Lotus' 'Notes' Get A Lot Of Notice

Users praise "groupware," and rivals scramble to catch up

In 1991, accounting giant Coopers & Lybrand began searching for technology to make its audit teams more productive. The firm was among the first to try Notes, a "groupware" program from Lotus Development Corp. Among other things, Notes lets co-workers organize and share financial and tax information. It also relays advice and analysis from outside specialists, boosting productivity by letting the firm "leverage a small number of highly specialized people," says Ellen M. Knapp, Coopers' vice-chairwoman of technology. With Notes, audits are done faster and complex questions from clients are answered sooner. Some 500 auditors use Notes now, but 2,000 will by next year. "This will change forever the way we deal with our customers," says Knapp.

It may also change the fortunes of Lotus Development. Once the No.1 seller of personal-computer software, Lotus has drifted to No.3, behind Microsoft Corp. and Novell Inc. Its operating profits, excluding acquisition-related charges and profits from stock sales, have dropped two years in a row. Revenues from its flagship Lotus 1-2-3 spreadsheet program actually shrank 6% last year, to $606 million, due to price wars and loss of market share.

MANY RAVES. What Lotus needs --and has been seeking for seven years--is something to fill the 1-2-3 gap. Now, it looks as if Notes could be it. The program, which runs on networks of IBM-compatible PCs, generated lots of interest and positive reviews when it was introduced in 1989. But sales were slow to take off. One reason: The first version worked with the slow-selling OS/2 operating system from IBM. Another: It took customers such as Coopers as much as two years to fully install and customize the software, and train workers to use it.

Now, the momentum is accelerating. Coopers and other influential customers such as Ford, Unilever, and Citicorp are reporting success stories. And on Mar. 24, the program should get another boost when Lotus unveils Release 3 of Notes, which will work on Apple Macintosh computers and workstations running the Unix operating system, as well as PCs. The result: Sales should double, to $100 million, accounting for about 10% of Lotus' revenues this year (chart). "They've really opened up a new market here and have at least a year lead on competitors," says Timothy R. McCollum, a software analyst at Dean Witter Reynolds Inc.

But competitors are coming out of the woodwork. WordPerfect Corp. is furiously adding information-sharing features to its word-processing software. Microsoft countered with Windows for Workgroups, but sales have been "disappointing," says McCollum. "For the first time, Lotus has Microsoft trying to respond to what it's doing," says Ben Z. Rose, an analyst with Hancock Institutional Equity Services.

Indeed, Lotus now wants Notes to become a software "platform," like Microsoft's MS-DOS and Windows operating software. The company is aggressively courting vendors to incorporate the program in their applications--a Notes word processor that lets writers work on the same draft of a letter, for example. If enough developers do that, Notes could become an "infrastructure for creating new classes of applications," says Cliff Conneighton, Lotus' director of communications-products marketing.

The key will be attracting independent software developers, something Lotus has little experience doing. "For Notes to be successful, it will have to have [the support of] hundreds of thousands of software vendors," says Daniel Petre, vice-president of Microsoft's Workgroup Div. "I'm not sure that's going to happen." Not so, says Lotus Senior Vice-President Robert K. Weiler. Software makers "are coming to us," he says.

In the meantime, Notes is proving that it can ring up sales for other Lotus products. Notes customers have helped make Lotus' cc:Mail the top seller in electronic mail programs, and many Notes customers are also inclined to go with other Lotus software packages. At Coopers, for instance, some branches had begun using Microsoft's Excel for Windows. But technology chief Knapp argued that 1-2-3 for Windows worked better with Notes and made it the standard for the company's 7,000 U.S. auditors.

TRACKING CONTACTS. To get Notes established, Lotus is targeting specific jobs that could benefit from groupware, such as processing health-care claims, sharing logistics reports, and logging reports of sales calls or other dealings with customers. To reach these markets, Lotus has signed up nearly 300 resellers to customize Notes. That's a big change: At first, Lotus relied heavily on its own sales force and a marketing agreement with IBM. "We want to create an industry around Notes," says Conneighton.

Enthusiastic office workers have helped spread the word. Ethyl Corp., a chemicals company, purchased Notes for 100 workers in 1991 so they could distribute research reports to field offices more efficiently. Soon, the Richmond (Va.) company's sales department wanted Notes to track customer contacts and distribute product information. Now, Ethyl plans to buy 400 more copies. "It's kind of infectious," says Ethyl computer specialist Joe Weber. "People come in, look over your shoulder and say: 'Can I have access to this?'"

BIG GAMBLE. If Notes can brighten Lotus' prospects, much of the credit will go to Jim P. Manzi, Lotus' chief executive since 1986. The 41-year-old Manzi has been roundly criticized for lacking the technical smarts to manage in the fast-paced PC software industry. But Lotus insiders say it was Manzi who kept Notes alive when customers--and the company itself--didn't know what to make of the complex package. And he has made communications and information-sharing important features in all Lotus software. He even encouraged the addition of "Chronicle" to the 1-2-3 program, a feature that keeps track of which worker made what changes in a spreadsheet file. Manzi also bet heavily on Notes at a time when profits from other products had been shrinking. Since 1989, he has allocated about $50 million on Notes development.

That's a big gamble, considering that Lotus doesn't expect profits from Notes until late 1993. For years, the company provided huge discounts to resellers, but recently it upped wholesale prices so more of the $495 list price will flow to Lotus. "If they can't make money on [Notes] this year, they can't make money," says Randy Burkhart, a vice-president at Notes reseller Corporate Software Inc., whose January sales of Notes soared to 10 times year-ago levels.

So this is the crucial year for Lotus and its Notes strategy. The new version should help: It's easier to customize and write new programs for. And at Coopers, Knapp says that workers are finding all kinds of new uses for Notes, such as using it to disseminate details of tax-law changes to clients. The firm is considering installing Notes on the computers of important clients as a way to keep in touch. That could lead to more customers for Lotus. With that kind of momentum, it's easy to see what comes after 1-2-3: Fore!