Siebel Systems: The Role of the CFO

Siebel Systems: The Role of the CFO

-Malcolm Baker and Lauren Barley

(This report is based on the Harvard Business School case collection: Rev: August 8, 2006

Baker, Malcolm P., and Lauren Barley. "Siebel Systems: The Role of the CFO." Harvard Business School Case 205-068, March 2005. (Revised August 2006.)). 

Abstract:

Mike Lawrie, the newly appointed CEO of Siebel Systems, considers a combination of growth and spending cuts to turn around the struggling software company. Focuses on the role of the chief financial officer, Ken Goldman, in corporate governance and compliance under Sarbanes-Oxley; in establishing a financial model for the firm; in operations and leadership; and in investor relations under Regulation FD. Goldman, who had presided over rapid growth at several other technology firms before joining Siebel three years earlier, must adapt to Siebel's new leadership and operating environment.

REPORT: 

The case identifies and emphasizes the evolving role of CFO in the changing industrial ecosystem. The lessons learned after the major fraud cases and subsequent geopolitical as well as dot-com bubble burst racked the corporate genome. In retrospect, a typical CFO’s activities were associated to monotonous and monochrome corporate governance scheme and compliance. But this case makes a remarking point on the necessity to evolve CFO role from being a number cruncher to being a major part of business partnering. The CFO’s scope not only sticks to the internal affairs of the industry as thought in past but interestingly as case highlights CFO as a key person who needs to coordinate with external  affairs.

The case builds its content on the volume of information that chronologically frames the expectation from CFO Ken Goldman. The complexity arises when the company’s decade legacy seems to be outdated. The first generational approach on product and technology needed a prompt update on creating values. The journey of value creation is attributed to pro-activeness within an organization where people are self driven. When you as a manager have to dictate each and every move an employee should make, that’s the point where we are making mistake. As we are nurturing the parasites which will slowly drain the essence of company existence. Further, decoding the main issues as mentioned in a case, Siebel was in need and hunt for soul searching its existence. The issue behind its fall in revenue was not only limited to depressed market condition. It was highly in pressure marking its share in market that it lost from heavy price discounting and ERP giant’s seamless integration. Moreover, the lack in the creation of innovation and realization of 75% of worldwide custom build CRM market was something Seibel needed to withstand its depression.

Few years back before all the issues turned to prone; there was almost a decade which saw Siebel success to its optimal. The humungous generation of net income $0.3 million in 1995 to $254.6 million in 2001 which accounts to almost 84767% is shear indication of its success in its industry. This is even reflected in share price which was increasing in trend and highest in August 2000. But the downfall started quite early than anticipated. The declining stock price since 2000 is where case starts weaving its compelling lessons. This is the point in case when Tom Siebel in hoard of making things right, stepped down from CEO. The replacement being Michael Lawrie, ex-CEO of IBM sketched two pathways for Siebel. One and the foremost was to get into another growth rate and second be prepared to hop on roller coaster of changes in strategy, financial structure, leadership, a compensation management and culture.

CEO Lawrie thought activist model to be key for any CFO role in the rapidly changing industry. CEO Lawrie idea to achieve 25% operating margin was directly related to CFO ken Goldman internal and external aspects of the job. Though, Ken Goldman had set him apart from late 90s vogue by prioritizing the setting of accounts and control within the limits. But as case develops this was not enough for evolving industry demand for CFO’s. Lawrie thought that CFO Ken Goldman should groove himself up asking well articulated questions defining company’s financial model. In addition, not only limited to internal aspects of job, CEO wanted Ken to be taking lead on the external aspects of job, i.e., Investor relations. Securities Exchange commission (SEC) allegations on Siebel officials on tempering with nonpublic information at two investor events was wake up call for ensuring Investor relations.

The case of Siebel is an eye-opener for realizing evolving CFO’s work dimensions. The few instances along the case make the point stronger. When Siebel had sufficient cash and cash equivalent but it was still taking Long term debt which shows lack of financial input from CFO. This implies that Siebel was late-back in Asset and liability management to generate income from investment. Researching in depth we can interpret that Siebel had taken long term debt from 1999 which in certain degree indicates the start of financial distress. However, Siebel managed the pay of long term debt in 2003 without much change in cash equivalent thus it tells us that Siebel was recovering during the period. Similarly, we can see that an accrued expense was increasing which means the company had not paid its creditors. With such high level of cash Siebel can easily decrease its accrued expenses. Also, as an author of this report on the case study, like to point out the missed opportunity Siebel could opt. The ongoing market share war with ERP giants was something Siebel should have not leveraged. The opportunity it held with the front office and back office integration was something that market would eventually demand. Unable to foresee the opportunity is lost opportunity in rapidly changing ecosystem.

Few unanswered question in the case gives us ample opportunity as CFO Ken Goldman to explore the unseen. As an author to this report we think he needs to approach the solution to counteract the depressing financial statements. The first and foremost thing he needs to prioritize, to meet and avail with three strategic options.

Out of the three cost cutting option “model change” is the most acceptable. It addresses the major issue in the business and tries to focus in profit generating business rather than continuing traditional CRM system. The model talks about minimizing investment in failing products which makes so much sense as business should be doing product profitability analysis and only invest their resources and time in product line that generates revenue. Also .in terms of product development the features which are not valued by customers should be made redundant.

Sales and marketing efforts should be less directed towards less revenue generating products, Sales force should be restructured so that more energetic people are hired who believes in increasing stakeholders wealth rather than just doing their job. Also the strategy to introduce standard pricing for smaller deals avoids administrative and other cost of providing discounts and customer’s rates.

In terms of General and administrative function there should be standard template for smaller contracts which would save administrative cost of drafting customized contracts. Also strategy in terms of Cost of service i.e. centralizing technical departments, increase pricing would add value to the product and service and improve companies performance and increase stakeholders wealth.

As a CFO Ken Goldman, we can recommend “model change” strategy better than other model as it has weight-age of being easily accepted and welcomed by the employees of Siebel. Though it has less saving than Structural change model there is less chance of employees feeling insecure at their jobs and de-motivated. In contrast, Structural change model focuses on restructuring, cost cutting and increasing span of control which comes in the cost of leveraging the company stature.  

Finally, it is famously said in an English language adage, “Picture is worth a thousand words”. Same is true in case of Siebel. The aggressive move of cutting cost can be reflected from 1^st quarter 2004 breakdown of expenses. The product development, sales and marketing, General and administrative expenses have plummeted by 329% from 772k to 179k. Nevertheless, what we need to be aware is the assumption of achieving operating margin of 25% is ridiculously high. As data shows the cost cutting techniques tries its best to reach 17%. The remaining 8% is only possible increasing the sales. Last but not the least, the case portrays and it does signal the new evolving CFO role that may be a game changer.