Commentary: Tough times for Commerce One

By David Metcalfe, Senior Analyst

To cope with a slump in demand, Commerce One has added products and cut its staff, but the company's resources and opportunities won't sustain its strategy. To survive, Commerce One must focus on applications for the consumer products sector and put Web services platform efforts on hold.

The business-to-business software pioneer recently redefined its strategy to align the business with today's tough market conditions. To get an update, Forrester met with Chairman and CEO Mark Hoffmann and heard that the new strategy consists of:

• "Spend management" applications. Commerce One offers a buy-side suite comprising modules for procurement, sourcing, auctions, invoicing and contract labor, similar to Ariba's Spend Management suite. In the third quarter of 2002, Commerce One signed 17 new spend management deals at a lower deal size and price point than competitors.

• Data connection tools. The company also sells data exchange solutions. Today, 1,700 companies use the Commerceone.net transaction network, and consumer goods companies access the UCCnet XML network using Commerce One's Xpress product. In the third quarter, 11 companies--including Kellogg--signed license deals for Xpress.

• A Web services platform. In July 2002, Commerce One announced the development of Conductor, a Web services-based platform for managing business processes. The new standards-based platform is due for general availability before the end of this quarter. Hoffmann does not expect the as-yet-unreleased product to drive revenue until 2004.

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• New partnerships. To underpin the Web services strategy, Commerce One struck partnerships with Baltimore Technologies and VeriSign for security, Sonic Software for messaging, Actional for integration, Contivo for data mapping, Cognos for analytics and Satyam for systems integration.

• Cost control. In October 2002, Commerce One announced a 36 percent reduction in staff, from 1,100 employees to 700 by the first quarter of this year. This will help Commerce One to cut losses, which were $31 million on a pro forma basis in the third quarter of 2002, on revenue for the quarter of $26 million.

Flat revenue for 2003
Commerce One aims to break even by the end of 2003 with new products like Xpress and Conductor, but revenue will remain flat in 2003 because:

• Low tech-sector growth will hold back applications demand. Commerce One needs growth in tech spending to reach break-even earlier and reassure customers. But Forrester forecasts nominal tech sector expansion of just 5.6 percent in 2003. Shackled by limited budgets, CIOs will buy applications from sellers of enterprise resource planning (ERP) software such as PeopleSoft and SAP. With a lighter-weight suite than Ariba, Commerce One will struggle to lift sales of mature spend-management products above 2002 levels.

• Technology immaturity will choke Web services platform sales. Demand for products like Conductor, which manage intercompany Web services, will not take off in 2003 due to technical hurdles like security standards immaturity. Forrester expects that CIOs will buy Web services platforms from infrastructure vendors like IBM and Microsoft, not independent software vendors. The result? Minuscule revenue from Conductor in 2003.

• Consolidation will shrink electronic marketplace revenue. More than 160 electronic marketplaces use Commerce One software, but the market will shrink as founders like Nestl? push consortia to merge their loss-making activities. Consortia mergers will reduce Commerce One's maintenance revenue and erase upselling and cross-selling opportunities for its new spend management applications.

• Financial losses will repel existing customers. In the current quarter, Commerce One will have 150 employees fewer than competitor Ariba--but Ariba breaks even each quarter with revenue twice that of Commerce One. Today, Commerce One holds on to $148 million of cash, but some customers fear that a burn rate of $30 million per quarter will bankrupt it. The evidence? In recent months, Trade-Ranger switched from Commerce One's platform to WebMethods' and BT Ignite migrated its electronic marketplace onto Oracle Exchange. Unless Commerce One reaches break-even soon, the trickle of customer defections will turn into a flood.

Find focus, or disappear
To avoid failure, Commerce One must trim its strategy to address the near-term market opportunity with its dwindling resources. This means it should:

• Focus on its low-cost spend management suite. Oracle and SAP boast few procurement and sourcing customers with multiple ERP systems. Clarus lacks the scale to develop a complete spend management suite following a major headcount reduction, and large companies avoid application service provider options. Companies looking for multi-ERP procurement solutions must choose between two packaged applications: Ariba or Commerce One. Commerce One should target the multi-ERP opportunity with a low-cost--not a new technology--value proposition.

• Put Web services on the back burner. Commerce One is right: Web services will lower the cost of B2B integration and grow the market for B2B software. But demand for Simple Object Access Protocol (SOAP) messaging across the firewall will be slow to take off--witness the longevity of electronic date interchange in the face of XML. To generate revenue this quarter, Commerce One's talented developers should drop their SOAP plans and deepen the functionality of sourcing and analytics applications.

• Target the sales force toward specific industry verticals. To outcompete incumbents like PeopleSoft and financially stable competitors like Ariba, Commerce One should zero in on industries where it already has a foothold--like consumer goods. For that sector, it should add functionality to better manage consumer product categories, spruce up analytics specific to consumer goods, and beef up alliances with consultants who specialize in best practices strategy for consumer goods--such as Accenture and Crossmark. Furthermore, teaming up with Cyclone Commerce would enable implementation of the EDI-INT standard mandated by Wal-Mart.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.