OPINION
Tiptoeing to Barcelona

It seems like all the interesting news breaks when I am out of the country. I was in Paris, attending a venture capital conference for emerging IT companies, when I got the news that Siebel Systems had missed its revised revenue forecast and sacked its CEO. The trip had been planned around my attendance at Siebel's User Week conference to be held in Barcelona beginning today (April 18). Talk about timing!

Missing your numbers is never a good career move. It might seem like the board acted precipitously, but in this case I think it was the right call, much like a decision to take Pedro Martinez out of a game after he's thrown 100 pitches. I like baseball, but I am glad I am not a manager in the same way that I am glad I am not a financial analyst. I am much more interested in the long run than in the quarter-by-quarter forced march.

Passing the Torch

So now the torch has been passed, but I worry because some have already said the new guy is going to shine up the apple for sale. I think that would be the wrong move.

Siebel currently has a market cap of about US$4.62 billion, but that reflects the fact that the company is sitting on $2 billion in cash. Siebel's biggest problem is not its technology -- it is the company's business model. They are stuck in a model that requires big deals and big margins, and those are not the deals that are out there in sufficient quantity any more. The company is between an on-demand model, which is its future, and a traditional licensed model, which is its past -- and unfortunately, its investors live in the past.

Generally, investors today understand the on-demand model and are okay with it. They understand the traditional model too. What they have trouble with is transitions, and that is exactly what Siebel is in the middle of, a transition. interested in the long run than in the quarter-by-quarter forced march.

Making the Transition

Clay Christensen wrote the book on the subject, "The Innovator's Dilemma," which deals with companies' -- especially technology companies' -- tendency to stay too long with one approach or product line and fail to transition. The leaders in mainframe computing failed to become the leaders in mini-computers and the mini-computer makers completely missed the boat on the PC. Will the same hold true for software companies in our age? Will it be true that the companies that led the enterprise software revolution cannot transition -- or cannot transition quickly enough -- to the on-demand model?

For Siebel, the issue is not about technology. The company has plenty of that, and truth be told, a pretty aggressive approach to delivering it in the on-demand model. Just looking at their timeline of delivery for major versions over the last 18 months proves the point. It's their business model that needs upgrade.

If this was a tennis match, we would find Siebel in that no-man's land between the baseline and the box where balls bounce in ways you just can't hit.

At this point Siebel needs to change its business model and it needs to do so quickly without a lot of worry about offending the entrenched interests that only look out a quarter at a time. If they don't, the company's finances will decline, to use Ernest Hemingway's phrase, "gradually, then all at once." Siebel's situation is not unlike the proverbial frog in a pot on the stove.

Next Moves

What's their next move? I would seriously consider a management buyout. Take the company private, do the necessary things to change the business model re-set expectations about what reasonable revenue targets are -- specifically the difference between large license fees and smaller but more predictable monthly and quarterly revenue. Then the company can re-emerge as a serious and public competitor in the on demand space. With an aggressive model and revised expectations Siebel could again be a growth stock.

There's precedent for this approach, though not a lot, because companies tend to wait for bankruptcy to take the necessary steps to revamp. RightNow Technologies (Nasdaq: RNOW) did a similar thing a few years ago though I don't know all of the details about their finances when they "went private." Nevertheless, last year they reemerged and have been doing well since.

Unfortunately, too often by the time you get to bankruptcy it's too late -- by then finance guys are running the company and the emphasis is on making the outfit financially viable which is often not the same as making the whole enterprise viable in the market. Then there's also the stigma of bankruptcy to contend with. Better to steer the ship while you have the most control of your destiny.

If I was running Siebel (and I am not, thank goodness) I would give serious consideration to taking the company private.