SSA restructures, seeks niche

The software company is taking a $120 million restructuring charge, the third step in a four-part plan to get the company back on track.

5 min read
System Software Associates once owned the industrial software market. Now it's struggling to find itself.

The Chicago-based software company announced today that it is taking a $120 million restructuring charge, the third step in a four-part plan to get the company back on track.

"This puts forward a business model that will bring us back to profitability in 1999," said Robert Hoyt, vice president of operations at SSA. "It puts our balance sheet in place with other software firms in our market."

SSA, whose AS/400-based BPCS software once ruled the industrial enterprise market sector, has struggled for nearly two years to regain the momentum it lost when client-server computing, led by SAP, stole its market share.

As part of the restructuring, SSA will lay off about 300 people, drop new development on the Digital and IBM Unix platforms, cut office space by 25 percent, and honor warranty contracts.

Still some analysts wonder if it is enough.

Bill McSpadden, president of Plant-Wide Research in Billerica, Massachusetts, said the cuts seemed to be a "little light."

"The company would be in a little bit better position if it restructured a little more severely," McSpadden said. "I don't mean that to sound heavy handed but if you are going to give bad news and swallow your medicine, do it once and get it over with. The worst thing SSA management could do is if they have to restructure two times in a row. Then they will have serious problems."

SSA wound up where it is today after spending millions in early 1996 to revamp its product to an object-oriented, Unix-based system. It was an attempt to leapfrog competition but nearly killed the firm in the process. The planned $125 million project took $200 million to complete and customers stalled placing new orders while waiting for the new product to be released and then mature.

SSA executives said the company also made the fatal mistake of trying to compete head on with SAP for large enterprise deals at top tier Fortune 500 companies instead of sticking with its core market--divisions of those huge companies and smaller second tier manufacturers.

"SSA needs to stay out of SAP's headlights," said Bruce Richardson, analyst at AMR Research in Boston. "SAP will leave them as roadkill. SAP has driven everyone out of that market including those in better financial shape than SSA."

Hoyt said the company is hoping now that the component architecture will be the key to new growth because such an architecture, along with a messaging system in BPCS, makes it easier for companies to link BPCS to other third-party products like SAP's financials. The result is that SSA is hoping to corner the market on selling systems to automate plant-level processes while letting SAP automate the corporate offices.

However, profits have yet to return even though the first version of the new and improved BPCS hit the market in September 1996.

For the most recent quarter ended April 30, SSA posted a mere 4.4 percent growth in revenue from the like quarter last year on sales of $102.4 million. The company took a $9.4 million loss for the second quarter. This is while competitors like PeopleSoft, J.D.Edwards, and SAP continue to show strong growth.

But that was under the old guard. Founder and CEO Roger Covey stepped aside and turned over his company to William Stuek, a 30-year IBM veteran who took over as SSA's chief executive and president in April. Stuek brought with him a battalion of ex-IBMers to turn the company around. Most of the new guard was put into high level management positions including one as chief financial officer and another as head of development.

"One of the challenges for SSA is that when Bill Stuek came in he was sold this glorious mansion but what he got was a nice plot of land and a fixer upper," Richardson said. "This is a company that needed to focus and Stuek is doing the right thing."

Stuek's four-pronged approach to return to profitability included today's restructuring, an earlier stabilizing of the company, an overhaul of top management, and a still-to-come plan to start growing the business again by making sure everyone is focused on the core markets. The new growth initiative is to be set into motion in the next month.

Wall Street continues to keep a wary but optimistic eye on Stuek as his strategy takes root. Christopher Mortenson, financial analyst at BT Alex Brown, said he is keeping the stock at a neutral rating for now.

"The action Stuek has taken, cutting back the cost structure, is appropriate and hopefully it will put them in good shape," Mortenson said. "The other side of the challenge is still how do you get the products right and grow revenue. These are still some big challenges. They need to get their [Unix-based] system cleaned up. Their AS/400 product is in extremely good shape but it is not a huge growth area."

SSA is also taking much of the lucrative service business back under its own wing. Hoyt said the company was giving away that part of the business, turning over service to other companies. But now SSA plans to bolster its service department and take care of its customers itself.

"SSA has two major things in its favor, the first is it has a very large installed base and now it is deriving significant revenue from that segment through service and support," McSpadden said. "In the last quarter service and support was a savior for them. The second thing is that from a midrange market point of view they have always had a good understanding of what sells in that marketplace. They just did not have a good direct sales program."

Most of SSA's sales has been through affiliates. McSpadden said with the new management in place, the company is now learning how to get "new and stronger affiliates and how to direct its existing sales force to sell products. But they must carry it off quickly. Make these transitions and get back to business."