People Soft's Hard Guy

By bringing discipline to the company, CEO Conway has pulled it back from the brink

The rise and fall and rise again of enterprise software maker PeopleSoft Inc. is a tale of two personalities.

On one hand, there's David A. Duffield, the founder and chief executive for 11 years. He built a friendly culture for employees and customers alike. At airy offices in the San Francisco suburb of Pleasanton, the Mr. Rogers-style Duffield wore comfy sweaters, signed e-mail with his initials, DAD, and supported a rock band made up of employees--the Raving Daves. Out in the marketplace, the company let customers vote on features they wanted to see in the next batch of products. Duffield led PeopleSoft up a growth ramp that made it a darling of Wall Street--only to see it crash to earth in 1999. That's when the market for giant corporate software packages that handled everything from employee benefits to tracking inventory slipped into the doldrums.

It's tough guy and current CEO Craig A. Conway who is bringing PeopleSoft back from the brink. Call him the Clint Eastwood of software. When Duffield hired Conway to run the company 18 months ago, he gave his successor free rein to overhaul the company. And overhaul Conway did. Half of PeopleSoft's top 12 execs quit within six months. Customers who had never been asked to pay their bills on time began getting reminders. And the touchy-feely talk faded away. Conway cringes at the old custom of referring to employees as "people people." Says Conway: "I wanted to bring some discipline to the organization."

Conway may not have a cuddly personality, but he gets results. After a long slump, revenues and profits are up--by 28% and 400%, respectively, in the third quarter ended Sept. 30. For the year, Merrill Lynch & Co. estimates that revenues will hit $2.1 billion, up 24% from a year ago. Net income is expected to hit $173 million, a 116% rise from 1999. Employee attrition has been cut to 10% from a scary 30% a year ago. Since bottoming out at $12 last May, PeopleSoft's stock has increased 191%, to $35. "My only real regret is not bringing in a Craig Conway sooner," says Duffield, who remains chairman but doesn't play an active role in running the company.

NEW CUSTOMERS. The company's future continues to look bright. Much of its recent growth comes from lining up new customers, rather than selling more software to companies that bought before. In the third quarter, sales of software to new customers were twice what they were a year ago. That's because PeopleSoft has new products to sell. In September, the company released the eighth version of its software. With the exception of one piece, it has been built from the ground up for the Internet. And last fall, PeopleSoft spent $495 million in stock to buy Vantive Corp., the second-largest maker of customer-management software, putting it squarely in today's hottest software market. While sales growth for enterprise software is expected to remain sluggish, at 5%, this year, the customer-management software segment is expected to jump 50% to 70%. "I have to credit Conway with seeing the potential and bringing an intensity and focus that was lacking," says analyst Charles I. Phillips of Morgan Stanley Dean Witter.

For PeopleSoft, the latest financial results offer the potential for a return to the go-go days of its past. The company basically invented the market for packaged software that managed human resources and then added programs to handle finances, manufacturing, and inventories. At its peak in 1998, it briefly ranked second only to German giant SAP in the enterprise-software market.

UGLY END. The party came to an ugly end in 1999. PeopleSoft wasn't run well enough to negotiate the downturn in the market for enterprise-software systems. Big-business software projects were put on hold while Y2K bugs were fixed. Meanwhile, large corporate customers were jittery about buying technology that wasn't built for the Internet.

Enter Conway. He had been groomed for the top ranks at cutthroat Oracle Corp. before being forced out in a 1992 power struggle. Known for his intensity, Conway also had a rep as a turnaround specialist after tours as chief executive at companies such as One Touch Systems Inc. and TGV Software Inc. Small and wiry, Conway competed in judo while in college. His talk is blunt. "I would like to pretend that there's some secret formula for turning around a company," he says. "But there isn't. You just keep solving problems. You keep working your way through an equation until you're finished."

Conway began by recasting product development. Oracle was putting all its muscle behind creating Net versions of all its products. PeopleSoft, on the other hand, had three different product development projects going simultaneously but none was nearing completion. Conway killed off two and devoted the company's attention to the Net. He pumped up R&D to 25% of total revenues--more than double the industry average. Bit by bit, he won converts. "That told me they were serious about the Internet," says customer Ted Bishop, a project manager at auto parts maker GKN Automotive Inc. in Detroit.

Many of PeopleSoft's top programmers had been deserting for the dot-coms. To slow the defections, Conway pumped up salaries, repriced options, and cut the employee vesting schedule from four years to two. Those moves, he says, were probably the most important in laying a foundation for the company's turnaround. "The developers saved PeopleSoft," says Conway.

Not everyone was thrilled with the changes. Top managers quit, including Senior Vice-President for Marketing Jeff Carr, now president of e-commerce startup RightWorks Corp. The senior managers who remain are pro-Conway. "We were in trouble and needed to get out of it," says Chief Technology Officer Rick Berquist, the eighth employee hired at PeopleSoft.

And those unpaid customer bills? They're being collected now. Conway made it a priority. Duffield took pride in doing what's best for customers but sometimes went too far. It used to be possible for customers who hadn't paid old bills to get new software shipped to them. That's like selling a new car to a guy who never paid off the old one. While Oracle averages 69 days between sale and payment, PeopleSoft's gap had crept to 103 days. "I couldn't believe you'd run a major software company this way," says Conway. Letters were sent. Within a year, Conway got the gap down to 81 days, and he's not letting up.

There's still plenty of work to be done. PeopleSoft shares are still well below the $56 of its 1998 heyday. Also, analysts say, the Vantive software has yet to show its true potential. While PeopleSoft was celebrating 28% growth, rival Siebel Systems Inc., the leader in Vantive's market, was growing at a blockbuster 130% clip. Indeed, the Vantive software is the only piece of PeopleSoft's suite that isn't entirely Internet-enabled. That should happen by the middle of this year. And then there's Oracle, which kept on growing when PeopleSoft stalled.

To bring PeopleSoft all the way back, Conway is doing a balancing act. He keeps the parts of Duffield's culture that make sense--like the pep rallies at the historic Paramount theater in nearby Oakland. But the sloppiness that had gone unnoticed two years ago is no longer tolerated. This is Conway's company now.

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