After a fairly lengthy period in which Amdocs (NYSE: DOX)'s competitors have been trying to take market share away through the back door, Amdocs CEO Avi Naor took a daring step and has managed, at least for now, to block some of these attempts. It seems that even in these troubled times, Amdocs is taking the right path to preserve its future growth. As of now, it is the toast of the capital market, the communications sector, and the investors, thanks to its acquisition of CRM company Clarify.
Amdocs set to work when its discovered, among other things, that its existing contracts were at risk, as well as its future revenue. The company realized in time that not only could it not take winning tenders for granted, but that parts of any contract could be lost even after a victory.
Communications sector sources say that the Clarify acquisition was a strategic necessity. While Amdocs currently leads the billing field, it needs additional capabilities to maintain its hold on its market share. To do that, and even increase its market share, it needs a new product with added value for its customers. In the end, the fact that Amdocs leads the billing field does not make it all-powerful when it comes to winning tenders.
Another problem Amdocs is liable to encounter soon is SBC Communications (NYSE: SBC)'s announcement that it is cutting its projects, which provide 15% of Amdocs's revenue.
One way or another, competing against the large companies is becoming more difficult each day. Recently it has seemed that Amdocs has not been winning tenders quite as easily as in the past. Management consequently realized it needed added value, and not necessarily from the billing field.
It is no accident that customer relations management (CRM) has accounted for almost half of Amdocs's business for a long time already. Amdocs long ago identified the great need for CRM systems and their importance for communications providers. At the same time, it also realized that in certain cases, the choice of a billing system is liable to be decided by the CRM system. Unless Amdocs provided CRM systems that would work smoothly with its billing system, the customer would be liable to prefer a different billing system fully compatible with Amdocs's competitor's CRM system.
The greatest risk for Amdocs, however, is the loss of certain parts of its existing contracts. Many accompanying consultant services for the system, hooking it up to other systems, and so forth, can be sold around the CRM system. These include a great many sub-systems involving pricing, billing, customer care, etc. The moment another manufacturer arrives with its own CRM system, it is capable of providing a range of these services for billing, thereby seriously reducing Amdocs's revenue from services accompanying its billing system. Most of Amdocs's revenue is from services, so a CRM system is ideal for it. That is why Amdocs is aiming at an end-to-end solution. The Clarify acquisition is designed to protect revenue from services that Amdocs provides for the billing field, while at the same time producing revenue from services for additional systems.
Another danger has begun to threaten Amdocs. According to industry sources, its customers are liable to halt or suspend contracts. It seems that even if Amdocs has already installed 80% of its system with a customer, the customer can hire a cheaper company to finish the job. Actually, it is enough for Amdocs to complete 80% of the contract. A different company can complete it at a lower price. The same applies to upgrading.
"There are now a great many companies willing to complete installation of a billing system begun by another company and do it at lower cost - sometimes even for free - simply in order to take market share away from the major companies," an industry source says. "Among other things, they are willing to upgrade a billing system and even put in their own systems for free. When these are public companies, the problem is even more critical, because taking away part of a contract enables these companies to report to the capital market that they have increased their market share. Amdocs, which does not do this, of course, is liable to suffer from small companies lying in wait."
To get back to the Clarify acquisition, a month ago, after Amdocs completed the acquisition, certain capital market sources claimed that Nortel (NYSE: NT), Clarify's previous owner, had sold Amdocs a shell company, since half of Clarify's employees were fired before the acquisition. Questions were also raised about Clarify's usefulness to Amdocs.
Amdocs may have to overcome several obstacles to integrating Clarify's product in its billing system, but many analysts and investors are now praising the acquisition and asserting that in the long term, it will enable Amdocs to make major progress.
"One of the prominent advantages of the acquisition, at least in the short term, is the immediate addition of revenue and customers to Amdocs," an industry source claims. "In view of the fact that Clarify's sales turnover reaches almost $200 million in my estimation, there is no doubt that it will greatly contribute to Amdocs, at least in the next quarter. In addition to the synergy between the technologies of the two companies, there are consequently other advantages from the acquisition, including an increased market share."
Another point of interest to some investors are the layoffs at Clarify, carried out before Nortel sold it to Amdocs. Industry sources believe that it is probable that these employees were fired at the request of Amdocs. One reason is the fact that Amocs has gotten no sizeable projects in recent months, leaving its employees more and more unoccupied.
It was probably quite clear to Amdocs that the layoffs were unavoidable. According to company rumors, several employees had already received notification of being laid off. It is therefore very possible that Amdocs preferred to discharge Clarify employees, while avoiding laying off Amdocs employees as much as possible.
Another reason for thinking Amdocs wanted the Clarify employees laid off is that those fired dealt in the field of CRM for organizations. Amdocs is interested in marketing CRM systems only to communications companies and may therefore simply have had no use for these employees. It can be assumed that those fired also included quite a few administrators.
In any case, even though half of Clarify's employees are joining Amdocs, it can be assumed that a considerable portion of the job of integrating Clarify's system will have to be done by Amdocs employees. The question is how quickly and efficiently Amdocs employees will be able to integrate the system. Opinions in the sector seem to be divided.
"If Amdocs employees perform the system's integration, it is liable to be done piecemeal," an industry source says. "The interface between Clarify and Amdocs products should be capable of taking in information from Clarify's systems in real time while the data are streaming. If the system is not capable of intaking information effectively, there is a risk that may of the CRM system's capabilities will be lost.
"One of the important functions of the CRM systems is their ability to identify with particulary great accuracy which users can be promoted to a higher level of monthly use by offering them additional service packages. The system can identify exactly which services it is worthwhile offering them. The emphasis is on a high degree of accuracy. There is a risk that someone not sufficiently familiar with the system will be unable to take full advantage of this feature. The main question right now is how Amdocs will handle Clarify's technology.
"Another problem lies in the fact that a CRM system is designed to operate on packet switching networks. This means that Clarify's system is meant to take information from IP networks. The problem is that as of now, Amdocs has limited ability to collect information from an IP network. As long as Amdocs lacks real-time IP network billing capacities, a reasonable assumption is that it will be unable to collect information to feed the CRM network. It's like building the roof before the foundations.
"IP network data records are structured completely differently than telephony data records. I therefore believe that Amdocs urgently requires an IP billing system to prevent the Clarify acquisition from failing. It should consequently be assumed that Amdocs will have to acquire a company with an IP billing system in the not-too-distant future."
On the other hand, others believe that Amdocs employees are no less knowledgeable that Clarify employees, and their know-how may be even more relevant to integrating the systems. "Keep in mind that Clarify's CRM products were designed to be hooked up to billing systems," an industry source says. "I therefore assume that they come with tools that will facilitate this type of integration.
"Furthermore, if you look at the model of Siebel Systems (Nasdaq: SEBL), you can see that most of its products are not carried out by Siebel employees. Systems integrators, such as PricewaterhouseCoopers, implement many of its projects. CRM systems were designed for integration into billing systems. Amdocs employees can therefore function as Clarify's systems integrators.
"When you get down to it, Amdocs has enough employees capable of integrating its billing systems with external systems. This is particularly true, because familiarity with Amdocs products is more relevant than familiarity with Clarify products for integration purposes."
"While it is true in order to combine two different systems, you need people familiar with each of them on the coding level, not many people are necessary. Actually, I believe that only a few employees familiar with Clarify's system from the inside are necessary. I assume Amdocs has enough employees that know how to perform this fusion between the two systems under instruction from Clarify employees. On the other hand, a lot of billing personnel are necessary.
"Furthermore, Amdocs launched its API interface six months ago. Through this interface, all of an organization’s computer systems are connected, including billing and CRM. This system enables the systems to communicate with each other. This interface is expected to ease the integration of the CRM system with the billing system."
Another challenge facing Amdocs involves the cost and time required to integrate the systems. "While the system is being integrated, Amdocs is liable to lose some of Clarify's market share," says a source in the sector. "When PeopleSoft acquired CRM company Vantive, for example, it lost quite a bit of Vantive's market share during the integration period. Before the acquisition, Vantive was number two in the market, right on Siebel's heels. After the acquisition, the gap between the two companies widened."
Another source says, "Amdocs can go to market with a comprehensive system, which will meet the demands, in six months to a year from the time integration is begun. This is contingent, however, on having its own IP billing system."
In any case, it looks like the first customer for Amdocs's CRM systems will benefit from a large battery of engineers, who will move in for months and receive payment to match.
How, then, will the integration of the CRM system with the billing system be accomplished, and what challenges will Amdocs face?
"In order to integrate the CRM system in the billing system, a comprehensive system must be designed, all of whose components work together in real time," says a source in the sector. "The billing software must include CRM. This combination is called a cross charge model.
"Amdocs, on the other hand, already has a billing system, to which it must connect Clarify's CRM system. This link is liable to prove extremely complex, since two entirely different applications are involved. While Clarify provides an interface through which its CRM system can be connected, the integrated system will not achieve the same effectiveness as a system designed from the beginning as a combination of billing and CRM.
"A billing system collects every detail received. Billing systems developed together with a CRM system are capable of decoding every such detail while the data are flowing in the network. In systems not designed together, however, data cross-referencing between the billing system and the CRM system must be performed after the data are collected, not while they are flowing in the network. This is a more awkward and complex process, and is consequently less efficient. Even though the task of combining the two different entities is expected to be difficult, however, it is not impossible.
"In any case, as of now, the only company that has developed a billing system together with a CRM system is MaxBill. The company is small, but has meanwhile closed some big deals."
"Globes": In the end, to what degree is Amdocs capable of competing in the CRM market?
"With the Clarify acquisition, Amdocs has gone from a billing company doing a little CRM on the side to a significant player in this market.," the source says. "One of the real difficulties it now faces is therefore its chances of competing with Siebel, which controls the sector.
"One of the still outstanding question is how Amdocs will deal with the fact that due to the direct competition between them, Siebel will refuse to work jointly with Amdocs on combining its Siebel CRM systems with Amdocs billing systems. Many communications companies buy Siebel systems. Amdocs is liable to face a situation in which some of these companies may abandon Amdocs's billing system in order to continue using Siebel's systems.
"Nevertheless, this is not a new risk. In any acquisition, you acquire both the customers and rivals of the acquired company. Aside from Siebel, Amdocs also gained some other competitors in the CRM field, including SAP and Oracle (Nasdaq: ORCL)."
Published by Israel's Business Arena on November 5, 2001