PeopleSoft's 'better plan' leaves customers cold

Lured by the promise of personal attention every bit as good as that lavished on bigger customers, John Matelski decided seven years ago to buy a $1.7 million accounting system from J.D. Edwards for the City of Orlando, Fla.

"I didn't want to be a minnow in an ocean," said Matelski, the city's chief information officer, who turned down a rival bid from PeopleSoft to supply the software.

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What's new:
Customer complaints are throwing doubt on PeopleSoft's handling of its merger with J.D. Edwards.

Bottom line:
The missteps could open the door for Oracle's buyout bid, helping it win over PeopleSoft shareholders.

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But these days Matelski is feeling very much like that proverbial little fish. Nearly one year after PeopleSoft's $1.8 billion acquisition of J.D. Edwards, Matelski says apathy has replaced tender loving care when he calls up PeopleSoft headquarters for customer support.

Other J.D. Edwards customers have complaints, too. Some lament the lack of attention. Others are annoyed at being asked to pay higher fees as PeopleSoft renegotiates their maintenance, training and license contracts. Though few are straying from the PeopleSoft fold, neither are they clamoring for more software the way the company predicted they would.

Some of these problems may be routine for a billion-dollar merger. But PeopleSoft has billed the merger has a "better plan" for shareholders than a buyout bid from rival Oracle, and it can hardly afford to alienate customers as it fights to remain an independent company. Oracle is pursuing a $7.7 billion hostile takeover of the Pleasanton, Calif., company--an effort it launched last year, before the ink had dried on J.D. Edwards deal. All three companies make business-efficiency programs that help companies process orders, update staff records, keep their finances in order and handle myriads of other office tasks.

A San Francisco judge is now deliberating on whether the Oracle bid poses an antitrust threat, as federal trustbusters charge. If Oracle wins, its $21-per-share, all-cash tender offer may start looking pretty good to PeopleSoft shareholders. Shares of PeopleSoft closed at $17.32 on Monday and have been in a steady slide all year.

PeopleSoft's announcement on Tuesday that its revenue missed lowered targets cast doubt on the company's business plan. The software maker blamed its financial miss on the Oracle mess, but securities analysts suspect its problems run deeper.

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Several have dinged the company for failing to capitalize on its acquisition of J.D Edwards--a deal that faces growing scrutiny as pressure from the Oracle buyout intensifies.

"Every single glitch makes it easier for Oracle to take over," said Joshua Greenbaum, a technology analyst at Enterprise Applications Consulting.

Any gaffes PeopleSoft makes with J.D. Edwards customers could also play into the hands of other rivals, such as Germany's SAP. SAP, the largest supplier in the $20 billion-a-year business applications market, appears to have come out on top of the merger mania by going it alone and offering a haven to uncertain software buyers.

CEO Craig Conway defended PeopleSoft's handling of the J.D. Edwards merger during an earnings teleconference on Tuesday. He noted that company met or exceeded =" 5150573"="">earnings expectations in the fourth quarter of last year and the first quarter of this one, as the merger went better than planned. The company has also invested in further development of J.D. Edwards' products and has released new versions, proving its commitment to those customers, Conway said. Analyst skepticism about the progress of the merger is based on pure speculation, he added.

"I'm quite confident that the overwhelming feedback from J.D. Edwards customers--and I meet with them 50 percent of the time that I meet with customers--is that they are extremely gratified that PeopleSoft took over J.D. Edwards," Conway told CNET News.com.

Ram Gupta, the PeopleSoft executive who has overseen the integration of the two companies' product sets, insisted that the J.D. Edwards merger is on track. "It's exactly how I'd have liked to see it go," he said.

Gupta says he's particularly encouraged by how quickly PeopleSoft has introduced updates to J.D. Edwards' products, such as PeopleSoft World, a revamp to J.D. Edwards' business applications for accounting and manufacturing. The new features are designed to please current users and help the company sell the software to its core PeopleSoft user base. Between 10 percent and 15 percent of the company's software revenue in the first half of this year came from such "cross-selling" activity, PeopleSoft said.

PeopleSoft is also on target this year to reach its goal, set in September, of cutting $167 million to $207 million in duplicative costs as a result of the merger, Gupta said.

Communications breakdown
Yet relations with some J.D. Edwards customers-?the small ones in particular--are strained. A chief complaint is that PeopleSoft has communicated poorly about new licensing and maintenance models that it's pushing J.D. Edwards customers to accept.

Appetizers And, a 400-person food manufacturer in Chicago, worries that PeopleSoft's pricing schemes could bust its IT budget. PeopleSoft charges separately for products that J.D. Edwards had thrown in as part of a package, said Kerry Christianson, an Appetizers And manufacturing analyst.

"I don't know if they really understand the smaller customer, which was J.D. Edwards' bread and butter." --Kerry Christianson, manufacturing analyst, Appetizers And

In addition, the company is unlikely to get a discount on its upgrade project. PeopleSoft only offers discounts to customers that spend $100,000 or more on the project, Christianson said. Appetizers And plans to spend less than half that amount.

"I don't know if they really understand the smaller customer, which was J.D. Edwards' bread and butter," Christianson said.

Customers have the option to keep the same terms they had with J.D. Edwards, Gupta said, even though PeopleSoft does want customers to sign up for its standard pricing model.

A disenchanted base of small and midsize customers would be a major defeat for PeopleSoft, which acquired J.D. Edwards in part for its relationships with such companies. Many software makers, including SAP and Microsoft, are eyeing sales to midsize businesses as the potential antidote to tepid demand from large, multinational corporations.

Yet PeopleSoft may have fanned the flames of discontent when it snubbed Quest, a large J.D. Edwards user group. Looking to streamline its user group activities, PeopleSoft pulled its speakers from Quest's annual conference after a disagreement over the terms of its participation in the event.

"I think that poisoned the well to a certain extent," technology analyst Greenbaum said.

PeopleSoft has also struggled to reorganize its customer support and sales groups as it absorbed thousands of J.D. Edwards employees and cut staff as part of the merger, analysts and customers have said. Matelski, from the City of Orlando, said his regional support group is on its third PeopleSoft liaison person since the merger. And David J. Joseph, a scrap metal company in Cincinnati, hasn't heard much recently from the new account representative PeopleSoft assigned to the company after the merger, said Ron Schulte, a systems administration manager there.

PeopleSoft admits the reorganization could have gone more smoothly. For instance, the company was slow to explain to sales staff how the reorganization would affect their territories, said Renee Knee, general manager of the global integration team at PeopleSoft.

The company was also uncertain about how to work with J.D. Edwards' network of software resellers in the United States, which may have led to some confusion, Knee added. PeopleSoft typically relies on its own legion of sales people to sign up U.S. customers but is now incorporating that approach with the reseller model, she said.

Wall Street worries
These stories are making their way to Wall Street. Pacific Crest Securities analyst Brendan Barnicle said that troubles from the J.D. Edwards merger were among several factors in the shortfall in PeopleSoft's second-quarter profit. Other were the high-profile Oracle trial and a widespread decline in corporate software spending that hit numerous software makers this spring.

Also, widespread discounting of software sales--a result of increased competition--is eating into PeopleSoft's revenue. Discounting is a growing problem for other enterprise software makers, including Oracle and SAP.

"It's not because of J.D. Edwards that they missed," Barnicle said. "It's just that J.D. Edwards has not contributed as much as they had hoped or we had hoped."

Those hopes may have been based on false assumptions, said Greenbaum--for example, that the 6,700 J.D. Edwards customers have bigger software appetites than they really do. The typical J.D. Edwards user is a midsize business with conservative approach to information technology and a limited software budget, Greenbaum said. About half run their business systems on aging IBM AS/400 computers. Take David J. Joseph, a company that runs an outdated version of J.D. Edwards' accounting software and that is in the midst of an upgrade.

"We're not buying anything new at this point," Schulte said. "We're just planning to keep current."

Automotive supplier Durr Industries is similarly undertaking a J.D. Edwards upgrade project and has no plans to purchase additional software--not that it isn't interested.

"We're also kind of holding our breath on the Oracle factor," said Robert Robinson, a business systems supervisor for Durr Industries, which is based in Stuttgart, Germany. "Once the case is settled, I think that will have a thawing effect in terms of what people are willing to invest in the products."