Chordiant Software, Inc. (CHRD)
Interview with:
Stephen Kelly, President and CEO
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real time, transactional Customer System for the B2C enterprise.

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Chordiant Software is delivering rapid payback and driving top-line improvement for their clients

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Technology
CRM Software
(NASD: CHRD)

Chordiant Software, Inc.

20400 Stevens Creek Blvd. – Ste. 400
Cupertino, CA 95014
Phone: 408-517-6100


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Stephen Kelly
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Editor

CEOCFOinterviews.com
May 2003

Bio of CEO,
As President and Chief Executive Officer, Stephen Kelly is directly responsible for the day-to-day operation of the company as well as overseeing finance, marketing and business development. Beginning in 1997 in London, Mr. Kelly built Chordiant’s international operations, and then assumed worldwide responsibilities for Chordiant's field operations in early 2000.

In addition to his Chordiant experience, Mr. Kelly brings more than ten years of senior management experience with Oracle where he held a variety of roles directing the vertical markets organization, including financial services, telecommunications and retail; European alliances organization; and government sales. Mr. Kelly also worked with British Petroleum and ICL after graduating with an honors degree in business administration and accounting from the University of Bath, England.

Company Profile:
Chordiant serves businesses that have millions of consumer relationships where it is critical to balance the cost of servicing with customer value. Chordiant offers a real time, transactional Customer System for the B2C enterprise. The Customer System consists of Chordiant Solutions and Chordiant Services that integrates with existing IT infrastructure and leverages current assets. Chordiant Solutions combine straight through service processing with your business processes for multi-channel applications in marketing, the contact center, and retail channels. Chordiant Services provide for successful implementations by reducing risk, increasing return on assets and lowering TCO.

Headquartered in Cupertino, California, Chordiant maintains offices in Boston, Chicago, Manchester NH, New York City, London, Paris, Amsterdam, Frankfurt, Munich and Madrid.  Visit us on the Web at  www.chordiant.com.

Chordiant 5 product family:
Chordiant 5 is the first and only process-driven, customer-centric solution designed to help global B2C enterprises reduce total operating expenses in marketing, selling and servicing efforts. Chordiant 5 includes the Chordiant 5 Enterprise Platform, Chordiant 5 Marketing and Chordiant 5 Selling & Servicing. This integrated suite of applications is built upon the flexible Chordiant JX Architecture™ to leverage your existing business and IT systems, resulting in faster deployment and lower total cost of ownership.

With Chordiant 5 solutions, your company gains a sustainable competitive advantage through multi-dimensional customer interactions that use your unique business processes and customer data in real time.

CEOCFOinterviews: Mr. Kelly, where was Chordiant Software when you became its CEO and what changes have occurred?

Mr. Kelly: "The environment was very different back in 2001 when I became CEO. During that time, we actually were recording triple-digit growth. We are one of the fastest growing companies in the software industry. Back in 2001, we grew at 126 percent, so we received plenty of accolades along the lines of the fastest growing fifty companies. In probably the first five years we grew over two-and-a-half thousand percent. The environment has changed dramatically since then and I have had the pleasure of being CEO in tougher times. Although we had a flat year in 2002, we have done well, relative to many software companies because we have focused on the core business and our customers."

CEOCFOinterviews: How do you handle a company in this tough environment?

Mr. Kelly: "Probably the most important is having a very clear market or category leadership. We are very lucky to have a three-year product lead over any of the competitive offerings. We have a contemporary and modern architecture and solution, which is incredibly relevant to financial services for any large consumer company. Clear distinction, clear value and clear market leadership are important factors for Chordiant.

The second element is a crystal-clear focus. When we look at the geography that we serve, it is tempting to spread ourselves all over the world. What we focused on is the core market in North America and the largest economies in northern Europe. We will organize ourselves accordingly to support the customers in those markets."

"We have taken the view that our solution is applicable to any large consumer company, however, we have chosen to be focused and to get a lot of leverage in a particular market. We have spent time in the financial services sector with some of the biggest retail banks in the world, insurance companies and consumer credit companies. Our focus has paid off and we are the category leader in some of the European countries and in North America in financial services. We have been fortunate enough to benefit from some of the growth areas in Telecoms, such as cellular and mobile. In a downturn, some things become more important than ever. We spend significant management effort in building a great culture in the company and focusing on the employees.

 I believe all great businesses focus all their external energies on two things: customer and market value. In doing this, a company creates tremendous return on investment and very low cost of ownership for the respective customers. Very high service levels do incredibly well, even in a downturn, and we pride ourselves on that category. The other side of the coin is to make sure that all the best employees in the company are really focused externally on delivering customer value.

In summary, there are three points to maintaining a company in this environment.  Point number one is about clear market leadership, point number two is about clear focus and point number three is very much about aligning the very best people in the industry in our company toward delivering great customer value and keeping focused on the customer."

CEOCFOinterviews: How do your products serve your customers?

Mr. Kelly: "What we allow a retail bank to do is something called a transactional customer management system. If you are in a contact center, Chordiant allows you to run the contact system environment from the desktop for the agent, right through to the back-office systems. If you are in a branch network of a retail bank, you can walk in and walk in front of a person that works as a management advisor or a teller and you will reach our branch network. On the desktop with Chordiant, we provide a complete single view of the customer, right through to the transaction systems. What we have allowed the retail banks and big insurance companies to do, from the desktop through to the back-end systems, is complete process automation."

CEOCFOinterviews: What is the importance of that?

Mr. Kelly: "The impact and the importance is it allows the big banks and insurance companies to reduce their operating expenses by between 20 and 30 percent. We have some of the largest companies in the world as customers that can testify to those savings. We have given the capability for these typically policy-based systems or product-based companies, to have a single view of the customer. If you are an insurance customer and you call into the contact center, the agent’s screen with Chordiant would pop up all your information about your life insurance and home insurance policies. The agent will have an intelligent view to the service levels needed to accommodate all your service inquiries. We also allow the companies to dramatically improve their revenues. Some of the big retail banks we work with have actually experienced accretive results from our deployments in the magnitude of hundreds of millions of dollars.

Some of the customers are: MetLife Inc (NYSE:MET), USAA, down in Texas; Canadian Financial Services(TSX:CFC), J.P. Morgan Chase (NYSE:JPM), The Royal Bank of Scotland, and Barclay’s(NYSE:BCS). Many of our clients have significantly reduced operational costs of their business with Chordiant deployments, driving top-line improvements in a matter of months, for rapid payback. We are fortunate in that we have an established market leadership, and a very clear technology distinction and solution. We have tremendous strength and referenceability with the companies that use our products. We allow employees to become much more effective in terms of servicing end consumers and providing higher service levels and – ultimately – increased revenue."

CEOCFOinterviews: Would a company typically start with one phase and then build out the system?

Mr. Kelly: "I will give you an example of the way that it works; the largest direct insurer over in Europe is a company called “Direct Line” and they started their life with Chordiant, probably about three years ago, on a single product offering, which was a lone offering. They offered that through the Internet channel and deployed Chordiant in a matter of twelve weeks, live through the Internet channel. Subsequent to that, they have taken that into other product offerings like savings and auto insurance through self-service. Now they have gone through and deployed Chordiant into the contact center. I mentioned that we had a three-year market leadership; one of the factors behind that is that all of our software code is reusable, and it is the most contemporary modern architecture. What that allows companies to do, is once they have deployed a loan or product offering over the Internet, they can take the same software code and deploy most of that into the contact center. You get a dramatic savings for every channel you deploy. Some of our customers have tested five, and get up to 70 percent reuse of the capability of the software, and what that means is it is far cheaper and far quicker as well as lower risk to deploy at three and four distribution channels."

CEOCFOinterviews: What is your revenue model?

Mr. Kelly: "Our revenue model is traditional. Companies normally invest in Chordiant’s Enterprise Platform. This acts as a foundation and allows you to connect all the back-end systems. For example, in a typical retail bank there is a savings account on one database and the checking accounts on another database and the loans on a different database. The Chordiant foundation allows you to sit right in the middle of that and connect all those databases together and provide a virtual customer information file in real time. The model for our software licensing is based on the value the customer derives from our software and how widely they deploy it."

CEOCFOinterviews: How much involvement do you have with the customers after it is up and running?

Mr. Kelly: "To get the program up and running could take three to nine months. Many of the customers deploy these systems themselves in cooperation with our own internal IT groups. Many of them use large integrators like IBM. We have a model that supports both the larger integrators like IBM and a model that supports the internal IT transition to make both journeys successful. Chordiant would have an ongoing relationship typically in the program office. It is likely that these programs would be live for maybe ten to fifteen years. We have an ongoing relationship with all of our customers, both at an executive and a program level."

CEOCFOinterviews: What is new in Chordiant 5?

Mr. Kelly: "Chordiant 5 contains some significant functionality actually, which gives us significant technology differentiation. There are some of the big companies like SAP, who are very successful in the manufacturing business, where Chordiant can’t compete. Those companies have given us a lot of credit for our architecture and our decisions around J2EE and XML, which is the industry standard component architecture, supported by all the biggest hardware and industry standards like IBM and ORACLE. It really does allow people to protect their investment significantly and allows all these different systems to inter-operate. We were the first company out there to adopt this architecture around J2EE and the industry standard. We brought the product to market in 2002; code name was Chordiant 5. We are the first company with very significant production customers in North America, and financial services as well as in Europe.

There is a very significant functionality delivered for the branch network in retail banking with Chordiant 5, which allows the branch agents and potential partners and intermediaries, to get access to customer data with a single view of the customer, and to drive intelligent treatment strategies toward the individual customer. Particularly in the financial services, you see an example; one of the measures most banks use is a return on assets and the most expensive asset they have is their branch network. Historically, it has been underused in selling product to customers. We have allowed the banks to transform the branch into a selling machine, as well as a competent service resolution inquiry environment."

CEOCFOinterviews: Will you tell us about the financial position of the company?

Mr. Kelly: "There was obviously spectacular growth in the first four years and then flat revenue from 2002-2003, which I think is respectable, given many software companies probably shrunk by 30-50 percent. For the last three quarters, we have been close to cash break-even. In the last year, we had a strong time in terms of managing eighteen new engagements with new and existing customers. In terms of the balance sheet, I think it is important for our customers to know that we have been around for many years. We have about 34 million dollars of cash in the bank, and essentially a cash flow break-even; that bodes well for the long-term. We have no long-term debt on the balance sheet and the balance sheet is solid with assets of about 88 million dollars."

CEOCFOinterviews: Do you see acquisitions as part of your future?

Mr. Kelly: "Yes, we came out with a strategy around catalyst consolidation and during our history we have done about six acquisitions. In the current environment, we are very actively looking. But, the way the stock market is, we don’t believe our stock price responsibly supports an acquisition strategy; however, we are always looking at an increase in shareholder value, and strategically, for the long-term, what that means. When we anticipate the stock price recovering and the shareholder value improving, we would then potentially look for an acquisition to drive growth as well."

CEOCFOinterviews: In closing, what would you like to say to shareholders and potential investors?

Mr. Kelly: "A couple of elements allow us to predict a path of great success for Chordiant. The first challenge that we are looking at is driving toward profitability and cash generation. Chordiant, over the last five quarters, has effectively taken 10 million dollars of expense out of the business without impairing the frontline or research and development capabilities. We took 10 million dollars per quarter out of the business; validating and underwriting our commitment to be profitable and cash generating. I think that is the first thing investors should look for. The second thing investors should look for is the growth potential of the company. We have unequivocal market leadership, and category leadership, particularly around the largest financial services companies in the world. Interestingly enough, financial services now have gone from a relatively small percentage of global IT spending when the dot.com bubble was happening. In 2003, the anticipation is financial services will dominate IT expenditure at about 25% of total global IT expenditure. It will be by far the largest vertical market and we are right at the heart of that.
 
We made significant progress in 2001, when the Americas were in proportion to about 16 percent of total revenue of the company. We moved that to 27 percent in 2002. My commitment is to have the Americas draw by Q-4, 50 percent of the company’s revenues. In terms of our capability to penetrate the Americas, there is a tremendous upside and opportunity there. The key to Chordiant is unequivocal market leadership and that has been validated by the larger software companies out there; companies like SAP, that are pretty much adopting our way of thinking, which is about business process automation, application and management. Also important is the capability to drive a universal desktop, a single view of the customer, and straight through service processing.

Programs based on Chordiant really drive hundreds of millions of dollars to the top-line, as well as taking out 25-30 percent of a company’s operating expenses. We have market leadership and some of the largest names in financial services that are referencable, and high-quality customers that have demonstrated return of investment. On the financial side, I think that there will be significant upsides as indicated by our IBM alliance and the Americas expansion. Our focus is to drive to profitability and then to move to growth the way we experienced in our early years. We are very pleased with our growth rate compound of about two-and-a-half thousand percent. In the next few years, it is probably not conceivable to drive a company to that same level of growth, but certainly I think we will see a healthy growth for Chordiant as we exit 2003."


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