Interview: John Mutch, CEO of Peregrine Systems

PARIS – When John Mutch took over as president and chief executive officer of Peregrine Systems Inc. last August, the service and asset management software developer had just emerged from Chapter 11 bankruptcy protection. Forced to restate results for 11 consecutive quarters up to Dec. 31, 2001, Peregrine is still working on its accounts for the year to March 31, 2004, as the effects of the restatements and its reorganization plan ripple through.

Ahead of the company’s global user conference, Synergy04, to be held May 25-27 in Miami, Mutch spoke to IDG News Service about the forthcoming changes in the company’s pricing, partnerships and plans for the future.

IDG News Service: How are your primary markets going to change this year? Where’s the growth?

Mutch: Service management and asset management have different dynamics. Service management is growing at 4 percent, asset management at 8 percent. Growth in service management is occurring through consolidation, where enterprise customers who bought one of everything are consolidating. In asset management, customers are shifting from “Wouldn’t it be great to know…” to it becoming a must-have.

We studied our customers, looking at their usage as stages, from chaos through reactive, proactive and service to value. 75 percent of our customers are in the first two stages, chaos and reactive. Each solution is packaged to target one stage, and to get customers onto the next stage. Most of our work is around bringing a solution to market that can bring people from reactive to proactive. For example, if the service control solution is at the reactive stage, you’re likely to experience service staff spending too much time on the phone determining configurations, and changes tend to cause outages. We add employee self service, change management and root cause analysis. It’s detecting patterns and recommending what you need to do to fix the root cause of the problems faster. It saves you money.

We work very closely with (IBM Corp. business unit) Tivoli Software. It provides an end-to-end solution against Hewlett-Packard Co. (HP), Computer Associates International Inc. (CA) and BMC Software Inc.

Remedy is a tool-oriented system built on the action-request system. What we are seeing with Remedy is customers who want scalability and compliance people favor Peregrine. With CA and HP the ability to connect to other architectures becomes key. Nobody wants to rely on one vendor.

IDGNS: But isn’t IBM also integrating Remedy?

Mutch: Tivoli isn’t integrating or supporting Remedy as a rule of thumb. The group that has signed with Remedy is IBM Global Services, and they will install anything! We are trying to win mindshare with them.

IDGNS: What’s the biggest change you’ve wrought in the company?

Mutch: We are repositioning the company from a point provider of products to a solution provider mapped to this evolution of products. Now, if you look at service control, you don’t just see a set of products but a set of services. It’s about evolution of the solution.

At Synergy04 we are going to unveil new pricing for these bundled solutions. We are going to desync our pricing. The way we have traditionally sold this, you have to buy every level of our products in a uniform set. If you bought 200 units of solution management, you had to buy 200 units of change management, even if you only wanted to use 50. We are going to say if you want to add change, root cause, any module, you can do it in the units you need.

IDGNS What’s next in your sights?

Mutch: We emerged from Chapter 11, and the company plateaud in revenue and profit. Now we are trying to establish an upward trajectory and new license growth.

We’re investing an extra US$30 million a year in new products. In fiscal year 2004 (the year to March 31, 2004, for Peregrine) we spent $120 million in operating expenses. In financial year 2005, we will spend $150 million in operating expenses. We are looking for a modest increase in revenue growth. We are entering a year where there’s a real investment cycle going on to reestablish product and thought leadership.

IDGNS: You recently announced that fiscal year 2004 would mark a fresh start in your accounting treatment. What did you mean by that?

Mutch: When you enter and emerge from bankruptcy, one of the unique provisions is that you can revalue your company, and if the assets exceed the liabilities, you can start afresh. The impact is a clean balance sheet, a fresh financial structure. It will remove many of the things like in our historical statement, we recognized revenue we should not have recognized, and later decided we should not have recognized it and so we took it out and started running it back in. It’s about investor transparency. We are looking at a perpetual license fee where we recognize it at the time of sale as a lump.

IDGNS: How is that different from what the company did before?

Mutch: What caused the problem before was, we never sold them a product, we sold them a service; what happened was, a salesperson would sign a side letter, if you don’t like this you can give it back. We also made up invoices.

The difference is, when we sell a product we will recognize the revenue if we meet the criteria: proof of delivery, no return mechanism, and a likelihood of payment. We have a very strict eye to meeting those.

IDGNS: How will partnerships like that with IBM evolve?

Mutch: One of the key strategies is to deepen and broaden our relationship with IBM. (IBM general manager for Tivoli Software) Robert Leblanc and I will be launching a joint Tivoli-Peregrine solution around orchestration and provisioning, a bundle with a set of predefined services to help customers unlock value quickly. Now that we have filed financial statements, IBM is willing to work openly with us. Leblanc on stage with me will be a very public sign that Peregrine is safe to work with.

The other thing that’s key to us is integratibility. Even though we are in bed with Tivoli in a big way, our ability to integrate with BMC Patrol or with HP and CA makes us agnostic, a kind of Switzerland of the industry.

At the product level it’s a lot about IBM. At the channel level we have a whole network of solution providers and also the managed service provider (MSP) channel with customers like Electronic Data Systems Corp. (EDS). Anybody who’s a big MSP, we are interested in working with. Our main MSPs are Fujitsu Computer Systems Corp., Unisys Corp. and EDS. Others, like T-Systems International GmbH, we would like to work with.

IDGNS: What’s your customers’ top worry?

Mutch: The major concern we hear is about proving return on investment (ROI), attributing capital expenditure to the running of their business. A bank’s mortgage division director might ask, IT charges me this much, is that cost effective? What are the alternatives?

Business has to focus on cost-effectiveness, ROI. Their response is to try to negotiate harder: Analysts have told them to go after their long-term maintenance costs with vendors. It makes us really justify the value we deliver. The great thing is, our customers can deliver that kind of information back. We can tell you whether you are in software compliance, in or out of maintenance.

IDGNS: What can you tell us about the new offering you are developing with Tivoli?

Mutch: It’s an orchestration and provisioning solution. It’s about software distribution and configuration management and optimization. It’s a combination of Tivoli and Peregrine products and services, ServiceCenter and AssetCenter incorporating unique pricing and deliverables.

We will have a new product name that will cover the value delivery. We have got plans to roll out training and education mutually between sales forces.

IDGNS: What will be the big focus at Synergy04?

Mutch: We anticipate 500 customers attending in Miami, with 20 customers presenting different tracks. It’s a users’ conference, demonstrating best practice. IBM being there is a big deal, and de-syncing is something customers have been looking for for a long time.