Novell's latest evolution
The software maker is turning to an army of technology consultants to resurrect its fortunes and rebuild its reputation.
As Novell gears up to report year-end earnings Thursday--amid plans to cut 19 percent of its work force--the company is also hard at work revamping how it does business. Novell plans to use the consultants acquired through its $266 million purchase of consulting firm Cambridge Technology Partners earlier this year to sell Novell's network operating system, directory services and security software to big companies.
With the company's acquisition of Cambridge Technology, Novell plans to transition from being a provider of network operating system software to a company that sells an a la carte menu of software infrastructure, such as computer user authentication and systems administration tools, along with consulting that is custom-tailored to customers' needs.
Novell hopes that a healthy consulting organization, one that will bring in hefty fees for specialized projects using the company's software, will help it offset slowing product revenue.
In the process, Novell hopes to finally shed its long-held reputation as a technology innovator largely unable to successfully transform new ideas into profits and move beyond its aging flagship product, NetWare.
Former Chief Executive Eric Schmidt, who left Novell in August for Web search company Google, struggled but ultimately failed to transition the company beyond its single-product strategy. Some former Novell executives said the company has never fully recovered from the fall from its NetWare heyday, when it dominated the market for network operating systems.
"They forever want to relive the glory of 1990," according to one former executive who requested anonymity. "Novell was immensely qualified to take advantage of every industry trend and took advantage of none of them."
Novell management is all too aware of that perception. "The problem that Novell got into was that while we had great technology, we couldn't sell it as 'solutions,'" said Stuart Nelson, Novell's chief operating officer. "What Cambridge really brings to the table are consultants. I think it strengthens the Novell brand."
| Novell stock price Stock price from November 1999 to present. |
Source: Prophet Finance
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But those consultants may need more than just a familiar brand. Novell, once the undisputed king of server operating system software, has lost server OS market share every year for the past five years, according to market researcher IDC, due to competition from Microsoft's Windows and from the Linux operating system.
But the company still holds 17 percent of the network operating system market, sells about 1 million server systems per year, and boasts 177 million users, or licensees, of its directory technology, according to analyst estimates.
Novell's potential ace in the hole? A stable of products that could provide the underpinnings for a new era in software, in which "plumbing" for software services delivered over the Net--such as the much-hyped Web services concept--could reap huge profits.
The trick is to convince the existing base of Novell customers to take a chance on those new products. But as Novell's network operating system market share continues to decline, the clock is ticking.
"Novell would like people to see a broader view of the organization," said Dan Kusnetzky, vice president for system software at IDC. "It has both the products and the services which could allow it to be viewed as a company providing the glue to tie everything together."
However, "this won't happen unless Novell goes out and tells people about its grand vision and convinces them that this is the right way to go forward. The window of opportunity is closing fast," Kusnetzky said.
Novell's latest evolution is a huge gamble and a careful balancing act, as the company attempts to craft a strategy around new technology, while being careful not to alienate a loyal installed base of NetWare devotees that provide the bulk of the company's revenue.
"The acquisition doesn't change a fundamental problem for Novell. As a software company, it's under a lot of pressure," said Jamie Lewis, chief executive of industry consultants The Burton Group.
Deja vu jitters
For longtime Novell customers, the Cambridge Technology acquisition may be too reminiscent of Novell's earlier days, when former Chief Executive Ray Noorda attempted to broaden the company's product lineup beyond NetWare. In the early 1990s, Noorda chose to acquire WordPerfect and Borland's database software in an effort to compete with Microsoft. The strategy failed, and Novell sold off the two product lines.
Novell's new technology is promising, company watchers said. But--in an oft-repeated situation--the company has had trouble marketing and selling products beyond its traditional base of corporate customers, such as United Airlines, AT&T and a multitude of small operations used to Novell's expertise in the more limited network operating system market.
With the addition of the consultants, Novell will now attempt to revamp its image and find a new audience for its products. Some longtime customers wonder where Novell is headed, and whether it can stay afloat as a competitive software company.
"I'm praying they're still there," said Mitch Ablove, acting director of information systems at the Golden Gate Bridge Highway and Transportation District in San Francisco.
Ablove is a "committed" user of Novell, but this year, since the Cambridge Technology acquisition, he has wondered for the first time whether the company will survive. In addition, Ablove's use of Microsoft's Windows 2000 has grown in conjunction with the Golden Gate Bridge's wider use of application software, such as systems to runs its business.
In a stark reality check of Novell's plans, Ablove and other customers are worried that Novell's intense focus on consulting could hurt its new technology research and development efforts. "I'm concerned the technology people--(former CEO) Eric Schmidt (and others)--have gone, and what's left are the consultants," he said.
Former executives said the Cambridge Technology acquisition raises the specter of Novell fading as a company focused on technology and instead relying on consultants who can milk a steady revenue stream to make its quarterly earnings expectations. A long string of former technology innovators, including Wang Laboratories and Digital Equipment, followed a similar path, only to vanish.
As one former executive put it: "I think the last gasp of any great technology company is to become a services company."
Novell's savior?
Novell officially ended the Eric Schmidt era earlier this month when it installed Chief Executive Jack Messman as chairman, a position Schmidt still held despite his departure to Google.
Novell's CEO since 1997, Schmidt led a brief renaissance at the company during the Internet boom but faltered in day-to-day operations and, according to some, was ill-equipped to rid the company of its ties to the past and its reliance on NetWare. As one former executive put it, Schmidt simply "ejected" himself from Novell once the luster of running the company had worn off.
One of the company's new technologies, known as directory services, or "eDirectory," has long been thought to be Novell's savior. But Novell has been slow to develop a strategy to populate the Web with its directory software, while old rival Microsoft and others have made strides.
Novell has also fumbled efforts to convince information technology departments and software developers to use eDirectory as a basis for writing new software programs. And it has been zealously guarding its technology gems when it should have been giving away eDirectory to spark interest, analysts and former Novell executives said.
The company is now partnering with other players and signing deals for eDirectory.
As companies buying technology develop strategies to expose their internal systems to the Web to take advantage of coming Web services, the operating system, or "platform" in industry lingo, will likely dictate the choice a customer may make in areas such as directory technology and other products.
"Whoever sells you your underlying platform will sell you your directory," said Enrique Salem, senior vice president for products and technology at Oblix, a company that builds software on top of directories.
And therein lies the dilemma. Novell faces a shrinking operating system business just as its primary weapon--eDirectory--has largely become a commodity as a technology bundled into a larger system, such as Sun Microsystem's Solaris with an iPlanet directory.
"For most people it doesn't matter what you run on. If you're Novell, you can only sell so many servers," according to Doug Spindler, president of the San Francisco Novell User Group. "It appears to me that they don't know exactly where they fit in or what they're doing."
While Novell is broadly promoting its eDirectory technology to any takers, other directory software makers such as Oblix, Epicentric and Netegrity have moved to dominate specific markets that take advantage of the technology--markets that Novell has been late to move into. This competition has resulted in a "very careful balancing act" by Novell, said eDirectory executive Ed Anderson.
Another huge opportunity--first discussed by Schmidt and his research team--may have eluded Novell due to the lack of a technology presence on the Web. Novell was the first to introduce a technology to manage a consumer's digital identification. Microsoft, for example, is promoting its Passport digital identification service as a basis for an upcoming wave of so-called Web services from the company. Sun and AOL Time Warner are planning similar services.
Known as "DigitalMe," the concept took advantage of Novell's directory repository to provide a user with a single wallet of information that could be used on a variety of Web sites. Schmidt spearheaded the effort and wowed a crowd of Novell devotees at the company's annual user conference in 1999 with the new technology, which showed both innovation and practical use--something that has been rare in recent years at Novell.
"Conceptually, (Schmidt) was right on," said Chris Stone, chief executive of software company Tilion and a former Novell strategy executive during the Schmidt era. Unfortunately, Novell's plans for DigitalMe fizzled, and "Microsoft's Passport, Netegrity, Entrust and others will eventually own this market," Stone said.
Loyalists continue to hope that Novell's technology--its release 6.0 of NetWare is getting rave reviews--can turn enough heads to restart the company's growth. "If people reevaluate and look at the entire package that Novell has to offer, they could regain some market share," Spindler said.
But others only see an uphill battle for Novell in a world dominated by larger software behemoths. The company's own internal woes could be dismissed if not for the 800-pound gorillas of the software industry they continue to battle, even as they evolve and tackle new markets.
"It's a good story. The products and tools really work," IDC's Kusnetzky said. "The only issue is that Microsoft, IBM, Compaq, HP, Oracle and a few other 'minor' competitors are telling the same story."
Novell executives defend their plans and point to the loyal customer base they have maintained despite Microsoft's relentless competition. "We're not going to lay down and play dead (for) anybody," Nelson said.