Can it be fixed?

Can it be fixed?

It was once a high-flying logistics technology firm - one of a handful of enterprises with a grand vision and, with tens of millions in its war chest following an initial public offering, seemingly the means to achieve it. But Descartes Systems Group has, by all indications, failed miserably in realizing that vision, which it once boldly described as "a global network that allows connectivity between all parties in a logistics network."

There have been plenty of indications that all is not well in the Waterloo, Ontario, headquarters of Descartes, named for the French philosopher and mathematician who said, "I think, therefore I am." Key personnel have defected to competitors; customers also have departed; the company reported a loss in each of the last 20 quarters.

In recent weeks the news has gotten worse. In March, the executive vice president and chief financial officer, Colley Clarke, abruptly resigned. And on May 6, the company announced the immediate "termination" of President and Chief Executive Manuel Pietra, and revealed to an already embittered investment community that revenue and loss per share for the quarter ending April 30 would be "materially below" earlier expectations. The news sent Descartes' stock plummeting 39 percent to US$1.16 per share on the Nasdaq.

What's happening? How does a company that has raised some $100 million in capital and that was for a time the darling of the logistics press spiral so far downward that some analysts question whether it will even survive?

Interviews with many who are familiar with the company, including investment analysts, former customers, former employees and technology consultants, paint a picture of a firm that has a client base and core competencies but one that has veered far off track in pursuit of its vision. That vision was to create an electronic network in which the multiple parties that make up a typical supply chain would be connected.

Descartes' idea was based on a two-pronged strategy: Construct a network in which parties would be electronically linked via a robust value-added network (VAN), and then leverage the vast amount of shipment information exchanged over that system - what Descartes once called a "thousand points of light in the supply chain" - and funnel it into the firm's decision-making software for route optimization, load planning, contracting and other activities. The objective would be to save clients money by making their supply chains run more smoothly.

Several obstacles got in the way. There was the prolonged recession in information-technology spending following the dot-com bust in 2000-2001. The downturn in spending affected all of the major logistics technology firms, including I2, Manugistics, G-Log and GT Nexus, to varying degrees. Descartes, however, has struggled with several problems unique to the company.

One that stands out is its difficulty in managing acquisitions. Descartes had modest beginnings in the 1980s as a developer of routing algorithms and other software for trucking. The company was savvy in raising capital when technology started to boom in the mid-1990s. Descartes soon expanded its vision to development of a multimodal, multifunctional business model, and managed to acquire a dozen companies beginning in 1997.

By all indications, it has encountered huge difficulties integrating each acquisition's technology into a coherent whole. "I would say that as a company, over the past several years, they have struggled to bring together their various acquisitions into an architecture that would sustain itself over time," said Jane Biddle, a logistics technology consultant based in Chatham, N.J.

Another problem has been its basic networking business. In trying to become a leader in VANs, it encountered data-quality issues. VAN messaging is worthless unless the data is good, a fact a Descartes executive acknowledged in 2001 by noting that it can take 18 months of tweaking to get messaging information to a level of 90 percent accuracy.

Descartes' technology problems, however, have not been not limited to data quality. The legacy nature of much of its VAN technology meant it needed to be made compatible with an environment that increasingly places a premium on services that are purely Internet-based. Achieving that compatibility has added to Descartes' struggles.

But others reject the compatibility issue as an excuse. They note that the firm has had plenty of time to reorient its technology to the Internet, yet still presents an opaque strategy to the market.

Former employees and others, moreover, point out that it wasn't just technology that needed to be integrated - it was people as well, brilliant and aggressive software entrepreneurs who had started and built companies and then found themselves working for a larger, more bureaucratic firm. As the outsiders joined Descartes, they often encountered an intensely political internal environment that led to turnover and low morale. The situation was made worse, some say, by the white-hot pressure of being a public company and having to report earnings on a quarterly basis - and, worse, having to explain persistent losses to increasingly hostile investment analysts, some of whom have all but given up on Descartes.

"I don't think there is any confidence left" among analysts, said David Shore, a software and information technology services analyst for Desjardins Securities Inc. in Toronto. The firm has had a sell rating on Descartes since early in 2003.

But it would be incorrect to say everyone has given up on Descartes. Many major steamship lines and non-vessel-operating common carriers continue to use Descartes' software for ocean contracting, and other software the firm provides is also viable, outside observers say.

Foster Finley, a vice president at A.T. Kearney, a Descartes partner that has used Descartes' software in many of its consulting jobs, said the firm may be going through financial troubles but has a leadership position in certain technologies and many satisfied customers.

"They have some of the best and most unique products in their space," Finley said. "They have a very widely installed, high-functionality routing solution that is very competitive and is relied on by a number of people," he said. Descartes' VAN service, he said, is "far, far greater then the next largest competitor."

Following the May 6 announcement of the chief executive change and latest loss, "We received a ton of phone calls and e-mails from our partners and customers letting us know they support us and are behind us, and that they appreciate our products," said Kimberley Emmerson, Descartes' director of public relations.

Others, however, say Descartes' success in certain niches should not obscure the overall weakness in its strategic direction. In particular, they point to a fundamental weakness at Descartes: that in trying to become a jack of all trades - all modes, domestic and international, messaging plus software - it ended up being a master of none.

Part of the problem is strategic. Descartes tried a few years ago to convert its revenue model to a transactional basis, in which not just the VAN messaging but also the software would be charged for on a pay-as-you-go basis. The change reflected customers' unwillingness to make large-scale software investments following the dot-com bust. But some now perceive Descartes to be wavering on that strategy, by showing interest in moving back toward a licensed software model.

Descartes' representatives would not comment about those and other questions for this story. Instead, they said to watch for a June 2 announcement in which the company's plans under its new management would be made clear.

The latest round of difficulties for Descartes emerged in the context of its May 6 news release in which Pietra's termination was announced. But even that bad news in some ways masked underlying problems that analysts say are at the heart of Descartes' difficulties. In a follow-up May 10 release, Descartes said its revenue for the quarter would be $13.3 million to $13.6 million, down from earlier estimates of $15.5 million to $16.5 million. It also said its loss for the quarter would be greater than expected.

Analysts ask why the company's revenue is declining when it claims to be signing up hundreds of new customers - many of them users of its VAN network services in which payment is per transaction. "They have said that because it's effectively a transactional system, it takes time to get people implemented, and start generating transaction revenue," said Shore of Desjardins Securities. "They added 850 customers over the last eight quarters, and revenue has fallen. The first 200 customers should be generating revenue by now. There are two explanations, they are not using the system, or they are not paying for the system, and neither of those would be good."

In practical terms, Descartes' pursuit of a broad vision may have meant a squandering of value in some of its acquisitions. In a February 2000 stock deal worth $80 million, Descartes ac-quired e-Transport, the former Pittsburgh-based DXI, which at that point was a leader in tariff publishing and retrieval, and had broad visions of serving as a collaborative hub for ocean contract management. But as Descartes turned its focus to other modes and pursuit of its larger vision, e-Transport withered due to lack of attention and investment to upgrade its technology.

Though it still counts major carriers and NVOs as clients, the e-Transport business eventually began losing customers to less-diversified, more-focused competitors such as Management Dynamics Inc. "We took a lot of that business away from them," said James Preuninger, chief executive of Management Dynamics, a comment echoed by others. Last month, apparel maker Oxford Industries switched from Descartes to Management Dynamics. Inttra, the ocean carrier-owned Internet portal, uses Descartes' Ocean Negotiator product for its tending service, which it calls Inttra Tender, but maintains the software itself. "We have this wholly in our own shop," said Ken Bloom, Inttra's chief executive.

Where does Descartes go from here? That's unclear. In a conference call on May 10, the new co-chief executives, Art Mesher and Brandon Nussey, said their first priority is to move rapidly to make Descartes profitable by cutting costs. Mesher said the firm will take "very decisive actions to reduce costs immediately."

"We will become an earnings-focused company," Nussey said. But what that means precisely is unknown. Almost certainly it means a round of layoffs - not the first for Descartes - which will affect morale and could cut into its core of talent.