Cold Realities For Novell

In the fall of 2004, Chris Stone, then vice-chairman of Novell, took a

nine-week executive education course at Harvard Business School. Stone was

considered a rising star at the software company. Several Novell insiders say

they thought his Harvard stint was the final step in polishing his skills before

he took over as chief executive from Jack L Messman.

But Stone was in for rude surprise. As the course was wrapping up, he met

with Messman, and the boss forced him to resign. Neither man will talk about the

incident. But former Novell executives say the two had clashed several times

previously over who should take credit for the company's decision to shift its

focus to selling the Linux open-source operating system. Two sources close to

the company say that disagreement was the primary reason for the final split.

The reverberations of that meeting are still being felt today. Earlier this

year, investors privately expressed concerns about Messman's ability to retain

key execs and manage operations. Then on Aug 25, the Waltham (Mass) company

surprised Wall Street with a 90% decline in quarterly profits, to $2 mn, and a

5% sales slide, to $290 mn. Critics quickly went public with their concerns and

began calling for change at the top. "I think ultimately fresh leadership

is needed," says analyst Jason Maynard of Credit Suisse First Boston. Blum

Capital, with a 5% stake in Novell, told the company in a letter that its

strategy is sound, but "the question is whether the current management and

board will execute." Change could come rapidly now. tire board is up for

reelection next April.

Red Hot Red Hat



Messman says he doesn't know what all the fuss is about. "It was
complex," he says. "We had a lot to fix. I said it would take two

years, and we're coming to the end of that." He dismisses the

third-quarter miss as a one-time glitch and insists that the company is on the

right track. Novell's board stands behind Messman, says director Richard L

Crandall: "Jack is a strong manager. He's the creator of this direction,

and I don't know how you give him weak grades on leadership."

Turnaround? Messman says Novell's revenue dip was a glitch

Messman may have the confidence of the board, but he still faces tremendous

challenges. He's trying to create a new sort of company, selling a combination

of traditional software and Linux software-called open-source because it's

created and shared by an army of volunteer programmers. Yet former Novell

managers say he has an autocratic, top-down management style that conflicts with

the collaborative spirit of Linux and the open-source movement.

Marketing is tricky, too. The mixed message about two kinds of products is

hard to convey to customers and has little appeal to those who aren't already

committed to older Novell products. Novell is known for its server operating

system, NetWare, which has been losing ground to Microsoft's Windows and

Linux. Unless Messman gets the strategy to click, Novell could resume the slow

slide it was in before it picked up the Linux banner.

If Novell can't regain its footing, it could represent a major setback for

Linux. The software has gained considerable traction in corporations, with

nearly a 25% share of the server operating system market, according to market

researcher IDC. Yet customers and the computer makers who back Linux want two

strong Linux distributors. And right now Red Hat seems to be running away with

the market. It had 63% of the Linux server market share in 2004, compared with

just 20% for Novell. "We don't see Novell that much," says Timothy

Yeaton, Red Hat's senior vice-president of worldwide marketing.

The worry is that Red Hat will become just as dominant in Linux as Microsoft

has become with its Windows operating system. That would eliminate one of the

key attractions of Linux, and may make corporate customers less willing to rely

on the operating system for their servers.

Even Novell's sharpest critics agree that getting into the Linux business

was the right move as open-source software emerged as a strong alternative to

Microsoft's. The company bought Germany's SUSE Linux, and smaller desktop

Linux company, Ximian, in 2003. Linux gave Novell a new product line to sell,

and it put the company in the middle of one of the fastest-growing markets in

technology.

But while the strategy was laudable, Messman's execution has been less so.

It took 18 months to retool Novell's 1,100-strong North American salesforce so

it could sell open-source software, and the company is only now focusing

overseas. Analysts and ex-employees say Messman's management style has

contributed to the departure of employees vital to making the Linux strategy

work. In addition to Stone, the company lost former CTO Alan F Nugent and former

SUSE CEO Richard Seibt, who both resigned. Nugent and Stone are widely credited

for Novell's Linux strategy. Messman sharply denies this. "I'm the guy

who came up with the strategy," he says. Nugent says, "Jack had to be

sold on the Linux strategy a number of times."

Novell says Messman has been an inclusive, rather than a divisive, manager.

"Management has become more team-oriented and collaborative under Jack's

leadership," says a spokesman.

Learning to Listen



To Nugent and other former insiders, Messman doesn't have the right stuff

to run a Linux company. In April, 2003, just a few months before Novell's

acquisitions, he alienated Linux developers by calling it an "immature

operating system." At that point, Linux was widely used in corporations.

After an outcry, Messman backpedaled with a public apology, saying Linux was

capable of handling demanding computing tasks.

Messman's management of Novell's costs has been an issue too. It has a

large campus in Provo, Utah, and headquarters in Waltham, Mass. There are the

two corporate jets, which Messman says are necessary for flying customers to

Waltham to meet with him. In contrast, Raleigh (NC)-based Red Hat is so

penny-pinching that its executives often take the subway rather than cabs when

they're in Northeastern cities.

To Messman's credit, he is responding to some of the investor concerns.

Novell has instituted a $200 mn share buyback. And Messman agrees that the

company can cut more costs and should sell off its consulting division, Celerant.

It's not too late for Messman to get the company back on track. Analysts

praise Ronald W Hovsepian, Novell's executive vice-president of worldwide

field operations, who completed the salesforce makeover. He cut the number of

products they were hawking from 300 to about 80. And he instituted a more

aggressive sales culture. "We obviously had to change a lot of the

DNA," Hovsepian says. Analysts see him as the new heir apparent to the

corner office, thanks to a go-for-the-jugular style that Novell lacked in the

past.

Will it be enough to shift Novell's direction? Maybe. A wild card is the

support from computer makers Hewlett-Packard, Dell and IBM. "There's a

huge benefit to having two suppliers. Customers have choice," says

Scott Handy, IBM's vice-president of worldwide Linux. The three giants might

push business Novell's way. With their help, Novell may yet turn into a leader

again. For the sake of Linux, it better happen. For the sake of Messman, it

better happen soon.

By Sarah Lacy in San Mateo, Calif In New York in BusinessWeek.

Copyright 2005 by The McGraw-Hill Companies, Inc