Special Report: Mercury aims higher

So far, Mercury Interactive Corp. has found itself in the right product place at the right time -- for the most part -- since its founding by executives of former CAD/CAM systems manufacturer Daisy Systems in 1989. The Mountain View, Calif., software maker hit the testing tool business at just the right time in the early 1990s, and unlike many other suppliers, decided to spend significant R&D dollars to move into new markets like performance monitoring and outsourcing during the Internet boom years.

'They were right there on every wave with an announcement,' said Melissa Webster, a research director at consulting firm IDC, Framingham, Mass. 'Mercury has always been motivated to chase markets that are growing strongly.' The company has utilized internal development and acquisition to move quickly into such high-growth markets.

'They are very good at spotting trends, and then coming in and either doing a partnership or an acquisition, and then plugging that offering into their marketing message,' added Theresa Lanowitz, a research director at Stamford, Conn.-based Gartner Inc. 'I have to give them credit for being a good marketing company as well.'

The result is a company whose revenues continued on an upward path with some significant gains -- including revenues up almost 30% to more than half a billion dollars in 2003 -- during a period of economic strife that saw many rivals lose either large sums or their independence through the early 2000s. The company successfully warded off start-up rivals early on in the testing tool business and later through its early days in the Web and packaged application testing world. In recent years, Mercury has continued to find success in the systems software arena against very established rivals like IBM/Tivoli, BMC Software, Computer Associates, Veritas Software (since its acquisition of Precise) and the like.

Some observers say Mercury could face the problem of spreading itself too thin as it moves into new markets; but the firm so far appears to have avoided that fate. Nonetheless, success has not always come easy for the company, admit Mercury executives and observers. While the Daisy expatriates saw the emerging client/server computing technology offering significant opportunities for testing, building software for such systems was far more complex than for predecessor host-based systems. Clearly software bugs would be everywhere, and quality assurance would become far more critical in the application development life cycle. The company created a development operation in Israel made up of some very experienced technologists, and headquartered marketing and sales groups in Sunnyvale, Calif., where it lived before moving to nearby Mountain View last month.

After utilizing its internal development operation to build the bulk of its testing tool offerings, the company has used technology from several acquisitions as well as the internal team to gain a foothold in the performance management business, starting with Freshwater Software in 2001 and continuing through as recently as last month with an agreement to buy New York-based Appilog Inc., a maker of auto discovery and application mapping software, for $49 million in cash. To date, 'the company has done acquisitions very well,' said IDC's Webster. 'They assimilate quickly, re-brand well and seem to monetize the acquisitions.'

Yuval Scarlat, an early employee of Mercury who now holds the post of vice president of products and managed service, said Mercury's willingness to forego massive net income gains during the Internet boom to invest in new technologies was not the case throughout much of Silicon Valley and the rest of the tech world. 'It was right in the middle of the bubble and everyone was celebrating [Mercury's success],' he said. 'But we decided not to give all of our money to Wall Street and we started investing. That happened near the end of 1999 when we made two big investments -- going after the management of applications on the production floor and in the way we deliver value to the customers.'

Last year the company spent huge sums to acquire Kintana Inc. and its corporate governance tools to add another new business.

The Kintana deal has added significantly to the bottom line, according to Mercury President and CEO Amnon Landan, who told investors with the release of first quarter 2004 financial results that 'our IT governance business was stellar [in the first quarter of 2004] with revenues of $17 million.' Overall Q1 revenues totaled $156.8 million, up 42% from the year-earlier period.

'Mercury is not about Silicon Valley,' maintained Scarlat. 'It's a mix of the best from Israeli and American culture. The genes of the company are American, but it's an international company with management around the globe. In terms of culture, we started with people on both sides of the globe -- American and Israeli. There's the 'no-fear' approach that comes from the Middle East and there's the 'get the house in order' and 'it's OK to try and fail' approach that comes from America.'

That approach reared its head early when Mercury's first testing tool -- a hardware-based package -- struggled because of its complexity and price tag. That first offering was created based on the early executives' experience at Daisy, where the crew had previously bundled CAD/CAM workstations and software. But Mercury founder and first CEO Aryeh Finegold and his team quickly changed course and unbundled the software running the system to create a software-based tool that could run first on Unix-based systems and later on the far more widely installed Microsoft Windows-based systems.

The ability to change course quickly continued through the years under Finegold and his successor Landan, who was hired in the first days of Mercury after the two had worked together at Daisy and later Ready Systems.

As the new toolsets were unveiled, Mercury found itself in the middle of a rowdy battle against well-funded East coast-based rivals Segue Software and SQA along with other start-ups at the time. As noted, Mercury also competed against its own tools for a time via a short-lived OEM agreement with Compuware.

Observers note that the attacks on Mercury by competitors at the time were sometimes personal and somewhat nasty. Nonetheless, most observers give Mercury a runaway win in that business as SQA was acquired by Rational Software and then IBM, and Segue has struggled for survival for many years under changing management teams and strategies. A key testing tool competitor today is Compuware Corp., which for a time in the mid-1990s re-sold Mercury's offerings before building its own toolset a few years later.

Other suppliers such as Parasoft and RadView have found significant success in specific niches that complement the Mercury tools for the most part, but Mercury overcame a slew of competitors in the broader tools market through the years.

'Mercury clearly is the 800-pound gorilla in this space,' conceded Andre Pino, chief marketing officer in the new Segue management team put together by President and CEO Joseph Krivickas. Pino said the new team has moved quickly to keep the firm's sole focus on testing tools after a somewhat ill-defined period earlier in the decade. 'We still focus on quality optimization -- software application quality. Mercury has a number of strategies that go beyond their original focus on testing, but [testing is] all we do; it uses 100% of our resources.'

The early business for most of the testing toolmakers first came from the independent software vendor community, a market that offered limited revenue growth. 'Soon we started to see that IT was a big opportunity,' Mercury's Scarlat said. 'When we looked closely at it, frankly we saw that IT was a mess, so we shifted in that direction.' Scarlat said the shift from host-based systems to the far more complex client/server technologies of the late 1980s and early 1990s forced IT operations to seek out a more disciplined approach to software development, which spawned the ill-fated computer-aided software engineering (CASE) movement and software testing tools, among other efforts. 'Back then the trend was client/server, and we identified the complexity associated with [it],' Scarlat said.

While the CASE movement faltered -- and IT continues to seek ways to implement strong process in development groups -- testing has become a key piece of the application development life cycle in many organizations.

Mercury moved to invest in other areas early on in the life of its testing tools. 'We saw the wave of the Web, ERP going to the Web, and we saw something very new and very different going on here. Each [change] involved an order of magnitude complexity change. The Web was 10 times bigger in complexity and challenge to the IT community than client/server. And client/server had been 10 times more complex than anything done before it,' Scarlat said.

Scarlat noted that Mercury also moved quickly to build tools for testing applications from packaged client/server and Web ERP leaders like SAP and PeopleSoft in the mid-1990s, and later gained some traction in the systems software business with its Topaz offering a few years later. 'There are several inflection points in the history of the company,' Scarlat said. 'But the transition to the Web and from the pre-production to the production world are probably two of the key ones. More recently, we added MSP [Management Service Provider, Mercury's take on the Application Service Provider or outsourcing model].'

Today, Mercury bundles all of its products into three categories -- IT Governance, Application Delivery and Application Management -- under what it calls the Business Technology Optimization (BTO) umbrella.

The BTO umbrella
In the early 2000s, with IT budgets drying up in the post-boom drought, and parched CIOs looking to squeeze every drop from their technology investments, Mercury unveiled a sweeping plan to reorganize its expanding lineup of products and services under the BTO banner, a then-emerging strategy for aligning IT activities with business goals, long an objective of IT and corporate executives that waned a bit during the Internet boon.

'This was post-boom, when people started questioning the cost associated with IT,' Scarlat said. 'Companies had learned some hard lessons, and they were beginning to ask some hard questions: Where's the customer value [in this technology]? Do those applications really provide what we intended them to provide? We saw a shift away from a focus on the quantity of applications and a new emphasis on quality. And for us, that seemed like an opportunity.'

'The problem that they identified with BTO is very real,' said Gartner's Lanowitz. 'The idea of making sure that business and IT is working together is absolutely the right thing to do. So this notion that you have the application life cycle spanning the entire IT organization, also spanning the line of business and the end user -- it's the right vision. It's the right way to start thinking about IT -- that you have to have some sort of insight into what's going on in your IT organization. BTO puts some of the power and control back in the hands of the CIO.

'It's going to stick around,' she said. 'Whether we continue to call it BTO or it goes under another name, that's at the whim and the fancy of the market. Whatever it's called, it is the notion of alignment of IT and business, and making IT part of the business.'

CIOs have been calling for a bottom-line approach to IT for years, added Dave Peterson, Mercury's VP of corporate communications. But the fact that so many IT departments operate as seat-of-the-pants organizations reflects an entrenched mindset on this issue. 'You can see IT applied to a number of core functions and disciplines inside the enterprise,' he said. 'You see it in finance, manufacturing, sales ops -- but when was IT applied to IT to help manage and deliver all the value out of all these systems and applications and infrastructure?'

On one level, BTO now serves as an umbrella under which Mercury can coordinate and package its products and services. But perhaps more significantly, it provides the right context for the company's evolving objectives.

'We're trying to be this bridge between IT people and business people,' explained David Murphy, who joined the company in January 2003 as vice president of corporate development to oversee, among other things, the search for company and technology acquisitions to fill out the Mercury product lines and extend marketing and sales efforts. 'So we're using terminology and thinking about business value in a way that speaks to IT, but that also speaks to the business people. We've found that when we talk to both groups about BTO, they get it, and they get very excited.'

The opportunity for the Mercury BTO effort may be enormous, at least according to a recent Yankee Group survey commissioned by the company. Yankee analysts asked 175 IT executives from mid-sized to Global 2000 companies about BTO. Based on the results of that survey, Yankee projects a 21% compound annual growth rate for the nascent BTO market through 2007. The group expects investment in BTO technologies to reach $3.3 billion globally in 2004, up 18% from $2.8 billion in 2003. Yankee analysts further predict that growth in this market will reach about $6 billion by the end of 2007.

Optimization centers
During 2003, the year following its first BTO announcement, Mercury continued to refine its product line internally and also boosted its lineup via a series of acquisitions. By the end of 2003, the company had assembled its new and existing technologies into a clearly defined set of BTO solutions under three categories: IT Governance, Application Delivery and Application Management. Within these categories, the company bundled five packages of integrated software, services and best practices, which it calls optimization centers (after the cross-industry management buzz-phrase, 'centers of excellence,' which advocates consolidating assets and internal expertise).

'It's an interesting way of putting things together,' said Gartner's Lanowitz. 'If you look at the way they had their product lineup prior to the Optimization Centers, they had services that you could buy, they had products that you could buy; people weren't really sure what was what. Now they're trying to simplify their product offerings, so that people don't have to ask is this a product, a service or a best practice? That's a first step, and they have a lot more to do in terms of simplifying their offerings, but they are definitely on the right path.'

Together, Mercury's Optimization Centers cover a lot of ground with a range of pre-deployment testing tools and post-deployment monitoring and performance management tools. The centers themselves constitute a middle layer of applications and services for automating IT activities across functional teams. The centers are built on common enterprise foundations that facilitate integration, and they are capped with real-time dashboards that present managers with state-of-the-department views. The dashboards, which leverage technologies from Mercury's acquisition of Allerez Corp. in August 2003, present managers with what Mercury calls 'key performance indicators.'

'The concept of BTO that Mercury has put out there goes far beyond what they are capable of delivering,' Lanowitz said. 'BTO is a very broad vision. Mercury has defined this very broad thing that says that IT and business has to be aligned. But if you look at all of the things that you have to have to have IT and business aligned, no one vendor can really deliver everything that has to happen.'

But the breadth does provide openings for Mercury to fill along the way. 'When they first introduced the concept, they didn't have anything for IT governance, even though it was always in their BTO vision,' Lanowitz said. 'Last year they made an acquisition [Kintana Inc.] and now they do.

IT governance
Mercury's IT Governance Center is based on technology from Kintana. 'Our customers were telling us, 'OK, you guys need to connect the dots,'' said Mercury's Murphy. 'They wanted us to provide a way to manage up-front demands, and then prioritize and manage the program itself. We had worked with Kintana, which was involved in this set of activities to manage the application life cycle, and we were doing integration projects between their products and ours. We liked them because they had built out this notion of IT governance into a very deep, workflow-rich environment.'

IT governance focuses on which projects an organization undertakes and how it goes about implementing them. It is a kind of application life-cycle management strategy that takes the form of day-to-day control of projects and operations. Mercury's IT Governance Center provides eight modules for managing demand, portfolios, programs, projects, resources, time, financials and change. The primary purpose of the package is to help IT departments spend effectively, but it also supports compliance with regulations, such as Sarbanes-Oxley. The Mercury governance package also offers support for quality programs and process control frameworks, such as Six Sigma, CMMI, ITIL, ISO-9000 and CobiT.

Paetec Communications began using the IT governance tools originally offered by Kintana soon after the Fairport, N.Y.-based telecom provider was founded in 1998. As a Competitive Local Exchange Carrier (CLEC), Paetec provides a range of integrated communications services, including broadband voice and video, enhanced data services and communications management software. The company stuck with the tools after the Mercury acquisition and continues to use them today.

According to Bob Moore, Paetec's VP of IT, the company focused its initial governance implementation on demand management. 'What brought us to IT governance initially was our need to put something in place that would allow us to scale the business, scale demand and be genuinely efficient with our IT spending,' Moore said. 'We wanted the ability to get in there and leverage things like business process enforcement and workflow enforcement to bring categorization, control, reportability and predictability to the front door of our IT demand.'

After that first implementation, the company extended its use of the demand management products to manage a broader range of requests for IT assistance to overcome the typical ad-hoc approach to IT help. 'The way most companies run, everyone thinks the desktop support group is the IT department,' Moore said. 'We wanted to create a Web-based mechanism that made it easy to put in a request and get it routed based on the context. We wanted to put some of the onus back on the customers. One of the great benefits of the IT governance technology for us is that it provides visibility directly into these requests.'

The dashboard technology in particular has proven to be an especially powerful tool at Paetec, Moore said. The company's CEO, Arunas Chesonis, liked the dashboard so much that he spearheaded a drive to get all of the department managers using the technology. 'The power of the dashboard is in its simplicity,' Moore explained. 'In the traditional IT environment, you have a lot of people asking for reports and information, and slicing data this way and that way -- and nine times out of 10 they just want to see things they need to act on now. The dashboard is just a great tool for that because it allows people to [see] the information they need in real time.'

Today, Paetec sells its products and services in 35 U.S. markets, and it uses several of Mercury's IT governance modules to manage not only its IT processes, but other internal processes as well, from human resources to marketing, to ISO 9000 compliance processes, to Sarbanes-Oxley requirements.

Application delivery
Under the application delivery category, Mercury has assembled two product-and-services packages: The Quality Center, which is designed to optimize the delivery and quality of new applications; and the Performance Center, which is designed to optimize the performance of existing applications.

Mercury's well-known testing products -- including WinRunner, TestDirector and QuickTest Pro -- show up in its Quality Center package. This center aims to provide the means to integrate and automate new application testing in an enterprise. It includes tools for requirements, test and defects management, as well as business process and functional testing. These tools are designed to allow managers to share and reuse testing expertise across the so-called quality life cycle, and to provide customizable workflow that adapts to specific quality process needs. Along with the dashboard presentation of the performance indicators it collects, the Quality Center creates a permanent audit trail.

Mercury's Performance Center package is designed to optimize the performance of existing applications through testing and tuning processes. This package comes with the company's popular LoadRunner product, which has become something of a standard for Web application load and stress testing prior to deployment. It also comes with tools for application diagnostics and capacity planning.

The Lillian Vernon Corp. is a longtime user of Mercury's testing products. The 53-year-old online and catalog retailer is one of the largest marketers of specialty gifts in the U.S., with a staggering inventory of housewares, holiday, gardening and children's products, which it sells through nine catalog titles, 16 stores and a Web site. The Virginia Beach, Va.-based company maintains a 1 million square foot warehouse and a 550-seat call center.

'Every woman over the age of 40 has either received or seen a Lillian Vernon catalog,' said Ellis Admire, the company's director of emerging technologies.

The Web brings in roughly 35% of the company's sales, Admire said, so testing and tuning the site are business-critical activities. When Admire and his development team sat down to build the company's current third-generation, high-performance site two years ago, scalability was the key issue.

'Before you go into production,' he said, 'you have to be sure that the site is performance-oriented and stable under a lot of load. We needed a way to assure ourselves that whenever we ended up with a banner on AOL's homepage, and the volume jumped to 50,000 page views in 10 minutes, that the site was able to handle the traffic.'

The company selected Mercury's LoadRunner product because of its ability to generate thousands of virtual users to simulate production traffic. In particular, Admire was impressed with the product's ability to simulate the real-world customer experience.

'The customer experience is key,' Admire said. 'It's not the horsepower. It's what that little old lady in Butte, Montana, who signs onto your Web site trying to find something for her grandchild, actually experiences. How fast do the streams load for her, and how easy is it for her to navigate? The only way you can assure yourself of the quality of her experience is by load testing with a company like Mercury Interactive. I say that because Mercury can do remote-location load testing. They can generate a load from various locations, so that it actually comes across the Web. It's not a lab kind of arrangement; it's a real-world test. And that is critical for understanding how all the nuances of the Web come to play on the customer experience.'

Two years ago, Lillian Vernon became the first Mercury customer to implement ActiveTune, which has since been refined and re-branded as ProTune. According to Admire, this production system tuning service allowed his company to load test its Web site in a live environment.

Last year, Lillian Vernon also began using Mercury's Topaz products, as well as its SiteScope agentless monitoring solution. The company also added an internal LoadRunner testing implementation that allows it to run the application on a server behind the firewall.

Lillian Vernon's business is seasonal, taking in approximately 60% of its revenues between October and December. During a memorable peak last year, the company's Web site handled 300,000 page views per hour, Admire said.

The Quality and Performance optimization centers also come with service offerings, including Mercury's ProTune Delivery Service, a hosted service for identifying, isolating and resolving performance bottlenecks and capacity constraints on Web sites and Web-based applications; and the J2EE Deep Diagnostic Service, which targets J2EE application performance problems.

The J2EE service is based on technology from the company's May 2003 acquisition of Performant, a maker of testing and tuning technology for J2EE applications. According to Mercury's Murphy, that acquisition allowed the company to respond to the growing presence of J2EE in the enterprise. 'We were finding that a lot of our customers were starting to deploy J2EE applications,' he said, 'and when you deploy those applications, both the performance-testing and production environments are relatively complex. [Performant] is a very deep diagnostic tool that puts a set of probes in place and allows you to do triage on your J2EE apps.'

Application management
Mercury's Business Availability Center and Resolution Center both fall under the application management category. The former is designed to optimize the availability and management of applications and systems; the latter offers what the company believes is a new approach to the process of resolving application problems.

The Business Availability Center is designed to provide tools for managing end users and business processes in a service-driven environment -- in other words, the impact of application problems and service failures on customers, as well as their implications for service level agreements (SLAs).

This is where Mercury's venerable Topaz product line now resides. Topaz Diagnostics is a set of utilities designed to identify infrastructure problems affecting end users. These tools can be used to verify content within applications (links, tables, text images and so on), to automatically track down the most likely root cause of a problem and to analyze transaction breakdowns. Topaz for SLM (service-level management) is a solution that enables management of service levels from a business perspective.

The Resolution Center is Mercury's newest package of integrated applications. Launched in March, this center is designed to allow managers to prevent, prioritize and resolve in-production application problems before they impact the business. It employs what Mercury calls a proactive approach to resolution. It incorporates applications that allow for the automation of repetitive tasks and the standardization of resolution best practices. It comes with a centralized diagnostic toolbox for application triage and the isolation of performance issues. And it provides deep diagnostics and processes to identify the root cause of problems and speed resolution.

The Resolution Center also features pre-defined run books of problem fixes for applications from companies such as PeopleSoft and SAP. And Mercury is working with other partners to develop custom application programming interfaces for their software.

Both application management optimization centers also include services, including SiteSeer, a hosted, self-service monitoring solution (based on SiteScope) that provides an independent view of availability from outside the firewall; and the Topaz Managed Services offering.

The application management applications also come with a set of services, including SiteSeer, a hosted service that leverages an agentless monitoring architecture; and Topaz Managed Services, a hosted service for real-time monitoring and availability.

As Mercury continues to grow past the $500 million mark in annual sales, executives need to continue extending product and services offerings, and ensuring that its brand becomes an IT staple, observers said, noting that the new logo unveiled last month is just one step in that path.

'They have a strong hold on the market in the area of distributed testing,' Gartner's Lanowitz said. 'They have to continue to succeed in the other areas. They have to make sure that the acquisitions they take on are of consumable size for them. And they have to start worrying about and protecting the brand. They are now a $500 million company. They have to focus on brand awareness.