Benhamou's Double Vision

Palm Inc.'s chairman and interim CEO is splitting the company in two.

Eric A. Benhamou, chairman and interim CEO of Palm Inc., admits to being intensely focused, persistent and always conscious of the strategic picture. That's a good thing, because challenges at Palm could easily distract a lesser executive. The U.S. recession has dampened sales in the handheld computer industry. Microsoft Corp. is reaching for Palm software market shares. Palm must overcome past operational blunders. And, not-so-incidentally, Benhamou is splitting the company in two. Palm's interim CEO was called out of the boardroom in November 2001 to replace CEO Carl Yankowski and right the floundering $1.03 billion, Santa Clara, Calif.-based leader of the handheld device market. As Palm chairman, Benhamou says he intimately knew the situation he was inheriting as temporary chief executive -- and how to address it. "I saw that we had great market potential despite the economic downturn, but that the company had lost the clarity of focus on what was really important to do," says Benhamou. "It was pursuing too many different goals and not doing a good job at any of them. What I tried to do was interject a great degree of clarity and sobriety in the management style of the company and try to affect change in style, culture, behaviors -- and certainly executive style." Benhamou has "a unique ability to crystallize his vision into very practical terms and set very clear goals for the company," observes Judy Bruner, a Palm senior vice president and the firm's CFO. Benhamou did just what Bruner says he's so good at. He laid out three objectives: turn Palm into two well-capitalized, profitable, high-growth companies; execute a so-called enterprise-market strategy; and introduce ARM-based wireless solutions. Time To Split Benhamou immediately accelerated the division of Palm into two businesses: PalmSource Inc. and Palm Solutions Group. PalmSource develops the Palm operating system, the software program that manages applications in Palm handheld devices and in the devices of such licensees as Handspring Inc., Kyocera Wireless Corp., Samsung Electronics Co. Ltd. and Sony Corp. Palm Solutions Group, the hardware unit, produces the handheld devices that you find in conference rooms briefcases. Although the businesses have been market leaders, both need to overcome significant mistakes. Palm's software business, for example, had an inherent conflict of interest. Many of the makers of handheld devices against which Palm competed in the hardware market were the same companies that license the Palm operating system for their devices. "It was perceived broadly that this was not necessarily a long-term commitment," says Benhamou. And this ambiguity was hampering Palm's growth in the smartphone market, which is poised to become the largest segment of handhelds during the next few years. Smartphones combine the functions of cell phones and handheld computers. "What I tried to do was state clearly, 'Yes we're going to be in this [software] business. In fact we're going to create an entire company devoted to being in this business, and we're going to do this in 2002,' " Benhamou says. For PalmSource to be successful, it must produce "the best operating system for the handheld industry," says Benhamou. PalmSource, whose CEO and president is David Nagel, also must develop relationships with licensees that will take the operating system into new markets, and support and grow the "Palm economy" -- the approximately 210,000 developers who have created some 13,000 commercially available applications. Meanwhile, on the hardware side, the Palm Solutions Group must excel at product innovation for both consumers and enterprise users, Benhamou says. But that's not likely to happen unless Palm has overcome its operational problems. In the spring of 2001, Palm just plain bungled the launch of its m500 model, a light, expandable, Internet-capable device. Customers waited for it to appear, causing inventories of older models to pile up. Although Flextronics International Ltd. and other original design manufacturers make all of Palm's devices, Benhamou candidly places the blame on Palm. Yes, the situation was exacerbated "by the fact the industry went through supply shortages and several key components were in critical supply," says Benhamou. "But despite that, it was completely Palm's responsibility to identify second sources for these components, to manage these supplier relationships aggressively, and to be able to manage inventories in the channel as well as internal inventories to the appropriate levels." To fix the problems, Benhamou says, Palm has put in place a "world-class supply-chain management team," established new relationships with suppliers and is managing those relationships far more predictably. Although Palm missed its revenue forecast for the fourth quarter of the fiscal year that ended this past May 31 and is being conservative about fiscal 2003 projections, Benhamou cites signs of improved operations at Palm Solutions. Inventory turns, he says, have risen to the teens from the low single digits. Internal inventory has dropped by at least 60%. And gross margins are up. Palm is now managing lower demand better than it did last year by selling off inventory to capture cash, preserve cash balances, and get Palm hardware into users' hands, says Greg Teets, an analyst at A.G. Edwards & Sons Inc. The two Palm units have split assets and workforces but remain one company and one stock. The formal split is expected to occur later this year, possibly when Palm sells a stake in PalmSource, at which time Benhamou, who also chairs the boards of 3Com Corp. and Cypress Semiconductor, is expected to return to being just chairman at Palm. Todd Bradley, president of Palm Solutions and a force in the operations overhaul, will add the CEO title effective Sept. 1. New Opportunities As palm makes internal changes, markets are changing as well. Handheld devices are now being connected wirelessly to e-mail and database servers. And IT managers are purchasing thousands of devices at once. This is the "enterprise market," in which organizations conduct business, from videoconferencing to restocking retail store shelves, from the palms of employees' hands. Unlike the early handhelds, which enabled a user to do relatively simple things such as look up an address, the new devices are nearly the functional equivalent of a computer, camera, and a cell phone all rolled into one. And they require exponentially more processing power and speed. That's why Palm is switching to ARM-based semiconductor technology. Texas Instruments Inc., Motorola Inc. and Intel Corp. are producing microprocessors based on technology from from Cambridge, UK-based ARM Ltd. for Palm and its operating-system licensees. "ARM [already] is the processor of choice in the cell-phone industry," notes Benhamou. "It is at least 10 times faster than the current processor we're using, and that makes it possible to not only drive a variety of wireless networks but also handle multimedia information." Concurrent with the integration of ARM technology is the release of PalmSource's new OS 5 operating system, which integrates speech recognition, multimedia and wireless. Hardware and software upgrades are expected to appear in Palm and Palm-licensee devices this autumn, bringing Palm closer to the power of devices running Microsoft's Pocket PC operating system. While Benhamou says Palm must be "leery of Microsoft's awesome marketing power and resources," he asserts that Palm remains the one to beat in the enterprise market. "Palm is focused on the handheld industry, and that is a very different industry than the PC industry, where Microsoft has its expertise," he stresses. "You don't create a handheld by starting with a PC and trying to shrink it down to the size of a handheld." As of this past May, Palm's U.S. device share was 52%, and its operating system share 88%, according to NPD Group, Port Washington, N.Y. In this year's first calendar quarter, Palm's worldwide operating-system share was about 55% compared with 22% for Pocket PC, says Todd Kort, principal analyst at Gartner Dataquest in San Jose, Calif. Palm's operating system had approximately 50% of worldwide enterprise sales. Kort says Palm's operating system has had success in education and light-business applications but that it's less prevalent in applications involving large volumes of data, wireless and security. "These are areas where Palm is playing catch-up now -- and certainly security is something they put a lot of emphasis on in OS 5." Benhamou contends the two-Palm strategy incorporates the resources necessary to capitalize on the enterprise opportunity, as well as to meet the demands of new markets in China and India. But not all factors are in his control. Palm will need corporate IT managers willing to expand budgets and buy new technology, as well as to see investments by the telecommunications firms in wireless services that connect handheld devices. The real measure of Benhamou's success -- two Palms that continue to lead their markets and produce superior returns -- is yet to be achieved.

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