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Sybase sees services as savior

Facing weaker than expected demand for its database software and development tools, the company is now under the gun to find a profitable niche.

Facing weaker than expected demand for its database software and development tools, Sybase is now under the gun to find a profitable niche.

But analysts are doubtful that a planned transition into the services area will give the company the boost it needs, at least in the short term.

Sybase executives have been planning for months to bolster Sybase's professional services organization to minimize the company's reliance on software product revenues. The company is planning an aggressive transition plan that will require its services arm to pull in sales, rather than relying on product sales to drive the need for consulting services.

Chairman Mitchell Kertzman expects the revamped professional services organization to gel soon. "We will put an organization in place that will bear fruit in the second quarter," he told CNET's NEWS.COM.

Yesterday's first quarter earnings results, which show that services is currently Sybase's only growth area and its largest single revenue area, means that the revenue transition to services is already happening, whether or not Sybase has the internal organization in place to manage it.

Sybase's database server license revenues plummeted by 27 percent from one year ago, while revenue from development tools, thought to be a Sybase stronghold, dropped by 12 percent year-over-year. Revenues from professional services, meanwhile, grew by 6 percent.

Service revenue topped $110 million for the quarter, while database server revenue totaled $67.3 million, and tools contributed $28.7 million.

To grow its services business even more Sybase needs more feet on the street--and with its current fiscal troubles, analysts warn that it may be hard to attract the talent it needs. Kertzman said the company plans to add additional consultants to its current staff of 1,300 professionals worldwide, but he gave no time frame. (Kertzman is a board member of CNET: The Computer Network, publisher of NEWS.COM.)

The outspoken Kertzman, who recently handed over day-to-day management of the company to CEO John Chen, said Sybase will also expand its services purview to include non-Sybase software.

Analysts said the good news for Sybase is that the current trend among IS chiefs is to outsource as many projects as they can, especially in some of the areas that Sybase has chosen to target, such as data warehousing.

"More and more chief information officers are turning to systems integrators," said Robert Craig, senior analyst with the Hurwitz Group. "Products are not getting easier to implement, they are getting harder, especially in the data warehousing and data mart areas. That's a tough, gnarly process, and there are not a lot of programmers out there who know how to do it."

The bad news is that Sybase's chief competitors have already seen the writing on the wall, and are making the same transition. Oracle has also beefed up its consulting organization to tackle data warehousing and business application consulting.

Oracle has the advantage of selling its own business application packages, which makes a natural avenue for the company to sell its consulting services.

Craig also points out that Sybase's plan to move beyond its installed base, to offer more general consulting services to companies using software from Microsoft and other vendors, places the company in direct competition with much larger and more experienced consulting firms, such as EDS and Coopers & Lybrand.

"I'd be leery about having a services group make my product selections, if they are not independent," Craig said. "The only way they could really compete in services with the Big Six is to spin off professional services into a completely separate organization. And they most likely will not do that," said Craig.

Other analysts said Sybase's best chance of regaining profitability may be to combine its services organization with a broader product line. "They need to become the L.L. Bean of the software business," said Rob Tholemeier, an analyst with First Albany.

"They need to sell anything, so that no matter what a company wanted to buy, they could buy it from Sybase," he said.

Tholemeier said Sybase has lost its reputation as a supplier of cutting edge technology. "It's OK for them to push technology, but they have to have all of the technology.

"I think they really need to start thinking more like a software distributor than a software developer," said Tholemeier.