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INSIGHT – Save the pennies for a Raney day.

Dennis Raney, CFO at networks software vendor Novell, is looking pretty pleased with himself. Not so long ago – back in 1996, which in IT industry terms is actually an age – the company was all but written off, with a tired management team, bad finances, a mish-mash of products and little or no strategy. However, under the guidance of CEO Eric Schmidt, the business has become refocused, and when Raney joined the team early last year had become widely hailed as a turnaround miracle. “It’s clear that you can’t easily outrun your past,” admits Raney. “So we do have to re-acquaint people with the new direction for the company, why we’re viable. Some people actually thought we had ‘gone away’,” he says with heavy emphasis, “so we’re presenting the directory and the opportunities we have around the directory.” The “directory” is Novell’s directory service, the lifeline that has kept the company afloat and independent. Think of it as the software on a network – be it the corporate local area network or the Internet – which makes sure everyone knows who everyone else is, and that the information each user is seeing is what they’re supposed to be seeing. Raney is on a tour of the European capital markets to evangelise this message that Novell is back and that, with the incredible growth in networks spurred by the Internet, its services and software are more important – and profitable – than ever. Novell has seen big gains in its share price since the turnaround began, and Raney is keen to stress that shareholder value has actually become a major concern at board level. “I can’t comment on the mental motivation of the managers (before the new team came in), but certainly in terms of delivering shareholder value, the company had dramatically underperformed over the years,” he says. “It was time to put shareholder value back on the front burner.” Like many other high-tech firms, Novell has no long-term debt (“leveraging technology companies is real bad financial practice”). But that doesn’t equate to value. Novell, in fact, seemed not to have had a terribly sophisticated view of how to manage its finances prior to the tribulations which lead it to the brink. True, disastrous investments in, for example, WordPerfect (cost $1bn, sold later to Corel for a fraction of that price after seeing its market share disappear to Microsoft) severely hampered the company’s financial performance. But there was more to it than that. “When I entered the company, we really had no financial goals expressed – we didn’t have any sense of a financial model or how you run a company with a financial model,” Raney says. “If you look at the leading performers in the market, regardless of what business they’re in, they all have a very consistent financial model that they follow. That deals with how they structure their income statement, the level of profitability that they want to generate and how they manage their balance sheet. So what I brought into the company was the idea of building a financial model around the leading performers in the software industry.” By the end of 2000, Raney is hopeful the model – 20% growth, 20% operating profit and R&D investment of 15% which should yield operating profits around 16% – will be in full effect. Achieving this is no walk in the park. “The model itself starts to enforce some discipline on expenses because we show people that we are going to move them to a certain percentage of revenue, and that creates a feeling that they need to focus on cost control,” Raney stresses. “Costs have risen 4% this year while revenue grew by 17.5%.” Naturally, benchmarking against the competition is important, but Raney excluded one company from his measurements – the best performing one. “Microsoft does better than that,” he concedes. “Microsoft has a monopoly position and there’s no way you can compete with a monopoly from a profitability point of view.” Sentiments that Bob Herbold (Microsoft’s chief operating officer, interviewed on the next page) might well endorse, although with a rather different spin. Microsoft was a major cause of Novell’s headaches during the 1990s, with promises that Windows NT would be the only server operating system companies would need. Now that that vision hasn’t materialised, much to the annoyance of many IT managers, Raney is on firmer ground. “The mantra two or three years ago that the whole server market was going to be taken by NT has disappeared,” he says. “We’ve got all sorts of environments out there, and it’s very difficult to find someone who has a homogeneous environment.” Shareholder value has also been found in a tactic more familiar to FDs in quoted companies this side of the pond: share buybacks. Raney has authorisation for $500m-worth, and the first $200m-odd of buy-backs has gone well. “Buying the stock back is a very good economic value for the shareholders,” he insists. “We looked at the share price and where we think it’s going to be after the execution of our business plan, and when we discount those plans by the cost of capital (about 16%), the returns are fairly high for us if we buy back shares.”

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