nexus breaks the company's core software product into Lego-like components that can run on standard Microsoft (MSFT) and IBM (IBM) platforms. Customers can buy the pieces they want à la carte and snap them together with software they build themselves or components from other software companies.

Nexus may be Shaheen's best shot at restoring growth. It gives Siebel its first product to sell to companies that want to build their own CRM applications -- a $24 billion untapped market that's now mostly served by pricey consultants. Shaheen says that market is nearly five times the size of the packaged CRM market where Siebel made its fortune.

But it will take near-perfect execution to build a business around Nexus. To give the product time to take root, Siebel will have to win more customers for its core CRM business -- a problem it has been trying to solve these last three years.

SIMILAR STRATEGY. Why would any exec want to step into such turmoil? Turning Siebel around is Shaheen's shot at redemption. Shaheen, 60, had a five-star reputation. As head of Andersen Consulting, he helped turn it into one of the top names in tech services. But in 1999, Shaheen decided to try his hand at the so-called New Economy. He took over online grocer Webvan just before the IPO and was at the helm when it collapsed into bankruptcy and vaporized, like so many dot-com schemes. "No one wants to have the final point in their career a failure," says Shaheen. "This is an opportunity to win again."

Shaheen's reputation is riding on a strategy almost identical to what former CEO Lawrie laid out. Indeed, Shaheen says much of the product strategy is staying the same. But where Lawrie spent time making acquisitions and investing for the future, Shaheen is focusing on cutting costs.

He plans to trim $50 million in expenses this quarter through headcount reductions, discontinuing research projects, streamlining field operations, and thinning out the product line. Shaheen says he wants to see how the second quarter, which ends June 30, shapes up. He's shooting for $350 million in sales every quarter, with 15% operating margins by yearend.

BUYING TIME? So far, those moves haven't soothed investors. They have a long list of gripes, including Lawrie's ouster after only 11 months in the job. They're fed up with Siebel's poor results and management's refusal to use its $2.2 billion cash horde to fund a stock buyback or issue a dividend. "The reality is, very few investors they have left are technology investors or software investors," Jana Partners' Lehmann says. "These are more active, more aggressive shareholders hoping for action. I don't think they get that."

The cash is a particular sticking point, and the dividend is intended as a compromise. Shaheen has reiterated that the company will not do a buyback, instead saving its cash for future acquisitions, Shaheen says. "It's hard to give it back when you know you haven't yet exhausted the analysis on what you might do with it to grow the business," he says. "I want to do the right thing. This has got to be a long-term game."

"TWO-FRONT BATTLE." It's hard to fault investors for being impatient. Siebel's revenues have declined for three years -- dropping 33% from a peak of $2 billion in 2001 to $1.3 billion last year. The stock, which once traded near $120 in 2000, hovers around $9, as of June 7 -- and that's up recently because of rumors that Siebel could be sold. "I'm here to run the company as best as I can, and if that attracts an investor or an acquirer, so be it," says Shaheen.

Many on Wall Street think Siebel is stuck fighting a losing war. "They're fighting a two-front battle, and SAP has considerably more resources. At the other end, there's a more flexible nimble company in Salesforce (CRM)," says Peter Coleman, analyst at ThinkEquity Partners, a San Francisco investment bank. "I don't know what company wins a two-front battle that are two separate distinct battles."

While buying Siebel used to be a no-brainer for customers looking for CRM, Shaheen & Co. are now struggling for every deal. Although Siebel has a reputation for providing solid technology, some customers complain that its software is too complex. Many are fed up with the integration woes they've encountered over the years. They're sick of paying millions up-front, then paying a consulting firm even more getting it to work.

NEW OFFERINGS. "Five years ago, I favored best-of-breed, like Siebel and i2," says Jan Dressel, chief information office of Siemens USA. Now, Siemens is standardizing by using SAP software worldwide and gradually switching out its Siebel installations. "The complexity is so high, we're better off going with a more integrated approach."

Siebel is counting on new products to change that attitude. Offerings such as On Demand, which provides CRM software over the Web as a monthly service, and Analytics, software that helps companies analyze their data, are growing -- albeit off a small base. Analytics is much bigger, with $140 million in revenues last year, up 40% from 2003. And, Shaheen points out, the product is in a market estimated at $15 billion, with a lot of room to grow.

But Siebel On Demand is playing catch-up to upstart Salesforce.com. Siebel has just 33,000 users, compared to Salesforce's 267,000. On Demand, which was introduced 18 months ago, added only $10 million to first-quarter revenues. It's a key product if Siebel is going to penetrate the small- and midsize business market, where it hasn't had much of a presence. And as big companies are increasingly moving part of their salesforce software to a lower cost, Web-hosted model, Siebel needs On Demand to keep its bigger customers from jumping to Salesforce.

"THE BULL IN SIEBEL." Salesforce CEO Marc Benioff scoffs at that prospect. "Customers don't trust them," he says. "They have sold more software that's not being used than any other vendor in history of enterprise software. That's the bull in Siebel."

Those are fighting words to Bruce Cleveland, the general manager of Siebel's On Demand division. He won't disclose how much Siebel will spend, but he says it's planning a new marketing campaign to take on Salesforce. Cleveland says he keeps an article about Benioff's success in his sock drawer to remind him why he goes to work everyday.

But Nexus is the product Siebel is banking on. Siebel's executive vice-president, David Schmaier, expects customers in the financial-services and telecom industries to be among the first users. Virgin Mobile is a good example. It built its own Web-services architecture that the Nexus components could just plug into.

"I'm impressed they haven't stood still on that front," says Michael Parks, CIO of Virgin Mobile, a Siebel customer. "That's why Siebel is still meaningful. It's not the same product I bought three or four years ago."

"GO AFTER THE UGLY." But bringing more traditional customers over to the new offerings will take longer, with more hand-holding. Although industry-standard Web systems are undeniably what customers want, they don't want it all tomorrow. That means Nexus won't bring in heaps of revenue to provide a badly needed revenue jolt. Meanwhile, SAP and Oracle are also breaking their applications into components. "This isn't going to be an overnight thing for them," says analyst Rebecca Wettemann from Nucleus Research.

Shaheen's solution is to position Siebel as the only company that can sell CRM any way the customers want it. With more than 4,000 companies using its software, he says Siebel knows more about solving customer-relationship problems than anyone in the business. His executives admit they've done a poor job of leveraging that expertise. But if Shaheen, the former consultant, can change that, Siebel could once again become the go-to company for solving tough CRM problems -- a real point of differentiation from Salesforce and SAP.

"Go after the custom business. Go after the ugly, very complicated problems that aren't solvable with current technology," advises Coleman of ThinkEquity Partners. "That's a huge opportunity and a way to get away from SAP."

That is, if investors give Shaheen a chance. Siebel's Cleveland dismisses some of the more outspoken shareholders as "sharetraders." But like it or not, that's the investor base -- hedge funds. If Shaheen doesn't convince them that Siebel can make it alone, they could foil his comeback -- and his shot at redemption. Lacy is a reporter for BusinessWeek Online in Silicon Valley


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