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Weathering the Storm
Will CRM vendors withstand the current economic climate?
For the rest of the July 2001 issue of CRM magazine please click here
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When the U.S. economic downturn hit the CRM industry, the signs of a troubled economy in this high-tech sector were clear: Many vendors' first-quarter earnings missed the mark, layoffs ensued and rumors of potential takeovers were flying. But all was not doom and gloom, as market leaders remained strong with rising revenues, and some companies expanded in Europe and Asia, even as they laid off workers in the U.S.

Dick Berner, chief U.S. economist at Morgan stanley, blames the cutbacks on excessive capital spending. "Over the last two years, companies invested heavily in software or hardware and went over the top." The United states, Berner says, will enter a mild recession in the second and third quarters, but in the fourth, the economy will see growth. "Like day follows night, recovery follows recession," he says. "We have a Fed that is aggressive. Next year, we'll see a robust economy."

Harry Watkins, research director for the CRM practice at Aberdeen Group in Boston, says no one can predict the depth of the downturn. "No one, from economists to the Fed on down, knows where it's headed," Watkins says. "Most of the companies that represent primary prospects for CRM initiatives are being very cautious and slowing down on all their capital acquisitions."

Rounds of Layoffs

Among the companies showing signs of difficulty, Internet and network applications provider Cisco Systems saw its third-quarter earnings fall 30 percent below the same quarter last year and subsequently laid off 8,500 employees.

With earnings of $9.3 million for the first quarter showing a 22 percent growth, Applix, a provider of customer analytics and business planning software, reported a 13 to 16 percent miss of its target.

Nortel Networks also reported earnings below expectations at $6.18 billion. The same quarter last year yielded $6.32 billion for the Internet company. Nortel expects a net reduction of 20,000 employees from last December until mid 2001.

E-business applications provider Onyx Software laid off 135 employees after its $27 million revenue from the first quarter fell short of its January 30 earnings prediction. Onyx remains strong in Europe, however. The company recently hired a new vice president of European operations because, according to Onyx CEO Brent Frei, the infrastructure remains healthy there, despite layoffs here.

While customer interaction software provider E.piphany earned $38.1 million, representing a 164 percent increase over last year, the company still missed its earnings target and experienced a net loss of $295.4 million due to amortization of stock-based compensation.

In an attempt to reduce operating expenses in response to uncertainties in the marketplace, a number of other companies cut positions. Broadvision let go of 325 employees; Firepond plans to cut 20 percent of its workforce; Vignette slashed 345 jobs and Blue Martini Software cut 80 positions.

Survivors Get stronger

Wendy Close, CRM research director at Gartner, says layoffs are inevitable during this time, and laying off redundant personnel is necessary. "Layoffs come with the territory." Close also says that as a result of the slowdown, the industry will see a lot of consolidation. The larger vendors that are staying strong will be the only ones left standing when the market turns around. "The smaller players--the ones whose stocks are in the toilet--will merge or cease to exist."

ICT Group, a global provider of (CRM) solutions, reported record consolidated net revenues of $57.8 million for the first quarter, a 40 percent increase over 2000 first quarter net revenues of $41.3 million.

PeopleSoft reported $503 million in its first quarter investment call--the highest earnings for a period in the company's history and a 70 percent hike over the same quarter last year. CEO Craig Conway agrees with Close, saying the market has taken a toll on small and midsize companies. "In the end, it will be an SAP, a PeopleSoft, an Oracle and a Siebel playing field."

Tom Siebel concurs, saying of the 80 CRM vendors in competition with Siebel, 60 will collapse by year's end. But even Siebel's e-business Goliath laid off the bottom 10 percent of its workforce during the last six months and halted administering executive bonuses. However, Siebel remains strong, earning first quarter revenues of $588.7 million, compared to $319.7 million during the same period last year. The company also hired 988 employees in development, customer service and at the executive level. "We did weather the storm quite well," Siebel says. "There's no doubt we will come out of this even stronger."

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