The outlook for struggling Novell in seeking
relief by purchasing a struggling services company--Cambridge Technology
Partners--is not very bright.
See news story:
Twists and turns at Novell continue
The merger of the two, announced Monday, comes during difficult times for both companies. Novell has had difficulty with its business model for the past four years. Its original "crown jewel"--the network operating system--is no longer compelling; its collaborative suite has not been competitive; and its Web initiatives have never garnered a large following. Novell's latest crown jewel--its directory services software, NDS--is a strong technology, but the message around it has remained muddled. Novell has had difficulty articulating a value proposition for NDS.
Cambridge Technology is a struggling victim of the dot-com meltdown. It attracted top staff during the heady days of the Internet boom and paid them handsomely with stock. Now it is having problems retaining that staff and retaining customers who are re-evaluating their e-commerce plans. It is looking for technology and, of course, for customers. These challenges, as well as the inevitable turmoil surrounding the shift in corporate culture, will undermine efforts to change the basic Novell business model.
We believe the combination of Novell and Cambridge Technology will enjoy limited success and growth through 2001 as the companies leverage early demand (that is, the "low-hanging fruit") but will slowly falter through 2003, at which point Novell will shut down and/or integrate into traditional services what little remains of the current Cambridge Technology organization. Services organizations depend entirely on "brain power," or skilled personnel. When those key people are not challenged or find better opportunities, the resultant brain drain literally kills a services company.
Part of Novell's problem is that it has failed to hold onto the high end of its channel and maintain strategic positioning with key OEMs (original equipment manufacturers). These have been migrating steadily to Microsoft technology. This migration was hastened when Novell made pricing changes late in 1999 that angered its channel. The acquisition of Cambridge Technology seems to be an admission by Novell that it has gone as far as it can on its own and that it needs to focus on a new business model emphasizing solutions instead of raw technology.
A big hole in Novell's market has been the lack of systems integrators or consultants to build the applications that users need on top of Novell's products. It has also needed to sell and integrate those products into customers' environments. Obviously, Novell is hoping that Cambridge Technology will fill this gap.
With this move, Novell continues a focused effort at remaking itself into an Internet services company, but it also creates an interesting conundrum. During the last eight months, Novell has been fostering extensive relationships with major systems integrators such as Deloitte & Touche in an effort to create market share and "re-brand" its products as more than just operating systems for enterprises. The acquisition of Cambridge Technology puts those relationships into a different and perhaps confrontational light.
Novell's past missteps
Novell has made several missteps in the past with acquisitions that have disappeared into the corporate culture with little positive effect, such as its UnixWare and Netoria. Whatever the consequences of this acquisition and Novell's current systems integration relationships, however, this is the right type of thing to do at this point in the life cycle of remaking the company--if only Novell can make it work.
Novell has basically been a technology company and has always had difficulty communicating how its technology equates to customer value. It does have a presence in large organizations, but it has lacked a service organization or strong partnerships with third-party service organizations to build and install applications on top of its technology to demonstrate the value.
Throughout the 1990s, Novell struggled against a tremendous, steady onslaught from Microsoft. So far, it has succeeded in holding the Redmond giant off--helped in part by Microsoft's own less-than-stellar performance in the networking area. Novell was also buoyed by one shining moment in the late 1990s when it was able to re-engage its client base on the cost savings they could achieve through Zero Effort Networking (ZEN), which demonstrated the value of NDS. This, plus Microsoft's late delivery of Active Directory, helped Novell sell Netware 5+ into its installed base and hold onto its market.
Novell had a chance to make a big splash on the Internet about a decade ago, working with AT&T to create what would essentially have been a Novell VPN (virtual private network). But it wasn't able to pull this off, and since then its presence in Internet technology has never jelled.
Novell tried to repeat its success with ZEN by being very aggressive with Internet-related products to penetrate this growing market--such as with Novell iChain for authentication and permissions infrastructure, OnDemand for thin-client services, the flagship eDirectory. Directory services in particular have been a technical strong point for Novell, but Novell has found it difficult to enter a market with strong leaders and differentiate enough to attract non-Novell customers in enough numbers to achieve a tipping point. As a result, Novell has not been able to develop a Web-centric directory services product portfolio around eDirectory that could compete with Netscape and the other LDAP (Lightweight Directory Access Protocol) technologies.
One has to question what offerings Novell has, as a provider of network-based services, that would be compelling to corporations. It has never really established itself as a strong player in Internet infrastructure. The only significant offering it has is eDirectory, and it can't articulate a real business model around it.
A less than ideal merger
Cambridge Technology is not the ideal partner for Novell--EDS or another strong integrator would be better positioned to exploit Novell technologies--but the merger still has a theoretical chance of working if the two companies can merge their very different corporate cultures. To achieve this, however, Cambridge Technology would need to succeed where Eric Schmidt failed--transforming Novell's business model and channel.
In the real world, however, the acquisition and integration of service organizations by product making companies rarely succeeds. The business model of a service organization is fundamentally different, and executives become impatient with lower profit margins, longer sales cycles and less ability to "push" out to the market. Moreover, Cambridge Technology has struggled to find its niche since Year 2000 projects wrapped up last year.
Novell will likely view Cambridge Technology as merely a channel through which it will "push" product. Cambridge Technology lacks a strong channel through which it can get new business. While it will attempt to sell within the Novell installed base, the loyalty and visibility of Novell's contacts are not visible enough to client personnel handling service projects. Not only is it difficult to push services on an installed base, but also the people in the organization who would use Cambridge Technology's services are unlikely to be the people who purchased Novell products.
The problem is that today Novell does not have all the pieces necessary for the Internet, and it is unlikely to develop those pieces soon. All Cambridge Technology really gets is a customer base that is at least temporarily locked in. Customer acquisition costs are a big deal in consulting. But to reach those customers, Cambridge Technology will go through Novell's channel, which has been hurt during the past few years by ill-advised pricing moves by Novell and aggressive poaching by Microsoft. It has to redesign the channel to sell services.
Don't panic, but don't party, either
Current Novell users should not panic as a result of the merger--but they should not rejoice, either. Users with considerable investment in Novell products and services can potentially benefit from this move if Cambridge Technology can turn the technical potential of Novell technology into viable business solutions that integrate well into Microsoft-dominated LAN and emerging Internet environments, such as Java or Microsoft's .Net. However, given the difficulties in integrating a product and services company, users should be cautious making any major expansions of the Novell presence until the merger is complete and synergy is demonstrated.
These two companies face significant challenges in integrating their two very different corporate cultures. We anticipate major internal battles over corporate strategic direction. Customers do not want to get caught in the middle of those battles.
Users in mixed Novell and Microsoft environments and those developing e-business strategies should review the announcement pragmatically, with a clear understanding that a decided underdog is contending for a share of the crown. Users should consider Novell a tactical rather than a long-term, strategic company. Customers that do not currently use Novell should be cautious about adding its products right now.
Meta Group analysts Peter Burris, David Cearley, Dean Davison, Jerald Murphy, Earl Perkins, Steve Kleynhans and Mike Gotta contributed to this article.
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