August 11, 1998

TMF Interview With Tom Kippola, Part 3

Fool: What's happening in the supply chain market at this point? Have the larger ERP players become a more significant threat?

Kippola: The ERP players are really doing three things. Number one, they're moving into the supply chain market, and supply chain you can break down into a bunch of different modules and those modules play out very differently in different vertical market segments. Number two, they are moving into the CRM [Customer Relationship Management] market place. Number three, they're moving downmarket, they're trying to move to the mid-enterprise. So that's going to continue. Now whether or not they're going to move into those markets at a rate that is going to forestall the growth or success of i2 and Manugistics in supply chain and Siebel, Vantive, and others in CRM remains to be seen. My thought is that companies like i2 and Siebel have probably gained enough momentum in the marketplace that they're going to be able to stand very well on their own even with the ERP vendors moving in.

Fool: So generally, there hasn't been any major change in your view since the book was written in terms of these markets?

Kippola: Correct. The movement of the ERP companies into these markets is something that investors have to take into account when determining how they allocate money amongst their CRM and supply chain portfolios. But we continue to think this will pan out to be a nice space for the [pure play gorilla candidates].

Fool: So what about the front office space? Since the book came out, Siebel's acquisition of Scopus has left it looking like the leading candidate to consolidate the customer interaction software space. Meanwhile, Vantive, which you had doubled up on last fall, has faltered badly. What do you see playing out at this point and what changes would you make to the portfolio?

Kippola: Well, it's unclear to me. My guess is that Vantive will get picked up by some ERP vendor. It almost has to at the valuation it's at. It will probably be some ERP vendor who hasn't entered this space yet or that has limited exposure. Although [Vantive's] license revenue was down, [they weren't off by much from the expectation]. So I think Vantive is still the strongest of the customer service players. Siebel is still rolling along very nicely in the high-end SFA [sales force automation] market.

There's a new market emerging, which is the mid-enterprise market. There are four players in that space. These are all private companies, though many will likely go public before the end of 1999. Those include Onyx, Pivotal, Saratoga, and SalesLogix. So there's a new gorilla game forming in the mid-enterprise CRM market. I think the conclusions that we drew in the CRM chapter in the book are still reasonably sound with the exception that SFA solutions... I don't want to say moved into the mainstream because there's still plenty of anecdotal evidence that these solutions are not always working, but the momentum of Siebel has carried them far enough that they've been able to establish themselves in that space. And by throwing off the dollars that they're throwing off, they're able to use that on acquisitions and attack their rivals. We mentioned in the book that that might be an outcome of what's going on in the SFA space.

Fool: So if you had the chance to revise the portfolio, would you have picked up Siebel when it bought Scopus or at what point exactly?

Kippola: Are you asking me in retrospect, should I have?

Fool: Well, in the book you entertained the idea in the summer of '96 and then again in October of '97, yet in each case you concluded that the SFA market just wasn't ripe yet, so you left Siebel out of the front office portfolio. At what point would you have added it since Siebel now looks like the leading gorilla candidate in the combined front office space?

Kippola: Let me give you an answer that sounds like I'm skirting your question but is actually the right answer. We recommended a portfolio of Vantive, Clarify, and Scopus, and by virtue of buying Scopus, you get Siebel shares. What's happened is anybody who would have bought that basket now owns the new basket. The high end in that space is now Vantive, Clarify, Siebel as pure plays, and then you've got Baan <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> as a non-pure play.

Fool: So Clarify is still part of the basket?

Kippola: I don't want to get into recommending stocks, that's partly why I'm hesitating... From being on the floor [at a recent front office tradeshow] and talking with the CEOs and VPs of marketing of many of these companies, Clarify is still a reasonably strong company. It clearly doesn't have the financial performance of Siebel, and it clearly doesn't have the strength in customer service that Vantive does. But it is one of the key players in the space.

Fool: So has the front office space seen a tornado yet?

Kippola: No, I don't think it has. I think we've seen customer service management software take off in computer services, telecommunications, and financial services. Beyond that it really hasn't taken off in tornado mass in other industries. Likewise SFA really hasn't taken off in critical mass in most industries. I think SFA has got a bright future in front of it. And now that I'm seeing this mid-enterprise market emerge for the whole combined CRM suite, companies like Onyx, Pivotal, Saratoga, and Sales Logic are growing very fast. The mid-enterprise marketplace is going to be every bit as dynamic as the high-end enterprise marketplace. Although these vendors don't get the deal size that Siebel gets, the number of customers they can go after is an order of magnitude larger.

Fool: Has the activity in the front office market over the last nine months taught you any new lessons?

Kippola: The customer service and SFA categories have merged together more quickly [than expected]. It's not that they merged in terms of technology, but it's become a check box that companies need. For a company to walk in and say, "We've got a customer service management suite but we don't have SFA" -- that's going to get that company thrown out of a lot of potential sales opportunities even when the prospect isn't even thinking of implementing SFA in the next few years. That's simply because the prospect wants a path, they want a vision to the future being able to tie all their customer contact technologies together so that they're seamless.

Fool: Interesting. To shift gears again, what about the Internet security software market?

[Kippola said he doesn't understand this market as well as co-author Paul Johnson does. But he had a few comments.]

Kippola: That market has warped into a new kind of market. It's warped into a securities suite and a systems management suite. Companies don't want to install point applications but a securities management suite.... Network Associates was originally an anti-virus company, MacAfee. They merged with Network General, which made network analysis software. That combined entity is now out acquiring companies in the security space and the help desk space because ultimately all these technologies have to interact with one another. So simply being a point security technology alone is no longer enough.

Fool: Going back to the ERP market, which SAP dominates, how much heat will the mid-tier ERP companies get from SAP, PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %>, Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>, and Baan?

Kippola: They should be worried, but not enough to lose any sleep. There's plenty of space available in the mid-enterprise. It requires software that can be implemented much more quickly. It requires different business models that in many cases require indirect sales forces as opposed to direct sales forces and systems integrators who are comfortable getting $1 or $2 [in] services revenue for every dollar of software, rather than $5 or $10 of services revenue for every dollar of software even as the software prices for these mid-enterprise firms are much lower than the software prices for the large ERP vendors.

So you see companies like Platinum Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSQL)") else Response.Write("(Nasdaq: PSQL)") end if %>, which are trying to position themselves as a gorilla in the mid-enterprise, and others coming from a lot of different angles: J.D. Edwards <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDEC)") else Response.Write("(Nasdaq: JDEC)") end if %>, SSA, Great Plains <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GPSI)") else Response.Write("(Nasdaq: GPSI)") end if %>. All are sort of making a play from their basis of strength and then trying to round out their ERP suite as well as move into the adjacent CRM suite. Platinum Software recently acquired a company called Clientele, which makes an SFA system. Here we've got a company that's been building out its back office suite that's now launched over into the front office suite. I think there's plenty of space for mid-enterprise vendors to do well even as PeopleSoft, SAP come down. They're going to attack the high end of the mid-tier first, and that's still going to leave the middle and lower end of the mid-tier available.

Fool: So is that mid-tier a gorilla space?

Kippola: Oh, I think so.

Fool: Well, I guess my final question is just are there any new gorilla games out there that look interesting?

Kippola: Yeah, I think there are. The front office CRM suite consists of marketing, sales, and service modules. What really hasn't been integrated well into the CRM suite is marketing. The marketing functionality in most of these products is pretty light at the present. There are a number of companies that are privately held that have recently gotten venture capital funding and that are entering this space. I should mention that one of the premier ones, Rubric, is a company whose advisory board I sit on. The other key player in the space appears to be a company called Market First.

Fool: What about gorilla candidates among companies that are public or may soon go public?

Kippola: Again, the mid-enterprise CRM space is interesting. I think we should see one or two of those companies go public in Q1 '99.

Fool: This is really my final question. What do you make of Apple, a chimp that looked dead but appears to have a bit more life in it? Do they have room to run, or is this just a swan song?

Kippola: If they have room to run, I haven't figured it out yet. That game was over a long time ago. I think that there are things the company could do, but they're radical changes to their current business model. They basically have two choices. One, they continue to run their firm by offering their installed base a path upwards to higher performance machines and they don't let their installed base walk away from them. Obviously, that in itself is still going to be rather difficult.

Or number two, they have the opportunity to leverage their brand in ways they haven't before. They could leverage it into consumer electronics. They could leverage it into Wintel machines. They could leverage into NCs [network computers]. But I think those are radical changes to their business model, and those aren't necessarily sure bets either.

Fool: So it's stuck being either an essentially sick chimp or reinventing itself for a different royalty game than it's played in the past.

Kippola: I think that's correct.

Fool: Well, I'm out of questions. Thanks for taking to time to chat.

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