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April 15, 1997updated 05 Sep 2016 1:00pm


By CBR Staff Writer

A longer version of this article appears in Computer Business Review, a sister publication.

Bug-ridden software, legal threats, plunging revenues, financial irregularities, mass staff defections and discontented users. Over the past year, Roger Covey has had his plate full. Ever since the chief executive and founder of business software vendor System Software Associates, boldly predicted a bumper year ahead for SSA in his 1995 annual report statement, things seem to have gone wrong for Covey, the 41-year-old who set up Chicago-based System Software Associates in 1981. We went through a difficult year, he says ruefully. But while Covey speaks as if the problems are in the past, others say there is more to come and that System Software could have further to fall. The mistakes can be seen clearly in System Software’s figures. After posting a net profit of $26.6m in 1995 on revenues of $374m, in 1996 the company plunged into loss, reporting a deficit of $32.8m on revenue down 9% at $341m. The worst of the pain came in the third quarter when revenues fell to $72.2m from $89.7m, resulting in a loss of $20.2m. Despite the admitted tactical business errors, Covey says that main reason for his company’s lackluster performance last year was product transition. Compounding these problems, the company was then forced to restate its revenues, at the end of last year, wiping $46m off its sales, after auditors said it had been booking revenues which were not yet, or could not be, realized.

By Joanna Mancey

Considering the scale of the turbulence that has been buffeting System Software over the past few months, the company’s public persona has remained relatively unscathed. SSA, which was the 22nd largest software company in the world at the start of 1996 before it was forced to restate its figures, is still widely regarded as a robust provider of enterprise strength applications software. Its flagship BPCS package, which consists of 40 modules covering manufacturing, financials, personnel and distribution, is used by 8,000 client sites across the world primarily on IBM’s AS/400 proprietary business computer. But according to sources close to the company, System Software may not yet have reached the nadir of its problems. Few will talk publicly – Covey, say competitors, customers and ex-employees, has threatened legal action on those that speak out about the company’s difficulties. But in private, many say that the catalog of troubles that combined to turn 1996 into one of the worst years in System Software’s history are far from spent, and that the issues run much deeper than merely a product transition. System Software first ran into difficulty in the early 1990s when the company decided to try to convert its IBM AS/400-based software for Unix so that it could compete in the burgeoning open systems market. By 1994, the project was faltering and 5.1 ended up being more than two years late and, according to analysts, was never stable – even now, analysts say that System Software’s Unix skills lag those of competitors. Only a small number of users bought the product and even fewer actually installed it. In 1995, Covey decided to wash his hands of BPCS version 5 and supersede it with version 6, an ambitious fully object-oriented rewrite of the software which would run on both open systems and the AS/400. The aim was to provide a high level of ‘application configurability’ that would enable users to adapt the software precisely to their operations while maintaining a short implementation time. This project, however, also ran into difficulty, missing delivery deadlines by almost a year. Covey says the latest release of version 6, delivered last September, is now stable, although he admits that there are improvements still to be made. Despite already spending a third of a billion dollars on development, research and development expenses are still rising. Nevertheless, he is adamant that the expense and the short-term pain will have been worth it. Getting to the new product was much more expensive than I thought, but now we have the leading technology for the next 10 to 15 years, says Covey. As further proof that System Software has refound its form, Covey says that the company is getting renewed interest from the systems integrators and has its largest pipeline of orders ever. In comparison with its leading competitors, System Software’s recent performance has certainly been bad. While it has been plagued with shrinking sales, all its major competitors have seen revenues shoot up 40% or more. The ERP, enterprise resource planning, market is booming, says Travis White, chief executive of J D Edwards & Co, System Software’s key competitor in the AS/400 market. We grew 40% last year and we will grow at roughly the same pace this year. In fact, J D Edwards says it has now overtaken SSA as the leading AS/400 supplier. The leading Unix vendors also claim to be benefiting at System Software’s expense. Covey is, understandably, quick to play down such claims of defection and points to a number of recent high profile companies – Nestle, Aiwa, Mitsubishi Caterpillar and Nokia among them. Even so, according to the company’s financial statement, SSA’s total claimed number of client sites has fallen by 2,000 since the end of 1995 from 10,000 installations to 8,000 sites. Covey says that its goal in 1997 is to achieve year over year growth every quarter and a return to profitability by the third quarter at the latest. But to achieve that, analysts say SSA must first rid the product of any remaining software flaws and improve overall performance. Second, SSA needs to add support for Windows NT and Economic & Monetary Union currency changes. The latter is promised for later this year, while NT support is scheduled for late 1997 or early 1998. However, given System Software’s track record for hitting deadlines, few are expecting the company actually to stick to these dates. There is also unrest over SSA’s strategy for the year 2000 problem. While version 6 of BPCS is year 2000-compliant, version 4, the most widely installed product, is not. Covey admits that at least a portion of SSA’s user base will not make the upgrade and therefore needs an alternative. SSA is now offering these users a millennium compliance tool kit. Covey’s challenges are not, however, confined to code. The rapid rate of staff turnover at the company during the last year, particularly in Europe, has, say competitors, left SSA with a much depleted sales force. We had a lot of difficulty in Europe, says Covey. It was necessary to make some management changes. Now, he says, with new talent on board and a clutch of freshly promoted executives, his organization is stronger than ever. Meta Group analyst Daniel LeBourhis’ main reservation about SSA is not its sales force but its support channel. SSA is, however, already trying to address that issue. The company has set up a number of BPCS competence centers with IBM, AT&T Corp and Cap Gemini SA, and has been gradually building up its support base. Nevertheless, analysts remain largely unimpressed with System Software and are urging users to exercise caution. To turn these views around and win back analyst support is clearly going to take a lot of investment. While Covey says that research and development spending is coming down, in fiscal 1996 the company spent close to $100m, up 56% from $60m in 1995. On top of this, there are suggestions that, although SSA is having success in signing new contracts, a number of companies have not yet paid in full for BPCS version 6. Few analysts agree with SSA that the company can complete its product transition without further funding, and even SSA has indicated that it is exploring the possibility of a public or private sale of equity. To add to its woes, System Software is also facing three shareholder class action suits, alleging violation of federal securities law. These factors mean Covey’s assessment that SSA’s tough times are over is treated with skepticism.

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