In the fall of 2001, business software pioneer Thomas M. Siebel was giddy as he looked ahead. Sure, the recession was hurting. But he claimed his company, Siebel Systems (SEBL ) Inc. -- the leader in software for managing sales forces and customer-service departments -- would be more resilient than its competitors. "Everybody is going to be naked," Siebel said with relish. "We're going to find out who are the dilettantes. We're going to find out who are the scumbags, and who are the sleazeballs. Everybody is going to be exposed for who they are. It's going to be a remarkable time."
Two months later, he confidently predicted that the high-tech downturn was about to end. He could be certain, he said, because of the forecasting capabilities in his own software.
Well, both Tom Siebel and his software get failing grades for prognostication. The tech industry is still mired in slow growth, and Siebel Systems, software's highest flier in the go-go '90s, has tumbled farther than its "dilettante" rivals. Revenues last year tumbled 22%, to $1.6 billion, compared with a drop of only 2% for the overall corporate-applications-software industry. In the first quarter, Siebel's revenues dropped 30%, to $333 million. Siebel's stock price, at $8.50, is off a staggering 94% from its peak in 2000 of $119.
It wasn't just the economy that hobbled Siebel Systems. A 2001 product upgrade was so difficult to install that customers were reluctant to buy it. The company's reputation suffered from bad publicity about its customer-satisfaction record. And it lost ground to corporate-applications leader SAP (SAP ) In 2002, Siebel Systems' share of the customer-management market it helped pioneer slipped from 29% to 23%, according to Gartner Dataquest (IT ) No. 2 SAP gained three points, to 15%.
Has Tom Siebel learned enough from his struggles? Yes and no. He blames poor managers for weak sales last year, and has since shaken up the management ranks. Yet he denied there's anything wrong with the company that a strong economy can't fix. He believes that only 9% of the potential market for his software has been tapped and that his newest technologies will keep his company on top of its competition when demand returns. "If I were to take this company today and compare it to this company in 2000, there's no doubt in my mind I'd say this is a much better-positioned company," he says.
Analysts think he's overly optimistic. True, the customer-management software market is expected to start growing again next year, by 10%, to $3.3 billion. But analysts say Siebel Systems will no longer dominate. As the market leader, it gets most of the blame for a groundswell of dissatisfaction with this kind of software, which can cost upwards of $10 million and take a year or more to install. A recent Merrill Lynch (MER ) & Co. survey found that only 45% of customers are fully satisfied with their purchases of this software. At the same time, Siebel Systems faces tougher competition than ever before, and Tom Siebel is "underestimating it," says analyst Joanie Rufo of AMR Research Inc. in Boston. The company's revenues are expected to drop 8% this year, to $1.5 billion, the lowest in four years, according to Banc of America Securities (BAC ).
To turn the company around, the chief executive will have to overcome some daunting challenges. After gobbling up software at a frantic rate in the late 1990s, corporations are buying in smaller chunks. Increasingly, when they buy, they favor suppliers that offer broad suites of integrated products -- including software for financial data, corporate planning, and human resources -- while Siebel Systems focuses on one area. "Siebel will die. They're the last of the non-suite suppliers," predicts Oracle (ORCL ) Corp. CEO Lawrence J. Ellison, a rival who offers a complete package. Once an Oracle exec, Siebel left to form his own company, and there has been bad blood between him and Ellison ever since.
While it's far-fetched that Siebel Systems will up and die, critics say the company has done precious little to improve its standing with customers. Last fall, its reputation took a hit after market researcher Nucleus Research Inc. contacted 23 companies Siebel had claimed as contented customers on its Web site -- and discovered that 61% of them were displeased because they had not made back their investments after two years. In April, someone sent analysts negative information from one of Siebel's internal customer-service surveys -- which prompted the company to complain to the FBI. Siebel also raised eyebrows when it revealed last year that it invested in SatMetrix Systems, the market research firm that conducts internal customer-satisfaction surveys that Siebel uses in its marketing.
Still, the company flatly denies it has a customer-satisfaction problem. It dismisses Nucleus' report, calling it "statistically insignificant," and claims there's nothing unethical about its investment in SatMetrix. To be fair, other application sellers, notably SAP in 1999, have had similar customer-satisfaction complaints, and they recovered. To improve success rates, last year Siebel Systems set up a team of 60 consultants who work with customers before they start on a project to ensure they have realistic expectations before they get started.
But that response seems unlikely to mollify purchasers. The company is so out of touch with the feelings of customers that it inadvertently referred BusinessWeek to an unhappy one -- Deutsche Leasing in Frankfurt, Germany. Friedel Jonker, a tech project director, reports that two months ago, its salesforce-automation system went down for an entire day. To Jonker, it was a major gaffe. "We don't want this to happen again," he says. He plans to consider alternatives to Siebel Systems the next time he shops for software.
Tom Siebel does a better job when it comes to product integration issues. He's convinced that it does not make sense to offer a full suite of products. It's better, he says, to do one thing well. He acknowledges that his products need to meld with others without requiring customers to install hundreds of patches. So he just launched a new product line, called the Universal Application Network. Customer BMC Software (BMC ) is using it to tie together software from Siebel, Oracle, and PeopleSoft (PSFT ). "We found this is helping us take the duct tape out of the equation," says Jay Gardner, chief information officer at BMC.
That's only a partial fix, however. Ultimately, to be competitive, Siebel's software has to be upgraded to work better with so-called middleware technologies from Microsoft (MSFT ) and IBM (IBM ) that make applications from many companies interact well. In a radical move, Siebel has decided to build two separate versions of his applications. The strategy will cost about $550 million, though IBM and Microsoft will chip in. Plus, because it's building everything twice, Siebel likely won't have new products in the market until late 2004 or 2005. Other companies, such as SAP, are sticking with single versions of their products and adapting them to work well with the software from IBM and Microsoft. It's less costly, and they'll be quicker to market.
It's a big gamble for Tom Siebel, but his company has handled major tech overhauls before. "Siebel is a company that could pull this off," says Thomas Topolinski, an analyst at Gartner Dataquest.
Meanwhile, though, Siebel may have a growth problem. Corporations, aware that brand-new versions of its software are on the way, might wait for them instead of buying current releases. And all the while, SAP is gaining momentum. It's thriving by selling customer-management software to many of the 19,000 corporations that already own its other applications. Last year, its sales in this segment grew 66%, while Siebel's contracted by 20%, according to AMR. "Our goal is to be No. 1 by the end of the year," says SAP CEO Henning Kagermann.
Tom Siebel scoffs at that claim. "It's not credible. They just give the software away," he says. But if he plans to stay ahead of SAP and regain his company's star status, he'll have to accept the fact that the software world has changed fundamentally -- and that his company has to change with it.
By Jim Kerstetter in San Mateo, Calif.