Microeconomics Shut Down Decision Term Paper

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Micro Economics Shut Down Decision

The October, 2000 announcement that Nortel Networks would enter the customer relationship management (CRM) application market by acquiring Clarify for more than $2 billion in stock stunned the majority of people. The question on everyone's mind was, "How can a hardware giant succeed with a software business?" The answer, coming only 18 months after the acquisition closed, was that it couldn't.

Nortel purchased Clarify in its bid to become an eBusiness provider by extending its hardware Internet foundation product lines which include optical, local area and wireless Internet products by adding applications to manage eBusiness relationships that the Internet facilitates. Three quarters of Nortel's customers were large communications carriers such as MCI and AT&T, newer carriers like Qwest, or wireless carriers such as Sprint PCS. The rest were corporations. Nortel made the bet that company's spending a billion dollars on its hardware infrastructure would also be interested in its software applications.

Nortel expected Clarify to bring it further penetration into the customer interaction center (CIC) market, an area in which the company had a poor reputation spurred by a poor product release of its NT-based Symposium Call Center server that suffered from scalability and reliability issues. Nortel also wanted to bring its prospects and customers with a prepackaged, lower-cost solution with an integrated CRM/CIC product. Clarify provided Nortel with a professional services organization for CICs that it did not have, but needed to be successful in the CIC area.

The acquisition for Clarify was also in response to competitor initiatives. Lucent had recently purchased CRM supplier Mosaix and had formed a partnership with Clarify's CRM rival, Siebel Systems. Cisco had entered the voice-networking market with the purchase of GeoTel for call center management and a partnership with WebLine for customer support capabilities.

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Nortel left Clarify as a wholly owned subsidiary that was led by Clarify's CEO, Tony Zingale. It also established a new organization that covered customer interaction via any touch point ranging from the call center through electronic commerce. The organization included Nortel's Symposium call center solution and voice processing and speech technology and Clarify's CRM.

At the time of acquisition, Clarify had emerged as number two vendor of CRM Software, bested only by Siebel Systems. Revenues for Clarify's fiscal year ended in December 1998 were $130.5 million. The company had almost 800 employees in the Americas, Europe, and Asia. Broadvision was the number three supplier closely followed by Remedy. However, a new category of CRM competitors was emerging, companies that offer back-office software such as enterprise resource planning and supply chain management. These included PeopleSoft, SAP, and Oracle. Siebel Systems did not have back-office capabilities, but focused on providing tight integration with these software systems.

Although Clarify product-specific revenue after the acquisition is not available, it's clear that Nortel's purchase of Clarify was a dismal failure. Clarify lost its number two market position and quickly fell to number seven. Nortel sold Clarify to Amdocs, a provider of information systems to the communications industry, for $200 million in cash in November 2001, a far cry from the $2 billion in stock that it paid for the company and a figure not much more than Clarify's 1998 revenues. Nortel also shut down its customer interaction organization.

There are several factors that contributed to Nortel's failure to make the purchase of Clarify successful for the company. The most notable is customer demand for CRM software that is integrated with back-office software rather than a CIC. To date, Siebel Systems is the only CRM….....

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