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Browser Breach: By David Bank 11/13/1997 Two months later, however, Microsoft Corp.'s chairman, Bill Gates -- not Mr. Barksdale -- stoo d with Mr. Siboni on the stage in Orlando, after Microsoft walked away with the KPMG Internet business and much more. In those two months, Microsoft offered a blizzard of incentives so compelling that Mr. Siboni reversed his decision, rescinded his invitation to Mr. Barksdale and directed technicians to remove Netscape's software that was already being installed on KPMG computers. "We saw a Microsoft organization that was relentless in terms of desire and drive," Mr. Siboni says. "We understand why Microsoft is what Microsoft is. They're smart. They're tough. They're relentless." Microsoft's tactics for taking away one of Netscape's most important customers illustrate the company's powerful abilities to extend its reach and conquer new markets. The company has such deep pockets, and so many ways to tie a simple software sale to broader business opportunities, that it can, in effect, pay customers like KPMG to use its products. No one, including Mr. Barksdale at Netscape, is saying Microsoft did anything wrong, unethical or illegal in relentlessly chasing the KPMG account. All that was broken, says a disappointed Mr. Barksdale , was an oral commitment. "Roger told me I had the business and that's all I needed," Mr. Barksdale says. "I never met a man who wouldn't keep his word if it didn't cost him any money. The trick is, who will keep their word when it will cost them some money? That separates the guys I want to hang with from the rest of the pack." Before losing KPMG 's Internet business to Microsoft, Netscape had actually won it not once, but twice. After evaluating both companies' products last fall, KPMG selected Netscape over Microsoft to create an "intranet," an Internet-based internal network for KPMG 's U.S. operations. The Netscape software was to be used to allow KPMG 's 18,000 accountants and consultants to share documents, exchange electronic mail, connect with clients, automate business processes and even hold electronic "town hall" meetings. KPMG signed the contract and paid Netscape in full, though neither company will disclose the amount. Netscape announced the deal on Jan. 24. "Netscape offers KPMG the industry's most compelling solution for our knowledge-management needs," Allan Frank, then KPMG 's chief technology officer, said in a news release. More important, KPMG agreed to help its large roster of corporate clients install Netscape's systems as well, a provision that promised Netscape a bonanza of additional business. The news caught Microsoft off guard. "That was not a good day for me," says Ian Rogoff, Microsoft's manager for large corporate accounts. "There were a ton of meetings at all levels. `What did we do wrong? Why did KPMG select Netscape?'" The questions came from Jeff Raikes, Mr. Rogoff's fiercely competitive boss and one of Mr. Gates's chief lieutenants. Microsoft sees Netscape's lead in the Internet-browser market as one of its most serious challenges. Eager to see if the Netscape deal could be broken, Mr. Raikes gathered intelligence from his sister, who happened to be a KPMG consultant. She suggested calling Mr. Siboni. Mr. Siboni agreed to a half-hour breakfast at the Ritz-Carlton hotel in New York in February, a meeting that stretched to two hours. The two men challenged each other. Mr. Raikes said Microsoft hadn't gotten a fair shake in the software competition and asked Mr. Siboni, "Are you guys just contrarians?" Mr. Siboni, keenly aware of Microsoft's reputation for driving one-sided deals, retorted, "You guys don't know how to partner with anybody." But in the end, Mr. Siboni was intrigued enough to agree to re-evaluate KPMG 's commitment to Netscape, by holding a competitive "bake-off" between the two companies' products. Given the news, Mr. Barksdale at Netscape reassembled his team to again make his company's case. KPMG 's technical experts, who earlier selected Netscape, were suspicious and hostile about Microsoft. "The last time I checked, Microsoft hasn't invented anything," one former top aide to Mr. Siboni says. "All they do is marketing and copying." To counter such attitudes, Mr. Raikes invited Mr. Siboni and his team in March to the executive briefing center on Microsoft's Redmond, Wash., campus. Mr. Raikes played two of Microsoft's trump cards: first, a 45-minute private audience with the world's richest man and most powerful high-tech tycoon, Mr. Gates; and second, a proposal to make KPMG not just Microsoft's customer, but its partner. Mr. Rogoff, who had been skiing at Lake Tahoe, took a day off from his vacation. He flew to Redmond and outlined plans for a joint KPMG -Microsoft effort to capitalize on the sales momentum of Microsoft's Windows NT operating system. Mr. Rogoff proposed a joint effort to serve corporate customers interested in electronic commerce and the automation of sales-force procedures, areas in which KPMG specializes. Partners such as KPMG are important to both Microsoft and Netscape, which are seeking to expand sales to large corporate customers. Unlike rivals such as International Business Machines Corp. and Oracle Corp., neither software company has large staffs of in-house consultants to help big corporations convert operations to Internet-based systems. That presents an opportunity for "system integrators," such as KPMG , to reap large consulting fees. Mr. Siboni was intrigued, but concerned that gearing up for a joint venture with Microsoft would be expensive for KPMG . First, KPMG had to decide which company's technology to use for its own needs, a move that would determine KPMG 's credibility in pitching software systems to its customers -- known in the industry as "eating your own dog food." Leaving Redmond, Mr. Siboni's team still had reservations as to whether Microsoft's products would meet their internal needs. Microsoft's products ran primarily on the company's Windows 95 and Windows NT operating systems; KPMG 's system included computers running Apple Computer Inc.'s Macintosh operating system as well as older versions of Windows. While Netscape offered software that could tie together KPMG 's diverse computers, going with Microsoft would require extensive software and hardware upgrades. Mr. Siboni confirms that the overall costs of Netscape's software would be several million dollars less than Microsoft's. KPMG 's technical team, which was already installing what would eventually be 22,000 Netscape Internet browsers for KPMG 's U.S. employees, gave Netscape's products high marks. And Netscape offered a better chance for KPMG to stay on its internal schedule to have the full system in place by June 1998. At the end of the bake-off in April, Mr. Siboni called Mr. Barksdale in April with good news. "You guys have done very well. I think it's going to go your way," Mr. Siboni told him. Then he added with a laugh, "You would be amazed at how hard these Microsoft guys are working." On June 2, Mr. Siboni again called Mr. Barksdale to tell him Netscape had "rewon" KPMG 's business. "Terrific," Mr. Barksdale said. That's when Mr. Siboni invited Mr. Barksdale to speak at KPMG 's Aug. 7 meeting in Orlando. But Mr. Siboni asked Mr. Barksdale to keep their conversation quiet for a week to give him time to inform KPMG 's overseas partners and break the news to Microsoft. "That call is going to be more difficult," Mr. Siboni says he told Mr. Barksdale . Mr. Siboni says he began that call to Microsoft by telling Mr. Raikes, "We are seriously leaning toward Netscape." To Mr. Raikes, it was a call to arms. He promised to "sharpen his pencil" and think more creatively. "Explain to me the kinds of things you would like to pursue," he asked. Says Mr. Raikes: "We just didn't give up." That is an understatement. During the next two weeks, Mr. Raikes repeatedly escalated Microsoft's earlier offers and concessions. To satisfy KPMG 's concerns about the timetable for Microsoft's software, Mr. Raikes agreed to include KPMG in a "rapid deployment" program to give the firm early access to Microsoft's software, accelerating the schedule by a full eight months, and promised to speed up work on the Macintosh versions of its programs. Microsoft already gives away its browser and other World Wide Web software; Mr. Raikes also offered deep discounts on other software if KPMG agreed to deploy Microsoft's technology globally. Neither party will disclose the price of the software package. Mr. Raikes, with Mr. Gates's blessing, then outlined his plan to use Microsoft's financial resources to seal the deal. For openers, he agreed to Mr. Siboni's demand that Microsoft acquire a 10% stake in a KPMG unit called Enterprise Integration Systems, which resells networking technology to corporate customers. "Everybody has to have skin in the game," Mr. Siboni told Mr. Raikes. Next, Mr. Raikes offered $10 million to cover most of the costs for KPMG to open another unit, consisting of 10 centers around the country and staffed with 500 trained consultants, to market services to corporations adopting Windows NT. The offer covered upfront costs for recruiting and training and even KPMG 's lost revenues from hours not billed to customers while the consultants are being trained. Most of Microsoft's investment was structured much like an author's book deal, with most of the money coming as an advance, or loan, to KPMG to be repaid from future revenues from the partnership. The remainder was in the form of a direct investment by Microsoft, with no need for repayment, to cover marketing and promotional expenses. "Money changes hands, and then comes back, to make sure there's no upfront pain," Mr. Rogoff says. That still wasn't enough to seal the deal. "Roger wanted more money from Microsoft," Mr. Raikes says. And Mr. Siboni still had concerns about Microsoft's ability to meet the delivery deadlines for its intranet system. Mr. Raikes's response: If Microsoft missed the software deadlines, it would forgive a greater share of the advance as a penalty. "I e-mailed him and said, `Here are my ideas,'" Mr. Raikes says. "He wrote back, `Let's talk on the phone.' We talked and said, `Congratulations.'" For KPMG , the deal was so sweet and the potential revenue from a Microsoft partnership so large that the company paid off its contract with Netscape for software it ended up not using. For Microsoft, the investments are justified by the long-term revenue potential of the corporate computing market, with the help of partners like KPMG . The size of the investment, Mr. Rogoff says, "is trivial compared to the long-term revenue stream." Microsoft's goal is to use KPMG 's access to clients to expand its base of customers, which can then be counted on to purchase upgrades and additional software for years to come. "Jeff and his people were just adamant about winning that work," Mr. Siboni says. "It was as if every day, our attention and mind-share was being focused on the momentum of the relationship and how we could improve it and how we could refine it." For that reason, Mr. Siboni says, Netscape was kept in the dark during the whirlwind negotiations with Microsoft. The final details -- a dozen agreements in all -- were finalized with phone calls over the July 4th weekend with Mr. Siboni barbecuing in his backyard in Summit, N.J., Mr. Raikes at his summer house on the Hood Canal south of Seattle and Mr. Rogoff holed up in a hotel room in Acapulco, Mexico, where he was vacationing. Finally, on July 15, six weeks after his earlier call, Mr. Siboni called Mr. Barksdale with the shocking news. "I know what we talked about before," he says he began. "But it's not as compelling as when we looked at it a few weeks back. Microsoft really knocked itself out." Mr. Barksdale 's reaction was a mixture of anger, frustration, betrayal and disappointment. "It was a hard one," he says. "I felt so bad for my team." When Mr. Siboni added that Mr. Gates would be speaking at the Orlando meeting, Mr. Barksdale says he just laughed, "I guess that's one trip I don't have to make." He says he is still upset with how he was used. "Don't call me and say I got the business and then go back to the next guy," he says. While Netscape was paid for its software, it lost not only the right to brag about one of its largest customers, but the privileged access to KPMG 's clients and future business. Mr. Siboni says he never intended to start a bidding war and regrets that Mr. Barksdale feels betrayed. He says Mr. Barksdale should have known his commitment to Netscape in June wasn't final because he asked for an additional week to confer with Microsoft. "At the end of the day, you have to do what's right for your organization," he says. "That's what you're paid to do." In his speech in Orlando, Mr. Gates shared some of the ways Microsoft maintains the competitive zeal of a scrappy start-up. "We're kind of a strange company," he said, explaining that he ordered executives to stop sending e-mail messages about customer accounts they had won, and instead report on the accounts they had lost. And he gave a nod to his defeated competitor, conceding that Microsoft had been caught by surprise by the Internet tidal wave that gave birth to Netscape. "It was a wonderful chance for me to go to the company and remind them, `Hey, we don't have a guaranteed place,'" he said. "`We've got to take this Internet initiative and really surprise the world with what we can do.'" Copyright © 1999 Dow Jones & Company, Inc. All Rights
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