Bedeviled by Bugs in the System, PeopleSoft Makes Big Comeback
The harried Cleveland State University official in charge of the school’s most important administrative software had to laugh last month when he opened the latest letter from PeopleSoft Inc.
The maker of multimillion-dollar programs for automating human resources and customer relations efforts was pitching another new system, this one for ordering supplies electronically.
But Cleveland State already has spent $16 million on previous, glitch-ridden PeopleSoft programs that it thought would cost only $4.3 million, and there’s no end in sight.
“In the fall of ’98 and the fall of ‘99, financial aid either could not be given out or it was wrong,” said university Vice President Joe Nolan, tossing the latest PeopleSoft pitch aside. “So much for customer relationship management.” Nolan’s reaction isn’t unusual, and it shows why an unexpected comeback by the Pleasanton-based software company, whose stock has tripled since May, could be short-lived.
“PeopleSoft as a company has turned itself around,” said analyst Sanjiv Hingorani of brokerage Dresdner Kleinwort Benson. “However, the stock price rose very sharply in a very short period of time, and I believe the rise was unwarranted for that period.”
The big reason for the stock revival is buzz over the new versions of PeopleSoft’s flagship products, the result of a huge investment the last two years in research and development.
To date, few large customers have installed the new products, which allow more people to use the Web to make health-benefit choices, register for classes and the like.
PeopleSoft’s gamble may pay off. But customers, employees and analysts suggest that the stock surge is based more on the hope for the future than on the facts thus far.
The company’s stock is still down from its 1998 high of $57.44. But Friday’s close of $35.25 is a lot better than $12, where it languished in May. In the last six months, key rivals Redwood City, Calif.-based Oracle Corp. and SAP of Germany have both fallen 20%, while Denver-based J.D. Edwards & Co. is off 12%.
“The stock just got to a more normal valuation for a company that people think will be a winner,” said David Sankaran, a PeopleSoft spokesman.
PeopleSoft’s stock-price turnabout came after investors fled the company in 1999 as it lost $178 million, laid off 6% of its employees and reported its first dip in sales, from $1.47 billion to $1.43 billion.
The company wasn’t the only victim last year in the market for big packages of corporate programs, known as enterprise resource planning software, or ERP. Revenue for the whole industry went flat, in part because corporations were putting off purchases while they prepared for the year 2000 bug.
But the downdraft was toughest for PeopleSoft, a company known for the folksy ways of founder and Chief Executive Dave Duffield.
A former IBM executive, Duffield launched PeopleSoft in the late 1980s. It went public in 1992 and doubled its sales every year until it lagged only Oracle and SAP.
Along the way, Duffield gave his “PeoplePeople” stock options and big bonuses, threw wild parties and declared fun to be one of the company’s seven core components. (The others: integrity, customers, people, innovation, quality and profitability.)
As a result, Fortune magazine named the company one of the 10 best places to work in 1998.
Perhaps the smartest thing PeopleSoft did was tailor its products to special markets, including universities and financial institutions, that had unique needs.
“PeopleSoft was the only company in America with an ERP system and a database that would make it possible to integrate all of the university’s resources,” said Nolan of Cleveland State. “Sounds like a great idea.”
Unfortunately, many of its customers believe that PeopleSoft put more emphasis on sales than on making sure the software ran well.
And the programs are so complex that buyers had to rely on expensive consultants for help, some of whom did more harm than good.
The need for assistance beyond what PeopleSoft provides is the reason San Francisco’s school district has spent more than $5 million on a system that initially cost less than $300,000. Five years later, it still isn’t working right.
Elsewhere, PeopleSoft customers discovered that students who stopped attending classes still were getting financial aid and that employees weren’t getting pension payments.
Consultants hired by W.L. Gore & Associates, the closely held maker of Gore-Tex fabric, entered Mickey Mouse and Donald Duck into the company’s PeopleSoft payroll system as a demonstration and couldn’t get them out again before the paychecks started rolling.
And seven of the Big Ten Midwestern universities wrote a joint letter to PeopleSoft decrying the sloppy programming and inadequate testing.
PeopleSoft executives acknowledged past missteps but said most customers are happy. They said they have committed themselves to better relations, even basing bonuses on customer satisfaction figures.
Every big enterprise software company has had some problems. Hershey Foods Corp. blamed a system created by SAP and others for distribution failures and a decline in profits for the last half of 1999.
But PeopleSoft had internal problems as well, including the stock drop that rendered many options worthless and helped push worker turnover close to 30%.
“We had a series of endless reorganizations,” said Edward Potocek, a PeopleSoft services executive who quit in September 1999. “There seemed to be no vision, no plan. . . . It took too long to get any decisions made. I also thought PeopleSoft was treating people horribly.”
Potocek’s sworn comments were filed this summer in an Alameda County lawsuit between PeopleSoft and a smaller company called Evolve Software.
After Potocek and scores of other PeopleSoft employees went to Evolve, PeopleSoft sued over potential trade-secret theft and asked for a preliminary injunction to stop the recruiting.
The judge rejected the request, saying PeopleSoft hadn’t shown it was likely to win at trial. And many of PeopleSoft’s ex-employees gave statements explaining that they quit because life at the firm was chaotic and unpleasant.
Craig Conway, a former Oracle executive, was named PeopleSoft’s president in May 1999 and took over as CEO from Duffield in September of that year.
The new boss is doing many things right, customers and analysts said. Conway oversaw the big bet on converting the company’s products to the Web model ahead of competitors.
His team eliminated three-fourths of the firms that had been recommended for installing the software.
A couple of months ago, the company belatedly began a certification program for those consultants.
Customer satisfaction numbers that once topped 90% are edging up again, from 82% to 86%, according to PeopleSoft Executive Vice President Baer Tierkel, and employee turnover is down to about 12%. Conway wasn’t available for an interview.
To Duffield’s original seven core components, “Craig added accountability, intensity and competitiveness,” said marketing and strategy chief Tierkel, who was employee No. 100 when he joined in 1991.
Conway also settled a lawsuit filed by W.L. Gore, and he flew to Chicago for a meeting with the angry Big Ten university officials.
“He said that higher education was important to him and that he wanted to be responsive,” said University of Michigan Associate Provost Paul Courant, who came away impressed. “You have the feeling that by dint of hard work, things are getting better.”
How much better is another question. PeopleSoft’s stock is trading at a whopping 153 times its trailing 12-month earnings, eight times the ratio for the Standard & Poor’s 500.
In order to grow into that valuation, the company will have to jack up its profitability and expand into new areas in the face of powerful competitors such as Oracle. In its quarterly report last month, PeopleSoft concedes that Oracle “may have an advantage” because of its far larger customer base from database sales.
So far, however, Oracle hasn’t committed itself to battling over every application.
And selling new products to existing customers won’t be easy while PeopleSoft is still sending daily software “patches” that repair bugs in the programs it sold them before.
“We will have people working over Christmas and New Year’s holidays just so we can keep up with the enormous number of fixes--many of which are fixes of previous fixes,” said Nolan of Cleveland State.
“We’ve spent a small fortune, and it’s still not anywhere near satisfactory.”
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Software Sales Race
PeopleSoft’s sales of big corporate software programs for human resources, customer relations and other functions are gaining steam, but so are those at its top two U.S. rivals. Revenue from software applications, in millions of dollars:
Source: Gartner Dataquest
