Siebel's Silicon Seer

Lead by CEO Thomas Siebel, execs at the software company saw trouble brewing, so they put a cost-cutting plan into action -- fast

Smart forecasting has helped Siebel Systems Inc. (SEBL ) weather the tech meltdown better than its brethren. After last year's torrid 130% growth, analysts expected the software maker's 2001 sales to hit $4 billion, up from $1.98 billion. That would have put the eight-year-old company near the top of the industry, next to giants such as Oracle Corp. (ORCL ) and SAP (SAP ).

However, CEO Thomas M. Siebel, looking over a computer screen of sales reports, could see by late February that the slackening economy was taking its toll. Contracts weren't getting signed. Customers were scaling back on big-dollar deals. And the market that Siebel plays in, software that manages remote sales forces and customer information, was shrinking from 50% annual growth to 25%. "The numbers just weren't adding up," Siebel says.

That ability to peer deep into the company's innards gave Siebel a leg up over many Silicon Valley rivals, who didn't see the trouble coming. Siebel cut expenses and turned up the heat on his sales team. That helped the company meet Wall Street's expectations and book quarterly revenues of $588.7 million, up 84% from a year earlier, while profits more than doubled, to $76.9 million. Now, even as the market continues to slow, Siebel expects his forecasting to help him reach sales of $2.6 billion this year. Sure, that's down more than 60% from earlier forecasts, but it's healthy in such a severe tech downturn.


  With this management tour de force, Siebel has created a model for steering a high-growth business through a downturn. "Anyone can look like a genius on the way up," he says. But on the way down, you need a fix on details and the willingness to move fast.

Siebel does this by using software that allows him to view every possible performance metric, from hiring costs to the sales closure rate. It's the same software Siebel sells to customers, and it's safe to say no one uses it better. Siebel knows when meetings should take place, when contracts need to be drawn up, and how long it takes to get them signed.

He also prods his sales force to anticipate problems: Commissions are tied to salespeople's ability to forecast as well as the deals they close. That gives Siebel "a deep understanding of what customers are going to do," says Haim Mendelson, co-director of the center for electronic commerce at the Stanford University Graduate School of Business.


  This spring, Siebel execs acted fast. Financial planners drafted four contingency budgets. Within weeks, Siebel had a bead on revenues and locked the right budget into place. He laid off 10% of his workers and postponed bonuses. Before the quarter ended, Siebel had costs in line with sales. "That Siebel did this with such speed is impressive," says analyst Robert D. Kugel of FAC/Equities.

The sharp execution continued in the second quarter. Spending on travel was cut in half. Recruiting costs were slashed to $1 million from $8 million. And Siebel sent reinforcements to the sales staff, creating special teams of execs and techies to help close big contracts.

Still, Siebel's stock has withered with the rest of the tech industry, down nearly 70% from its peak of $119.88 last November. It isn't as bad as the 90%-plus plunge of many software upstarts, but analysts worry that Siebel's strong position won't be enough to maintain its profit growth if the economy worsens.

Some cracks are starting to show. Second-quarter sales grew by a more modest 38%. And rivals are closing in. "Siebel is going to face very serious competition from us and SAP," says Oracle CEO Lawrence J. Ellison. The battle is sure to be bruising, but expect Siebel to come into it armed with the best forecasts in the business.

Note: This story originally appeared in BusinessWeek's 2001 special double issue, "America's Future"

By Jim Kerstetter in Silicon Valley