BEA Leader Alfred Chuang Sets Strategy

At its eWorld conference next week, BEA Systems will be rolling out a number of initiatives around services-oriented architectures, security and industry partnerships. This week, BEA announced Project Beehive, which provides a portion of its WebLogic Workshop developer tool framework to the open-source community. The company is looking to build on last year's release of its flagship WebLogic 8.1 platform and compete more broadly in the infrastructure space. BEA is also looking to grow. To do so, CEO and co-founder Alfred Chuang plans to enlist the broader VAR and VAD channel that BEA shunned a few years back in favor of its direct sales force. He will have to work hard to salvage BEA's tarnished reputation with some channel partners. Some first steps have emerged, however, in the form of a brand-new partner program and BEA's first North American distributor in Agilysys. Chuang talked recently with VARBusiness senior writer Carolyn A. April about his channel strategy, growth plans and primary competition: IBM.

VB: Three years ago, you sat down with our editors and outlined your goal to make BEA a billion-dollar software company. This past year, you made it. What's your next growth target?
Chuang: I told the sales force the next big milestone is $3 billion in the next five years. And I think this kind of [statement] has a lot of meaning to them. It's a way for the company to focus, to understand a lot more about what we are chasing and to be able to analyze what we need to do to achieve these extraordinary goals.
In this business, there are really only two things. One is product. Can you get product that can ignite the market itself? Product that is extraordinary, that will make the market do different things? In our mind, the biggest challenge faced in the enterprise is there are no standards. We have been pursuing two major things in the marketplace: One is more conceptual, the SOA (services-oriented architecture), which we have been pushing really, really hard in the marketplace. The second thing is the product to match that, WebLogic 8.1, our platform product, which has all the base pieces from the Java virtual machine to the application server, portal, integration, security technology and tools found in Workshop. All of it combined is the first step in making a platform available to make things in the enterprise compatible. That's critical if you want to reach a significant goal in the marketplace.
When you get to $3 billion, you become the elite of all elite, top three or four. To do that, you need to change the market, and we as a company have never been a follower. We invent to change how things work.

VB: In terms of R&D investment, IBM says it invests $1 billion in WebSphere alone. How can you compete with that?
Chuang: Thanks for telling me that. I'm an IBM shareholder, and I think I am going to write them a letter and ask where the $1 billion investment in WebSphere has gone. It's very shameful. I might ask for my money back.
No one can believe any IBM numbers. If you add them up, it's outrageous. IBM is an $80 billon company, but more like a $6 trillion company if you add up all the numbers [they give you]. These people have no shame when it comes down to bragging about how much is spent on what. And they don't have to report the damn thing. I have to. [At BEA], we are doing a 12 to 13 percent spending rate on R&D, on $1 billion in revenue. We have 700 people in R&D, and we constantly have brand-new innovations. We are the only company that sells an integrated platform, with customers using us and getting cost benefit. But there are many things to expand on. One is [systems] management, which must be more user-oriented. [The other is] mobility, which is the next big thing.
We are well-poised to transform the market. We are not struggling. We are a company that has $1.5 billion in cash, generating $300 million in new cash in a year, netting $160 million, a billion-plus in top-line revenue, 25 percent operating margin and at the same time reinventing our product from scratch over the most difficult three years in the economy. That's the kind of stuff that we do. I love doing it.

VB: What is fueling your renewed emphasis on the channel?
Chuang: On the channel side, you do the math. By using just the direct channel, can you get enough customers, enough deals, enough developers, enough coverage to get to a $3 billion goal? The answer is very simple -- you can't. I think we have to do different things in our channel strategy than just catering to ISVs and systems integrators. We have to get the channel to move products to reach the masses we are looking for. Because if you look at the pure number of users we will have to get, the coverage model we will have to cover and the geographies that we don't have access to, all of it becomes a different vehicle for us. So we have set very different goals in terms of the mix between direct and indirect, and that's a subject that has never really been talked about before inside BEA. The reason it's talked about now is all driven by the goal and the [$3 billion] number.
Now the magical thing about where we stand right now is to look at the app server. Whether it's the easiest thing to use or not really doesn't matter. Customers think it is. Everyone has one. Open the box, put the DVD in, it installs itself and next thing you know you are running e-commerce applications. So the world believes it's just like Windows. It is. Our role of continuing to drive direct selling of it has to diminish over time. We've got to let more people play their role. And I have no problem giving margins to people to do that. The focus right now is to get that VAR and VAD channel really going; not, by the way, in boondocks places where we don't cover. We are talking about in our core market.

VB: What are the critical components to getting you there?
Chuang: No. 1, the people in the company have to feel the commitment that this is what the company wants to do. The reason why channel programs fail is that companies can't decide. They get one step forward, and then they get scared because their direct sales force is the easiest to measure and easiest to yield. You put salesmen in, you get revenue. Indirect is much harder. You have to make big bets. The people in this company have to believe that we are making that big bet. And that has to come from me. I have got to be strong and say, "We don't have a choice. If we don't do this, we ain't going to get to $3 billion, forget about $10 billion. And it is a critical milestone to get to $10 billion."
No. 2, you have to have the right people who know how to set up, work with and mediate when you have VARs and VADs and your own people still selling out there to large customers. You need to balance so people don't feel you are constantly dealing with channel conflict, but actually making progress.
No. 3, resources. Nothing happens unless you put your money where your mouth is. People see if you put enough resources on the indirect side. If it's only on the direct side, they know that we are just kidding.
It's our objective for the year to staff, to find right people to lead, have right distributors signed up, most importantly have myself and my executive team push that this is what BEA has to do to get to the $3 billion.VB: How do you change the sales team's mindset?
Chuang: You start with compensation. If our compensation is channel-friendly, you can get there.

VB: How much are you investing in the channel?
Chuang: It is big money. We have 300 to 400 people in the company involved in channels now, compared to 500 in our direct sales force. And I have an expectation that [the channel team] will exceed the number of direct sales guys before the year is even over.

VB: Provide some insight into the Agilysys alliance, your first distribution partner.
Chuang: I think they and many others do several things for us. There's a new generation of [VARs/VADs] out there that are creating business and adding value. For the longest time, we talked about the no-value-added resellers, people moving boxes, which is the world I came from during 10 years working for Sun. I want a different level of partners that add really significant value, whether it's custom integration work or them having their own value-added product to sell along with ours. Agilysys adds unique value to customers. They don't just say, "We are a BEA reseller." They give you solutions at the end of the day. And that's what we need. How many verticals can I cover? I'm going to need a lot of these distributors and resellers that specialize in verticals.

VB: What kind of partner ecosystem are you going after? Is it quantity or quality?
Chuang: Year 1, it has to be quality. The quality of the sale itself from resellers is extraordinarily important. So they will need support from us. If we don't give them proper support along the way, we won't succeed. I can get guys to go sign up 300 VARs across North America today, but they won't do jack. The way to do this right is to sign up the quality you want and let them proliferate, let others sign on around them to sell products, and I think the ecosystem then grows in a very high quality fashion.

VB: Will your model remain primarily co-selling and heavy touch?
Chuang: The initial round will be a lot of co-selling, especially with ISVs who embed our product. In the long run with VARs, however, that won't be the model because it won't scale. You can't expect to pair enough people to help them on every deal. That means with some products we will be super hands-off, like the application server. But some products need a lot of hand-holding, like integration, and you have to be very selective about who you work with. [Integration] will be much lower volume, much higher margin. The ultimate goal is there be a large portion of our sales that we will not touch at all.VB: Who do you consider your long-term competition?
Chuang: Ultimately, that is still IBM. Look at the dynamics in the marketplace, and you've got three or four major players left. If you look at IBM, they are a customer-relationship company and are moving even more toward the direction with their PwC partner style. Our job is to take their accounts away, and I think we've done a pretty good job of that. Every quarter we are making more progress, and people are coming to us because they are buying innovation. But IBM for a long time will remain our competitor because that's where the installed base is. We are attacking the installed base.
Then you have Microsoft. The good thing about them is that every two months they are flipping their software [releases] by two years. I mean Longhorn is now 2006 or 2007, right? And the specs keep changing, so no one knows what the hell they are doing. They have a huge problem [with partners], and it's a touching problem. We argue whether [BEA] can go to low-touch, but they are wondering whether they can give any touch at all. They have to struggle through this for many years to come, and I'm not sure if culturally they focus on that.
Then you have the last wild card, which is Oracle. They have a programming paradigm program. Their core business is the database, and the database is programmed on SQL and has its own set of tools. They now tell customers to also do J2EE and distributing programming. And their sales force is confused. What the hell are you selling? J2EE or SQL? You can't do both. If you sell too aggressively on the J2EE side, you cannibalize the database business, which they cannot afford to do. This is a company that generates 40 percent operating margin from databases.