META Report: Novell Faces a Critical Year

By CIO Update Staff

(Back to article)

News Item: Novell announced the layoff of 19% of its workforce last week (1,400 positions) and its latest shift in strategy. Novell stated that it will achieve a new "solution focus" through accelerated consolidation of Cambridge Technology Partners (CTP), which it acquired earlier this year.


Situation Analysis: Novell's latest layoffs and reorganization are symptomatic of its continued difficulty in establishing a coherent and stable focus for its business and marketing strategies, as it moves from a product-centric approach to offering more services.

This is a problem Novell has struggled with for much of the past decade. While internal debates continue, pulling the company first one way and then another, its chances of preserving its market presence as more than a boutique vendor are at risk.

Other Recent META Reports
The Nirvana IT Organization

Value-Based Collaboration Strategies

Portfolio Management Helps Manage Through Uncertainty

The Hidden Costs of Handheld Devices

"Novell is having trouble deciding what it wants to be when it grows up and becomes more than the NetWare and e-directory company," says META Group analyst Earl Perkins. "If it stabilizes on a direction for more than six months, it has a chance of remaining an important player."

But Novell cannot seem to settle on a coherent vision for its future, as its efforts are divided among older and newer products and a new emphasis on services. The old-line networking product, NetWare, is fading in the market in the face of Microsoft's continuing onslaught. Novell's new product set, based on eDirectory - arguably the best external Web directory in the market currently - is too narrow by itself to sustain the company at its present size.

Meanwhile, Novell's diversification into services - based on its purchase of ailing CTP - is not gaining traction despite Novell's announced goal of transforming itself into a services-based company. As a unit of a software vendor, CTP faces the same problem that IBM Global Services and all other services arms of larger vendors have: It needs to maintain adequate platform independence to retain present customers and add new ones, while also attempting to push the parent company's products.

Unfortunately, the latest layoffs are coming mainly from Novell's marketing and sales staff, which does not bode well for the company's future. Even if Novell does stabilize on a single vision, without strong marketing and sales, it will be unable to communicate that vision to the marketplace and particularly to potential new customers - which are vital to its future. If Novell is to succeed, it must break out of its present, slowly dwindling user base.

Fortunately for Novell, it still has about $500M in the bank and an excellent product in eDirectory on which to build. This will give it another year to recover, expand its focus, and establish a new direction. Currently, eDirectory, iPlanet, and IBM are the most frequent choices for companies that need external Web-focused directories. We believe iPlanet will have its hands full as Sun Microsystems absorbs the former partnership organization and tries to rebuild it into a framework. This will give Novell an opportunity to build a larger following for eDirectory.

However, we also expect BEA, IBM, and Microsoft to invest more heavily in this market within the next year. If Novell does not make a powerful push with eDirectory and execute on a strong strategy to build on this new flagship product, it will find itself marginalized by the giants - or possibly acquired by one of them. So far, the products Novell has built on eDirectory in the single sign-on and other security and access areas are entering already crowded markets where Novell will have difficulty establishing market differentiation.

Potentially fruitful tactics for Novell during this critical period include forging tighter relationships with portal vendors as a directory, security, and identity provider, and focusing on (and packaging more adeptly) identity, directory, and other file management services for extranets/intranets.

User Action: Near term, current Novell users have no reason to fear that the company will go out of business or abandon them. Novell's momentum and cash position will keep NetWare going for at least the next two years, which will give Win2000 networking time to mature for some potential switchers. The erosion of the NetWare market has slowed with the economic downturn, and we believe that most companies planning to abandon NetWare for Win2000 near term are already well along in their migration. Therefore, we do not view the current announcement as a signal for users to start moving to other products, unless they are already planning such a move. We expect the NetWare market to stabilize for the next year.

Companies looking for an external network directory system - particularly those that need a solution soon - should have Novell eDirectory on their shortlists, along with iPlanet. They should not be concerned about Novell's stability as a directory vendor. eDirectory should be judged on its own merits and not on its connection to Novell's brand.

In the services market, CTP continues to present a spotty service profile. Whether it has the resources and expertise for a given project is a hit-or-miss situation. CTP was struggling before Novell bought it, and the takeover has not provided it with the resources to change that situation.

Rather than trying to transform Novell into a services company - a difficult transition for any hardware or software vendor in the best of times, and much harder in the current economy - Novell's management might be more successful at leveraging CTP's services presence to help it win a larger market for eDirectory and other products.

While Novell's long-term future is uncertain, the question is whether it retains its current market presence, fades into a boutique company, or becomes an acquisition target and possibly is broken up in the process. Novell's present course seems to promise continued shrinkage rather than growth. However, we believe the company still has a year to turn itself around, and it has accomplished similar turnarounds in the past. It is a year too early to count Novell out.

META Group analysts Earl Perkins, Val Sribar, Jack Gold, Dale Kutnick, and David Yockelson contributed to this article.