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A rocky start for Borland in 2009 but a timely move for its CEO

Thursday, January 8, 2009 by

On Tuesday 6th January 2009, Borland made a number of gloomy announcements that, given the prior forecast for 2009 and the company’s poor quarterly returns were to be expected. The news that the company is reducing its workforce by 15% will undoubtedly be worrying for those affected but it is hardly unique in an industry that is facing up to tightened spend across the board.

It is, though a far cry from Borland’s performance in the last IT crisis – the bursting of the dot com bubble eight years ago – when the company saw a long period of consecutive growth in its quarterly financial statements. The Borland of then was a much different organisation to the one it is now. Since then, Borland has divested itself of a number of its traditional tools products (CodeGear) and the business has been focused around the enterprise ALM market. In the current recession the large IT development projects where people would be looking to use enterprise ALM are on hold. This time around, Borland’s ability to ride out this recession is much less clear.

The departure of CEO Tod Nielsen to join VMware in the role of Chief Operating Officer (COO), working with CEO Paul Maritz is perhaps the biggest surprise, not least because of the question it raises over his tenure as CEO at Borland. However, Paul Maritz’s choice of COO is not without its merits.

At Borland, Nielsen presided over continued improvements and efficiencies in operating costs and working practices. He and his team had the foresight and commitment to push for the adoption of agile practices. As a result the company was able to quickly bring to market the Borland Management Suite, a high quality product that also embodies the notion of agility.

On one level, Borland now provides a good working example for other organisations looking to bring agile practices to the way they operate, develop and deliver their software services and products. But for all that, the company has not been able to translate the improved operating and development and delivery practices into profit successes on the balance sheet – something that suggests underlying issues with the sales and marketing strategy, though the tough market environment for ALM based solutions may also be a factor.

There will be many critics of Tod Nielsen as he takes up his position at VMware and he will have much to prove over the coming months and years. Presiding over a significant fall in share price – with Borland’s share price now languishing around the $1 mark and frequently dipping below it – is not a good record for the copy sheet. But Nielsen’s ability to reduce costs at Borland will give the company a better chance for it to weather the storm. Tod Nielsen has also shown that he is not afraid to make tough and unwelcomed decisions no matter how unpalatable the results. The sale of Borland’s tool business whilst clumsily handled in parts was ultimately for the best (more so for the tools division) given the focus of Borland for ALM and the size and financial capacity of the company.

It may be this and their past working history that has attracted Paul Maritz, who has shown that he has a desire to change things at VMware. The company faces a highly competitive market, with its core offering largely commoditised by the dual forces of Microsoft and open source (Xen), and the battle ground shifting to management, where it faces the large incumbents of BMC, CA, HP, IBM and to a lesser extent Microsoft.

Nielsen’s operating improvements at Borland and his extensive experience of working in a variety of senior management roles in some of the leading software organisations in the market have shown that he is at the very least a sensible choice for the role of COO at VMware. The question will be what he does over the next 6 to 12 months to sharpen the business operations at VMware and put the company into good shape to face formidable competitors. All eyes will be on how he works with Maritz to shape VMware’s strategy going forward.

So much for VMware, but where does this leave Borland? In the same announcements that heralded the departure of Tod Nielsen, the company also issued changes on the board, anticipated Q4 2008 sales revenue that are lower than those for Q3 2008 and significantly down on the same period for 2007. There was also the easily missed news that Peter Morowski the SVP of research and development would be leaving to pursue “other opportunities”. The loss of both the CEO and the head of R&D and changes on the board coupled with a perilously low share price will be disquieting for shareholders and customers alike. And yet the news is not all bad. Borland is a lean organisation; it has invested wisely in putting in place agile working practices that should allow it to react quickly and engage more effectively with its customers; and there is still a galvanised workforce that is winning awards and loyalty from its customer base.

But if the company’s investment with agile working practices and its ALM strategy is to be anything more than an exercise in change, the board and management team will need to act swiftly to demonstrate that it is able to weather these turbulent times. The team will need to reassure its client base with continued developments in its product roadmap. They may also need to restructure their sales and marketing tactics and focus heavily on execution if they are to generate significant rises in revenues and an eventual return to profitability.

The alternatives for the company are not attractive. The pool of potential acquirers has rapidly diminished and the prospects of being sidelined to that of a niche player would be a less than appealing ending for a company with such an illustrious history.

There is nothing inherently wrong with Borland’s products, but confidence is a fragile commodity and we have seen from the money markets how fast it can evaporate. All of which makes Borland a somewhat riskier investment at the moment than it deserves to be.

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