A quote from investment guru Warren Buffett on software firm Xactly’s web site grumbles that corporate America has botched compensation more in the last five years than in the last 100. Helping corporations strike a balance between keeping their sales staff motivated and keeping expenses in check is what the startup’s software pledges to do.

The incentive management market, as it’s called, is heating up. On March 24, Xactly got a bonus check of its own—$8 million in a second round of venture capital funding led by Outlook Ventures (see Xactly Gets $8M in Round 2). Three days later, publicly traded Callidus said it was making its pricey licensed-based software available on a cheaper subscription basis, a move to go after the same mid-sized businesses that San Jose, California-based Xactly targets.

Xactly Gets $8M in Round 2

There is plenty for those two and other rivals to fight over. Callidus Chief Marketing Officer Shanker Trivedi estimates the market for sales compensation software sold to mid-sized companies at more than $1 billion. Both outfits seek to help businesses turn over the chore of figuring out compensation schemes to tidy software programs, relieving department heads who struggled with the task using spreadsheets.

Until its move to offer software on demand, Callidus, also based in San Jose, had focused on large corporations with more than $1 billion in revenue, such as Wachovia and Home Depot. It can charge up to $1 million for a one-time license. Xactly charges a $40 monthly user fee, hence its appeal to small and medium-sized businesses.

Callidus’ plan to now cater to mid-sized businesses with 300 to 800 users using a similar subscription model has touched off a war of words, though Mr. Trivedi contends that his offering won’t compete with Xactly’s because it doesn’t target small businesses.

A nice thought, but Xactly doesn’t just play in the weeny end of the market. Xactly CEO Chris Cabrera, an ex-Callidus exec, says his company specializes in deployments of as little as 10 users to as many as 500, putting the two firms in potential competition. That said, Xactly’s software works out to be cheaper than Callidus’—about $60 per user cheaper, Mr. Cabrera reckons.

You would think that price difference would be enough to settle his nerves, but the combative Mr. Cabrera bitterly likens his rival’s new subscription-based offering to “putting lipstick on a pig.” Even if you don’t know what Mr. Cabrera means exactly, you can see how things could get ugly.

Ten-year-old Callidus has the reach that newbie Xactly lacks. Plus, there are other niche players to contend with, including Centive, says Denis Pombriant, managing principal with Beagle Research. And the business software giants aren’t ignoring incentive management either. Oracle and SAP are offering the software as part of their larger portfolios.

SAP

Chief Fix-it Officer

Microsoft’s Windows division needs attention, and it looks like it’s getting it. On March 24, two days after announcing it would put off releasing Vista, the consumer version of the Windows OS, until January, Microsoft said it would reorganize Windows.

The unit accounted for 31 percent of the company’s $39.79-billion revenue in 2005. The fumbling could start to hurt.

Steven Sinofsky, a senior vice president from the Office business software segment, which produces Word and Excel, was named chief fixer, replacing Windows head James Allchin, who is supposed to retire once Vista actually starts shipping (Better hold on to that holiday booking, Jim).

Microsoft denies that Mr. Sinofsky is on a Vista rescue mission. His brief, publicists say, is to ensure that Vista’s successor OS, codenamed Vienna, will be ready to roll out on time in three years. But analysts say it would be naïve to think that Mr. Sinofsky won’t be minding the Vista brief.

Microsoft certainly thinks Mr. Sinofsky has the goods. A graduate in computer science from the University of Massachusetts, Amherst, Mr. Sinofsky joined Microsoft in 1989 as a software design engineer. Eventually, he rose to head the development of Microsoft’s Office products.No doubt, Microsoft thinks the OS division could use some of the discipline he’s brought to the office division.

Cleaning up the Vista mess won’t be easy. Analysts Joe Wilcox (JupiterResearch), Rob Helm (Directions On Microsoft), and Carmi Levy (Info-tech Research) identify a bunch of problems here—along with tips on how Mr. Sinofsky can fix them.

Double Trouble

It’s probably not just the Vista operating system delays that are keeping Bill Gates up at night. Microsoft’s fledgling business software division also needs some help.

The group is still integrating some recent acquisitions. In 2000, Microsoft bought accounting package software firm Great Plains. Two years later, it acquired Navision, which does supply chain management and other tasks for small and medium-sized firms. Total spend for the two: about $2.5 billion.

The sad part is the acquisitions are unlikely to pay off for at least five years, analysts say. Microsoft plans to integrate products from the properties with its own customer relationship management software as part of a new product line called Dynamics.

At a conference held in Dallas March 28, Mr. Gates said Microsoft is on track with the integration, but Ray Wang, an analyst with Forrester Research, sees a tough road ahead. “It’s not easy putting it together,” he says.

The stakes are high. The business software unit represents only 2 percent of Microsoft’s fiscal 2005 revenue. But with a 17 percent growth rate, it’s the fastest growing of the company’s seven business units.

Since Microsoft’s units are intertwined, the Vista delay could drag down the division, says AMR Research analyst Bruce Richardson. “It’s a speed bump to innovation when everything is so interconnected,” he says.

The Vista delay may be bad news for Microsoft in more ways than one.

Elevator Going Up

No pressure, Steven. If Steven Sinofsky pulls off his Windows rescue mission, he becomes a frontrunner for the top job at Microsoft. “If Sinofsky succeeds, it solidifies his rise,” says Carmi Levy of Info-tech Research. “He’s a potential leader for Microsoft.”

But the music has yet to start for the latest round of musical chairs. Despite investor griping about Microsoft’s sluggish reaction to market trends, CEO Steve Ballmer isn’t calling it quits anytime soon—not of his own volition, anyway—and there’s no guarantee that Mr. Sinofsky can coast into the top position even if he does put Windows back on the rails by the time Mr. Ballmer bows out.

Microsoft Chief Technology Officer Ray Ozzie, Platform Services Co-President Kevin Johnson, and Technical Strategy Chief Eric Rudder are all candidates for the job. None is a slouch.

But if Mr. Sinofsky can stop the stumbling and lead Microsoft’s cash cow to lusher pastures, he gets some powerful feathers in his cap. “Running Windows is like running a company in itself,” says Joe Wilcox of JupiterResearch.

Grumbling over Microsoft’s leadership has been leaking out into the open lately. “The culture isn’t accountable,” complained one blogger on the Minimsft blog run by an anonymous Microsoft employee.

For Fun But Mostly Profit

High-tech hijackings are on the rise. Using malicious software called Zippo or CryZip, cyber criminals are encrypting users’ data and then asking for a ransom to unlock the files, security experts say. The price to release computers taken hostage? Usually $300, transferred to an online account that’s hard to trace. The amount may also be small enough to discourage victims from going to law enforcement.

The scam works like this: Once the Trojan horse infects machines, it searches the hard drive for Word documents, databases, and spreadsheets, and then moves them into password-encrypted files.

Security experts aren’t sure how many computer users have fallen prey to the scheme. IT pros have been able to decrypt the files, sparing some from having to pay the hijackers. But there’s a fear that malware-for-profit attacks like these will only increase in the future.