In-Depth

Rational rolls along

• By Michael W. Bucken
• May 1, 2001

As awful news continues to flow from a sea of new and established suppliers of software development technologies, Rational Software Corp. approaches its 20th anniversary on firm financial and technological footing. Through acquisition, internal development and an innovative (and successful) effort to define industry standards, Rational has so far survived a dramatic shakeout in the development tools business

Rational last month did slash 400 jobs and cut financial estimates for fiscal 2002 starting April 1, but given the economic conditions, analysts still expect the firm to edge close to its goal of $1 billion in 2002 revenues and profits to come about 40 cents below the earlier 86-cent per share projections. Rational executives continue to project a strong second half of fiscal 2001. Officials expect that the customer breakdown will continue at 30 to 35% IT operations and 65 to 70% software suppliers, including infrastructure companies like Lucent, Murray Hill, N.J.; Cisco Systems, San Jose, Calif.; Motorola, Schaumburg, Ill.; and Ericsson, Stockholm, Sweden; as well as makers of portable devices and embedded systems.

Rational risk-taking
Though many observers describe the company and its management team as conservative and somewhat unexciting, Rational has clearly benefited by successfully taking on several extremely risky ventures. Since its birth as a public company with the acquisition of publicly held Verdix Corp. in March 1994, Rational adopted a strategy of creating a suite of products from internal and acquired technologies priced at far less than the sum of its parts, and extended itself into the ASP business.

Since 1994, the company has become best known as an acquirer and integrator of companies and products that have filled out a product line that has become standard for IT developers in various large corporations and in the research and development units of suppliers of complex packaged software. The pricing advantage of the suite has aided Rational in competition with strong best-of-breed tools.

Setting the industry standard
About five years ago, in a move many observers have lauded, Rational hired the top object-oriented methodologists in the world—Grady Booch, Ivar Jacobson, James Rumbaugh and Walker Royce—to create the Unified Modeling Language (UML). UML has become a widely accepted industry standard controlled by the Object Management Group (OMG), a Needham, Mass.-based standards consortium. At the time, the methodologists were creating multiple object-oriented methods that threatened to muddy the development waters for years to come. The UML specifications have become standard for much of both software vendor and corporate users.

Rational has since moved on to an effort to create a next-generation standard dubbed the Rational Unified Process, a Web-enabled toolset that defines a host of software best practices. The jury is still out on another risky Rational proposition—a $50 million minority investment in and the additional spending of $405 million last November to acquire the rest of Catapulse, a company formed by Rational co-founders Paul Levy and Michael Devlin in early 2000. Catapulse's goal is to create an application service provider model for developers named the Hosted Development Service (HDS).

"It will take a while to [determine whether] it will work," said Kathleen Quirk, an analyst at The Hurwitz Group, a Framingham, Mass.-based consulting firm. "For now [HDS] does make a good option" for the Rational Suite products.

All of these moves, Rational executives say, fit into an overall strategy of providing a single set of tools for each facet of the software development life cycle—modeling, analysis, design, content and configuration management, testing and maintaining. The primary piece of the development puzzle unfilled by Rational are the tools of integrated development environments (IDE). Hence, the suite depends on links to such offerings as IBM's VisualAGE toolsets, Microsoft's Visual Studio offerings and JBuilder from Borland Software Corp., Scotts Valley, Calif. Company officials have long claimed no plans to build or acquire an IDE.

"We make it clear to customers what we are," said Rational's President and Chief Operating Officer Thomas Bogan. "We tend to be very disciplined about what we do."

Don't look for any major additions to the suite over the short term—at least not via acquisition, said Eric Schurr, senior vice president of marketing at Rational. "We aren't planning any big acquisitions for a while," he said. "But we do have $1 billion in cash available, so look for us to buy some little companies. We're always looking to add value to the product line by building [products] ourselves or buying them."

The suite spot

The Rational Suite includes a shared platform that provides cross-functional development teams access to tools for each slice of the development process. Each Rational tool is built to fit easily into the platform.

How suite it is
Analysts say the rewards resulting from most of the risks taken by Rational executives have so far helped the company face down an uncertain economy that has wounded many tool suppliers—even shuttering many that were founded to provide tools for building Internet applications.

Several observers credit the firm's successful integration of the wide variety of acquired complex tools for its ability to so far withstand the sputtering economy. The firm unveiled its first suite of tools about a year ago after more than two years of integration work by Rational engineers. By year-end, executives say, the Rational Suite offerings were contributing nearly one-third of the firm's revenue totals. The firm's configuration management software, ClearCase, was the only major Rational product not included in any of the early suite offerings because the firm feared it would boost the price tag beyond what development units would be willing to pay. It was added earlier this year.

"The Rational tool suite has worked out much better for us than the best of breed [option]," said Mark Pietrasanta, vice president of technology at Commerce One Global services, a unit of Commerce One, a Pleasanton, Calif.-based consulting firm that builds e-commerce systems. "We would have had to glue everything together without this."

Pietrasanta said Commerce One developers do not yet use all the products in the suite, but that is expected to change as time goes on. "We use RequisitePro, Rose, ClearQuest and ClearCase so far."

The lack of a Rational IDE has been beneficial for Commerce One, Pietrasanta said. "The IDE we use in a project depends on the project and a lot of times is dictated by the client."

"They have put themselves in a position as a 'one-stop shop' for developers," said Dick Heiman, an analyst at Framingham, Mass.-based International Data Corp. "The major driver has been the suites concept."

Adds Quirk of The Hurwitz Group: suite buyers often look for a single product—usually the Rational Rose modeling tool—but turn to the bundle due to its attractive pricing structure, and because "all of the products are strong."

One example is Realeum Inc., Alexandria, Va., a maker of vertical applications for the real estate industry. About 18 months ago, Realeum started work on what it called Project Javelin, a mission-critical effort that resulted in its flagship Foundation property and customer management package for large real estate firms, said Chief Technical Officer Mark White.

"We were Sun poster children and we needed tools and technologies that supported Java, EJBs [Enterprise JavaBeans] and servlets," White said. "In the early phase we used the configuration management tools [ClearCase] and methodology [UML]. Then we started using Rational Rose for UML modeling and we hired a head of QA that brought in Requisite Pro and the ClearQuest repository for defect tracking." At that point, the Rational Suite was installed for its testing tools, he said. The Realeum Foundation system is slated to be shipped this spring, White said.

The Rational of recent years is certainly different from the company founded by Air Force Academy classmates Levy and Devlin to build tools for technical software developers. The company focused on vertical markets and Ada-based tools until an acquisition spree that was launched in 1995 after Rational had reached the $50 million annual revenue mark.

And Rational continues to focus on improving the software development process, making it an engineering function rather than the artistic one preferred by many developers. "They certainly do take a process view," Heiman said. "I like the idea behind the Rational Unified Process to build a more disciplined software development world. The problem is whether the Rational best practices will be widely accepted. Best practices don't have a good history with developers. I'm not sure they can get away with it in the e-business world, where there is still a 'fix it later' feeling."

Rational entered the public market with its acquisition of Verdix Corp. in March, 1994, which brought Rational under the scrutiny of Wall Street traders. At the end of that year, Rational bought Palladio Software and added Objectory AB a year later. The company's biggest acquisitions, Pure Atria Corp. and SQA Inc., came in 1996 and 1997 respectively, and added testing tools and the ClearCase line of configuration management products to the Rational mix. During that time, Rational also picked up the Visual testing tool from Microsoft Corp., Requisite Inc., SoftLab AB and Performance Awareness Corp.

The Rational buying binge came in the midst of a very ambitious and ultimately failed effort by the former Platinum Technologies to integrate a bundle of acquired development tools, data warehousing and systems management software suppliers. That effort ended with the sale of the firm to once bitter rival Computer Associates International Inc., another successful acquirer of large software vendors. Other large software suppliers, including BMC Software and Compuware Corp., have tried to integrate significant acquisitions, but have not been terribly successful.

Rational faced significant challenges with several of its acquisitions, but especially with the purchase of Pure-Atria, which less than a year earlier was formed via the merger of Pure Software, a maker of testing tools, and Atria Software, developer of the ClearCase configuration management system. "The name of the company, Pure-Atria, said it all," said Rational's Schurr. "When Pure and Atria merged, they wound up with a big East Coast-West Coast split." Pure was based in Sunnyvale, Calif., and Atria in Lexington, Mass. "Rational has a core competency in acquiring companies. We make it clear [to acquired companies] what our strategy is. If people see value, they stay; if not, they leave."

Rational executives say the firm has stuck to the strategy set out at the start of the effort that called for offering a well-integrated suite of tools, and maintains a single corporate philosophy that is imposed upon acquired companies and incoming employees. "We have had a very clear vision from the start," said Rational's Bogan. "Beyond the acquisitions, the strategic vision has been to build a single set of tools for developers to use through the life cycle. Customers can get confused by point products."

Sustaining a development culture
The corporate philosophy, Bogan said, is established at the top of the firm by founders Levy and Devlin. "Rational has always had a strong culture, a development-centric culture," Bogan said. "Companies with ambiguous direction would have a difficult time with such an acquisition strategy."

A majority of Rational executives, Bogan noted, have been with the firm for several years, many before the acquisition strategy was set in 1995. Bogan and Schurr both came to Rational with the acquisition of SQA, a more marketing-oriented firm that Bogan says fit in well with Rational.

A most important piece of the Rational acquisition strategy, Bogan said, was to "buy the types of companies that would bring the best chance of success. There was a significant amount of alignment around the vision and cultures of the acquired companies." Bogan also notes that Rational has had four years to implement the strategy—its last major acquisition came in 1996.

Analysts are closely watching whether cutbacks in corporate technology budgets, and the shakeout of Web-based development software suppliers, will blunt Rational's growth in the coming quarters. "There's still a question of how a slowdown in corporate development budgets will affect Rational," said Quirk of Hurwitz Group. "But so far companies are still spending to build software that could provide a quick return, such as customer service applications or customer satisfaction applications." If that continues, she said, Rational should avoid the fate of some of its competitors.

At the same time, Quirk said Rational could be bolstered by the acceptance of development processes within large development organizations. "As these companies are building e-business systems, they have to implement the process," she said. In the long term, smaller companies may also turn to more complex processes, but for now many are turning to cheaper alternatives like the nascent eXtreme Programming (XP) model.

But most of all, Rational's future will continue to depend on making the right technology and marketing decisions moving forward, observers say.