Vendor Ratings, VDR Theresa Lanowitz, Bill Gassman

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1 Vendor Ratings, Theresa Lanowitz, Bill Gassman Research Note 11 December 2002 Vendor Rating: Mercury Interactive Mercury Interactive, a profitable $360 million automated testing company, has launched a strategic initiative to break out of its best-of-breed point products mode by targeting toplevel executives. Mercury Interactive Overall Rating: What You Need to Know: Mercury Interactive knows it must grow deeper into IT operations, business process and technology optimization. It has launched a strategic initiative, Business Technology Optimization (BTO), to propel it to the next level. Mercury has an impressive financial record, is well managed and is focused on growing to the next level while remaining committed to its customer base all attributes that bode well for a company focused on growth. The company is taking incremental steps to attract C-level executives. Mercury is a vendor with a strong heritage that is poised to do well as it grows. Analyst Comments: Mercury, a dominant vendor in the automated testing market, is attempting to take its expansive strategy to C-level executives. Detailed Rating: Corporate Viability Strategy Financial Marketing Organization Product/Services/ Technologies Product/Service Technology Pricing Customer Service/ Product Support Sales/Distribution Support Services Initiative Rating Promising Corporate Viability: Financial Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Financially, Mercury Interactive continues to perform well. Even amid a sluggish economy, the company has met financial expectations. Mercury has posted strong revenue statements for the past three fiscal years (fiscal year ends 31 December; see Table 1). Table 1 Mercury Revenue 3Q02 (year to date) $282.4 million (increase of 4% from the same time period in 2001) FY01 $361 million (increase of 18% from 2000) FY00 $307 million (increase of 64% from 1999) FY99 $187.7 million (increase of 55% from 1998) Source: Mercury Interactive Mercury s revenue comes from product licenses and services. Product licenses (new sales, managed services, upgrades and maintenance) account for approximately 66 percent of the revenue. Professional services account for approximately 34 percent. This mix of licenses and services is reasonable and expected for a company specializing in building commercial software products. Preproduction licenses account for 88.5 percent of the total license revenue; post-production licenses account for 11.5 percent. Through 2005, Mercury will remain an independent vendor and will not be acquired (0.7 probability). With the ongoing consolidation and collapse of enterprise application development tools vendors, Mercury s added value comes from being a neutral vendor not tied to any specific platform. Strategy Mercury is at a turning point. The $360 million company must smash through the next milestone of $500 million and set a strategy to grow to the $1 billion mark. The current strategy is to integrate the markets of today, and tie them into the new initiative BTO, which was launched in October Mercury s BTO strategy focuses on enterprises being asked to do more with less in an increasingly complex and competitive environment, and the need to show the business value of IT. Mercury is the clear leader in the distributed testing tools space and has built strong customer relationships in application development organizations. Several years ago, the company began a swift expansion from the testing market to the IT operations area by focusing on application performance management (APM) tools. The success of its APM offerings has clearly moved Mercury beyond the testing market, and higher in the IS organization with a business-centric approach to managing applications in production. BTO is a multifaceted strategy tied to the life cycle of an application. The value proposition of BTO is to monitor business requirements and metrics through each stage of the application life cycle, from development to deployment to operations. Through this approach, the application functionality, capacity, quality and expense are monitored so that business managers as well as the IS organization gain transparency into the development process. An important benefit of the BTO approach is easier management of an application once it is in production and links to business activity monitoring tools. The strength of the BTO vision is that by providing the tools to instrument and monitor applications during an application s development phase, Mercury becomes a logical solution to support IT operations and business activity monitoring dashboards. 11 December

3 The BTO initiative is more than a marketing ploy. Mercury has taken tangible steps toward integrating several products into what it calls the Optane suite. One example is the Topaz Business Availability product. It provides real-time IT business service views which expose to business managers and executives how well IT operations is meeting line-of-business goals. This is the least-risky part of the BTO strategy. It drives Mercury deeper into the IT operations market while getting onto the desktop of business managers. The BTO strategy affords Mercury the opportunity to garner new customers at the coveted C level of the enterprise while leveraging successful relationships with current customers. Early adopters will include financial services and manufacturing enterprises that have tightly integrated IT into their business operations. The optimization of IT resources back into the development cycle is more amorphous, hence a riskier component of the strategy. BTO is not just technology. It is a fundamental change in the way information is gathered and shared within enterprises. It crosses groups and political structures and changes the way processes work. Most enterprises will require business process consulting to be successful with BTO. To deliver the process re-engineering requirement of BTO, the strategy is to partner and build channels with leading integration firms. Relying on external partners adds to the risk. Mercury s strategy for growth has low-risk and moderate-risk components, but winning at both will protect its premium pricing and put it in a good position for long-term growth. To succeed with the BTO strategy, partnerships are critical. Mercury must rely on its strengths of strong financial performance, strong sales and marketing organizations, and consistent management to attract and keep partnerships. Failure with the BTO strategy could severely undermine the pricing of Mercury s testing and monitoring tools by failing to establish product leverage across the application life cycle, which would force Mercury to compete head-to-head in each market. Marketing Historically, Mercury has partnered at the right time with the right vendor. It its recent BTO announcement, Mercury launched a partnership with Accenture, and within one month included other consulting and systems integrator firms such as Cap Gemini Ernst & Young, Computer Sciences Corporation, Deloitte Consulting, IBM and BearingPoint (formerly KPMG Consulting). In addition to relationships with consulting and systems integrator firms, Mercury has aligned itself with independent software vendors (ISVs) such as Oracle, PeopleSoft and SAP. This ISV alignment means Mercury tools are preferred by these vendors and, subsequently, the tool preference spills over to customers. Ultimately, the customer benefits from the Mercury and ISV alliances because Mercury is the preferred vendor, the client company will have earlier access to newer technology and can incorporate the necessary updates in supporting products. Mercury has an advanced and active Alliance Program that includes channel, technology and benchmarking partners. Mercury understands that no single vendor can deliver and execute on a complete end-to-end solution in the IT world. With this attitude, Mercury set out to create partnerships that have proven to complement its own offerings while accelerating the growth and visibility of the company. Organization Mercury is a global company with offices in 25 countries worldwide. Amnon Landan, president and chief executive officer (CEO) since 1997, has been with the company since 1989, and has held a variety of positions, including research and development and operations. The demeanor of a company is a direct 11 December

4 reflection of its CEO. Mr. Landan is a calm leader with a thorough understanding of technology, yet he is keenly aware of what must be done from a business perspective to grow the company to the next level. Mercury s senior management has historically executed well and made decisions that take Mercury forward, yet keep it focused on its core competences. Acquisitions are carefully analyzed. To date, integration of these acquisitions has been smooth. Products/Services/Technologies: Products and Services Mercury s flagship product line consists of WinRunner an enterprise functional test tool and LoadRunner a performance and load-testing tool. During the past two years, Mercury has invested heavily in its new market segments of production tuning and application performance management. Mercury has a penchant for spotting emerging trends. Since 2000, Mercury has offered testing, tuning and monitoring services by extending the functionality of its products. The service offerings are attractive to enterprises without the resources to accomplish a complete performance optimization of applications. The concept of software as services will be more common as enterprises begin to re-staff organizations after the economic downturn of 2001 and Technology Since Mercury s inception in 1989, it has been at the forefront of the automated testing market. Over the years, the company has successfully expanded through limited acquisitions and product extensions (for example, the acquisition of Freshwater Software in 2001 provided Mercury with the technology to expand its APM solution, as well as a customer base of 4,000). The company offers updates to its product lines on an annual basis which fits the need of most IS organizations. Mercury s flagship products, WinRunner and LoadRunner, are beginning to age. The products were initially architected for a client /server environment. Internet applications require a much more nimble architecture. Mercury has announced QuickTest Professional, a functional testing tool, for newer environments such as.net, Java 2 Platform, Enterprise Edition and new versions (for example, Web-based) of popular enterprise resource planning and customer relationship management tools. Mercury is using QuickTest Professional as an integration strategy for its customers. Mercury s move to integrate instead of migrate shows that the company is committed to supporting its customer base and will take steps in its product lines to invest in new architectures, while supporting older architectures as long as customers demand it. Mercury has taken core pieces of its testing technology and embedded them into its APM technology. The synergy of the pre- and post-production products is helping the adoption rates and the satisfaction of Topaz and Freshwater customers. Pricing Mercury has long been a proponent of seat-based or node-lock pricing. In a market where not every developer is a potential customer of a Mercury tool, seat-based pricing served the purpose of making Mercury a well-known vendor with quality products. Now that Mercury has developed significant traction in the marketplace, the company has announced a floating license model. To preserve and protect its revenue stream, the company offers local and global floating licenses. The floating license agreement is a positive step for Mercury, and shows that the company is seriously committed to being a provider to the enterprise. 11 December

5 In the APM market, Mercury is still learning what pricing the market will bear. Application monitoring started off priced by transaction, but now is offered with an application-based pricing model. Some customers are finding Mercury pricing for post-production load tests too high for the load they require, and are cutting corners, therefore not properly testing their applications. Mercury showed an aggressive pricing style when it purchased Freshwater and obtained its SiteScope customers. The price was doubled and the customer base complained. Mercury held its ground and the complaints subsided while sales continued to grow, indicating that it is quickly learning to be shrewd when it comes to the pricing subtleties of the IT operations market. The next pricing evolution must serve the consultants and systems integrators that will make up a large part of an IS organization in the future. These important customers must be able to easily take a scalable, reliable and available environment from engagement to engagement without incurring pricing penalties from the vendors. Customer Service/Product Support: Sales/Distribution Mercury has a strong and successful direct sales force. The sales force is experienced at effectively selling to the enterprise while being technically aware. In addition to its direct sales force, the Mercury Channel Alliance Program is a way for Mercury customers to purchase software through a value-added reseller, a solutions partner or systems integrator. Members of the Channel Alliance Program are certified by Mercury. Certification through an alliance program is essential for the customer to make sure the level of service from the original vendor is guaranteed. Mercury was one of the first in the automated testing market to establish a comprehensive alliance program. The sales force is challenged, however, to sell into the APM market outside Mercury s traditional customer base. As Mercury advances its BTO concepts, the sales force will have to be retrained or a new and specialized sales force will have to be built. Support Services Mercury offers customers support in a variety of ways. In additional to traditional phone-based technical support programs, Mercury s online presence allows customers to search knowledge bases, engage in discussion forums, monitor the status of an outstanding request and submit requests to technical support. Mercury has been a recipient of the WebStar Service Award for excellence in online customer service (2000 and 2001). It also sponsors local user groups to facilitate the sharing of information in communities. Related Research and Ratings: Mercury s Growth Strategy Comes With Challenges Mercury Interactive ActiveTest for Hosted Load Testing Magic Quadrant: Testing Tools for Distributed Platforms Hosted Development Services Testing Magic Quadrant Skill Gap Analysis: A Tool for AD Managers Hosted Development Services Let AD Focus on Its Core Web Application Performance Management Vendors Mercury Interactive: A Leader in the ASQ Market 11 December

6 Rating Definition: Promising Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Core Topic Constructing Applications ~ Application Development Mercury Interactive Headquarters: Sunnyvale, California Web Location: 11 December