How to Save Billions of Dollars in Internal Operational
Costs Using the Internet:
A Summary of 2 articles eCompany Now and Fortune)
Comparing much of it to The 10 Component Competitive Analysis Model
By Peter J. Jessen
November 21, 2000 editing of Nov. 5, 2000 original
(Copy sent to MN legislature House Speaker, Steve Sviggum and Senate President Roger Moe and others: Roy Terwilliger, Larry Fitzgerald, John Marty, David Jennings, Otis Courtney, Sarah Psick, Victor Moore, Tom Hanson)
Larry Ellison, considered the 2nd richest man in the world, is a co-founder and current CEO of Oracle. This summary is of two articles on Oracle: the Nov 2000 issue of eCompany now and the Nov. 13, 2000 issue of Fortune.
This summary is divided into four parts:
1.. This introduction establishing relevance for any company........................................
2.. Outlining Oracles heres how from the eCompany now article.............................. 2
3.. Providing additional background from the Fortune article......................................... 7
4.. Overlaying my analysis/comments by indicating in brackets which of the 10 Competitive Analysis Components (listed on p. 9; see separate 30 page paper of 11-20-00) the particular article excerpts fit. The articles also reflect my discussion about the importance of vision. IBM had a chance at both Microsoft and Oracle and passed on both. ......... 9
These two articles each have three themes/stories in one:
1. a partial bio of bad boy Ellison (relishing the bad boy part; the editors need to get lives);
2. how using the Internet saved Oracle $1 billion and is about to save it $1 more billion; and
3. how Oracle is offering what it did for itself to the rest of the world, in the hopes of overcoming Microsoft as the worlds dominant software company, and wiping out the competition just as it marginalized Sybase and Informix.
Oracles savings using the Internet was developed by its head IT guy who had the idea (an example: only 2.5 people are needed to handle expense accounts, as all are entered into the Internet following a standardized criteria, and any not making the criteria are kicked back to the entrants boss. The articles say Ellison is lucky, which is correct (because he was present at creation when the big players passed), and as he owns nearly a quarter of the stock, and as he has a smart IT guy who made the transition for Oracle on his own, which Ellison then walked in on when he returned after three years of boats, bimbos and braggadocio (couldnt think of a b word for his airplane). He is relishing how the Internet enables him to run the company top to bottom, as he uses the Internet as his key, lever and club. All bolding and underlining is my emphasis added to the articles. All words are from the articles. Any words in [brackets] are comments I have added.
On the cover of eCompany Now, is this cover statement: I Saved A Billion Dollars. The covers sub-head reads Oracles Larry Ellison May Be a Braggart, but He Really Did ItThanks to the Web. Heres How.
In summary: he wants to own/control the $30 billion Internet applications business (which is the secret to how he would then pass Bill Gates to become the new richest man in the world).
The inside table of contents title of the article in eCompany now is Dog Eats Dog Food. And Damn If It Aint Tasty, indicating, again, that Ellison saved $1 billion last year using his own net products, and is poised to save another billion this year as well helping others to do the same.
On the cover of the November 13, 2000 issue of Fortune is this cover title: The Next Richest Man in the World with the sub-head on the cover of Larry Ellison is sick of playing second banana to Bill Gates. So whats his plan to become No. 1? Make Oracle the Microsoft of the Internet.
Key points from the Nov 2000 eCompany Now ARTICLE:
1. Background: The balance of power
in software, and in computing, began to shift from desktop computers linked
by small servers (Microsofts market) to giant servers and databases
that run the Internet and the electronic-commerce platforms being built
on it (Oracles market). Ellison and his long-held vision of
network computing are finally ascendant, and Gates is suddenly an underdog
again, regardless of the outcome of Microsofts antitrust litigation.
[Ellison misses the point: its both/and not either/or. Without
the PC the Internet could not have grown the way it did. Oracle
stands on the shoulders of the giants that came before it, and does not
replace them]. [CAC #10]
2. New Internet phenomenon: tighter control and coordination for the
company head (and, by extension, other managers as well): the newfound ability to track, analyze, and most important, control the behavior of each unit and employee, globally and in real time, by forcing them to do their work via the Internet. [CAC #9]
3. Internet for company internally the same as externally: just as the Internet can eliminate the middleman between buyers and suppliers: it can also can eliminate the layers of management that stand between a CEO and his troops. [CAC #9]
4. Although much has been written about the Internet bolstering individual freedom [when it is internet], the global network also represents a major advance in corporate command and control [when it is an intranet]. . [CAC #9]
5. Re unruly sales personnel: can no longer cut backroom deals with customers or strike private compensation agreements with salespeople in other cities or countries, as they can no longer be secure that headquarters wont have a clue. . [CAC #9]
6. Standardization: (CAC #1). All the terms, including sales contracts and commissions, are spelled out on a single global database, and all the deals must be reported into it, to be easily tracked by Ellison and his aides via browser. In other words, Ellison can now manage by the numbers. . [CAC #1]
7. Ellison on this development in sales: I was never interested in the sales force before. Now we control the sales force or choreograph the sales force by using computers. Its all programmed. . [CAC #2]
8. Cost cutting: Ellison discovered one other important thing about the Web. By centralizing information and automating relationships with employees and customers, he could cut out a huge amount of costs. Results received: first estimate of $500 million rose to $1 billion, 10% of Oracles revenue. . [CAC #3 and 10]
9. Profit growth: jumped 61%, far outpacing its 15% revenue growth (under normal circumstances, that kind of growth would have taken nearly $1 billion in operating expenses). . [CAC #3]
10. CAC #2: Ellison didnt like the operations end of things. In 1997, he nonetheless decided to find out why Oracles applications business, mainly accounting, ordering and sales software that ran on its own databases, was having problems. He didnt understand at the time, he admits, because he had never used his own applications. As he
states it in the article, he had never even seen the applications, because the applications dont provide any information. [CAC #2]
11. Reason for his mantra of going from complexity to simplicity: Ellison:
The purchasing system, for example, couldnt identify who the best suppliers were by price, quality, and other metrics. That information was scattered among 70 different computer systems and 70 databases in 70 different countries. Ditto for human resources and sales data. He couldnt even find out how many people worked for Oracle because of the scattering of the data, now how much was sold to a given customer with multiple locations. [CAC #4]
12. Oracle in-house capability and new goal based on that: Ellison: Im the
CEO of the number one company in the world providing technology to manage information. I said, Well, this is insane. Weve got to build a global system, weve got to unfragment our data. . [CAC #9]
13. The difference: THE INTERNET: before, applications had to reside on both desktop machines and servers: hideously complex and glacially slow as they expanded. Example: To replace or change an application at Oracle, the information-technology staff had to tinker with each of the companys 40,000 desktops. The Internet allowed his long avowed view that information processing would be far cheaper and more efficient if a few giant servers ran all the applications, zapping the resulting data to hordes of simple desktop terminals. . [CAC #3]
14. The basic problems were: (1) lack of a common language uniting computer systems around the globe and (2) the lack of high-speed connections to quickly provide the data being processed by applications residing on the big servers. . [CAC #3]
15. The Internet came to Ellisons rescue, enabling him to finally get around and
over #13 and #14. In Ellisons words: Its an incredibly low-cost form of global communication that allows you to centralize complexity but distribute the information all over the world. . [CAC #3 and 9]
16. Product: Ellison ordered the company to rewrite its databases and software-development tools to run on the global network. 8i, Oracles first Internet-ready database, was shipping in March 1999, and became the standard for running big websites and corporate intranets. . [CAC #1 and 4]
17. Physician heal thyself: Ellison discovered that Oracle had huge holes in our applications, as he discovered that Oracle didnt have marketing, supply-chain, or logistics systems, among other things. [CAC #2]
18. Goal: automation and seamless integration that would allow corporations to work at maximum efficiency, with the lowest IT costs, the fewest employees, the greatest market intelligence, and the maximum speed. [CAC #3, 4, 9]
19. What #18 means: that online marketing applications would deftly identify and sell to a potential customer, which would then send the order on to accounting, manufacturing, forecasting, logistics, and shipping, usually without much, if any, human intervention. [CAC #3 and 8]
20. Contrary to others views, Ellison believes that stitching together applications from half a dozen vendors cant possibly work, because so many moving parts have to be constantly upgraded and integrate, always by consultants. [CAC #4]
21. And IBM is going out and saying, because companies are buying marketing from BroadVision and sales from Siebel and service from Clarify, accounting from SAP and supply chain from i2, that We have 130,000 consultants to help you put it together, what Ellison calls the Frankenstein approach: pain, time, uncertainty. [CAC #3 and 10]
22. Dismantling Oracles internal fiefdoms: Each of Oracles country managers had their own e-mail, human-resources, and financial-reporting systems, supported by 43 data centers scattered around the world, with 70 separate accounting systems in 70 different countries, each hiring IT departments to change hem in different ways. [CAC #9]
23. The change: Two data centers, one at HQ and a backup in Colorado Springs, Colo., and one global database for each major function, such a sales and accounting. [CAC #9]
24. Overcoming internal resistance: Knowledge if power, and the managers were
being asked to give it up. Passive resistance broke out everywhere. Ellison: We had to make numerous management changes. I mean, we had to send a Navy Seal team in to blowup the Canadian data center, Ellison recalls, laughing. [CAC #9]
25. To reduce resistance: FIRST: consolidated all of Oracle e-male systems first. When that world wide system went live, the managers saw the light: easier and better and cheaper. SECOND: rolled out other global Internet-based applications that allowed both customers and employees to access information from a single database through an internet browser, and to do transactions on their own. THIRD: lumped applications into 11 modules, each with a specific function, and then integrated the 11 into a single suite call 11I, which Oracle began selling in May. [CAC #2, 3, 4, 8, 9, 10]
26. Tangible benefits from this centralization: [CAC #3, 10]
a. 250 fewer IT staffers
b. 2,000 fewer servers
c. 80% reduction in leased space for computer operations when it gets down to the two data centers
d. $200 million saved in IT costs (the equivalent of producing $1 billion of sales at a 20% operating margin)
e. $50 million saved from consolidating global operations, which the Oracle Sr. VP believes the overall spending can be squeezed down to $300 million this year compared with $600 million two years ago.
f. When all of Oracle is up on 11i, slash from 450 to 50 the U.S. staff that supports Oracles desktop computers.
g. $550 million saved in cost of supporting customers, because global databases let customers do everything for themselves. Example: We make our customers enter their own bug reports [on problems with software]. That saves us money because we dont have people siting by telephones. Another example: Using the global-sales data-base, customers buy Oracle products themselves by going online. That improves the accuracy of everything we do and lowers our costs.
h. $330 per customer call saved by calls being handled by the website (from $350/call to $20/call), which is twice as likely to be resolved without more follow-up, increasing the chance of solving the problem by 100% and reduces cost by a factor of 17.
i. $11 million saved in expense account handling, as all are filed online (reducing cost of each filing from $60 to $10).
j. $248/person attending customer training seminars at hotels or conference centers, by putting customer-training seminars online.
k. 41% jump in margins on education segment, up from 17% (as the education business manager argued that 13% was a more reasonable margin goal, the business was moved to a different manager).
l. $1 billion: total savings
m. True or false? Ellison exaggeration or real? The answer would appear to be: True.
n. Proof: [CAC #9]
(1) Operating expenses were flat last year. If they had risen at the same 15% rate as revenues, that would have been an additional $948 million.
(2) Oracles operating margin accelerated, rising almost on a straight line from 1.5% increase in the first quarter to 13.8% jump in the final period.
(3) Headcount fell from 2,500 from 41,320
(4) Productivity, measured by sales, rose 22%
(5) Application sales jumped 61% in the fourth quarter to $447 million while consulting revenue fell.
(6) Even if 1/3 of the savings are due to other than the Internet, 2/3 of $1 billion in operating-cost reduction is still pretty impressive for a company that reported $10.1 billion in revenue for the fiscal year.
(7) Since then proof: Mid-September, jump in net income for first quarter to $501 million, a performance driven by a double-digit increase I the companys operating margin.
27. Personal payoff for Ellison: Before: Ellison felt like being the general in the Joseph Heller novel, Catch 22: Every time the general issued an order, it was countermanded on the whim of the clerk-typist in charge of sending the messages. Hence, in terms of modern executives, we sit up her in our fancy suites and think very hard on something, tell people to do something. But as these orders go out through many layers of bureaucracy, they change and change and change. Now: Internet-based applications can make global management more of a science, a fact that fascinates Ellison as much as the potential for profit. [CAC #9]
28. Re pricing: Ellison chairs the all powerful pricing committee, which sets prices worldwide for all of the companys products. Before: Or so I thought, Ellison says. But what actually happened was different: a product price went for more review to another headquarters group once headed by the recently departed President, Ray Lane, which might change it, then to the European division, which might change it again. And then it would go to Germany and they have to decide what to do, and either change the price again or even decide to wait six months before rolling it out. Oracles prices varied all around the world, making sales all the more difficult to predict from one quarter to the next. Now: Ellison: prices go directly from me to the customer. Reality now: Ellison again: The interesting thing about the Web is that you can make it policy and it really is policy. Savings: from 250 people reviewing requests for discounts to four. [CAC #3]
29. Re sales: Ellison: Before: wheeling and dealing by sales persons. Now: no more wheeling and dealing, which is not their job, but now doing their job: understanding our products in-depth and understand where our technology can be applied with a good return for a client. Also: before: wasting of time in each country by sales people working to cut their own compensation deals. Now: Oracle headquarters decreed what the compensation plans would be, and distributed them via the Internet. When notified that 2/3 of the sales persons still didnt have a compensation plan, because sales managers hadnt approved them yet, Ellison responded: The managers dont have to approve them. We can bypass the managers. [CAC #3, 9]
30. More savings: $100 million by eliminating the $100 million HQ budget, wiping out most of its functions, and distributing others to division heads, made possible by what Ellison calls management-by-computer. [CAC #3]
31. Competitors believe their suites are better. Let the hidden hand deliver the answer.
32. Strong appeal t startup and middle-market companies: seamless automation. [CAC #10]
33. New sales strategy: Beginning August 28, Oracle began giving away one of the 11 modules on the Internet. In two weeks, 3,000 companies with 100,000 users signed up for the product. [CAC #3, 4]
Key points from the November 13, 2000 Fortune ARTICLE:
1. For a detailed account of Ellisons cost-saving program, see the November 2000 issue of eCompany Now [which, of course, precedes this] [CAC #1-10]
2. The numbers: sales of $10 billion last year; $3 billion in operating profits, growing over 40%/year; logged $7 billion in marketable securities; operating profit margin 41% in a recent quarter; stock up 10 fold since 1998; $184 billion market cap; $30 billion Internet applications business growing by 25% a year. [CAC #3]
3. Goal: to be as successful with its Internet suite as Microsoft was/is with its Office suite (i.e., to copy and then thrash Gates). [CAC #1, 3, 5, 6, 7, 8, 10]
4. Making Oracle the one-stop shop for database and application software is the right thing to do for his corporate customers. I.e.,: If you say that our strategy is like Microsofts I that its giving customers what they want in one seamless package then yes, its like Microsoft. [CAC #1, 3, 5, 6, 7, 8, 10]
5. Identifying relational databases as a great business opportunity is one of the several unquestionably brilliant moves Ellison has made over this career. [CAC #4, 10]
6. Theres no small amount of institutional inertia that prevents companies from simply throwing over one app for another. . [CAC #9]
7. Nonetheless, says Oracle, we see CEOs come in here and get on their knees and weep after we explain this to them saying they want it. [CAC #5-8]
8. Interestingly, most of Oracles applications customers thus far have been smaller businesses or divisionsor newer ones that dont have many legacy systems to throw away. [CAC #10]
9. New rivals including Siebell, PeopleSoft, SAP, threatened to relegate the database to mere plumbing. [CAC #1, 10]
10. Oracles response, under Ellisons leadership: create a suite of Internet-based enterprise applications software to work perfectly with Oracle databases. [CAC #3, 4, 9]
11. A radical, bet-the-company strategy to build a colossus of finely integrated business applications that will do for the Net what Microsofts software did for the old world of personal computers. [To develop its own CAC #1 for the rest of the net entering CAC #10, being a CAC #5 as a CAC #6]
12. While it is common lore that IBM essentially handed over the PC system-software business to Microsoft, it is less known that Big Blue also took a pass on what would become Oracles business. [CAC #4]
13. his scheme carries huge risk. [CAC #7]
14. And now, thanks to the Internet, a company can tie suppliers and customers into this movable data feast (sales, financial, customer data, and then distributing as desired) [CAC #4-10]
15. Competition: PeopleSoft, SAP, Siebel. [CAC #4, 10]
16. Whole new crop of enterprise software companies has built entire businesses around the Web from the ground up: Ariba and Commerce One in procurement and exchanges; Broadvision in e-commerce, and i2 in the supply-chain arena [CAC #4, 10]
17. The aggressiveness of Ellisons strategy scares some. [CAC #8]
18. Andy Grove is not optimistic. [CAC #10]
19. As the whole business evolves, though, many are putting their faith in Ellisons ability to reshape these products and make them work somehow, somewhere. [CAC #10]
20. Ellison: not a great technologist, not a great manager (though smart enough to get them). BUT: he is a great leader: his great strength is to make exceptional employees do the impossible. No question about it, the Ellison persona is powerful stuff. [CAC #10]
21. Like the leader he admires, Churchill, Ellison likes to keep the message simple and repeat it often. [CAC #10]
22. Ellison has boiled down all this change to what he considers a couple of salient points about business: First, the Internet provides execution with incredible access to information.
Second, you can take huge chunks of cost out of your business using that information. Third, Oracles software can help executives do this. And finally what better place to try this out that an Oracle itself? [CAC #10]
23. Some of Oracles results: 97 e-mail servers to two; 140 global pricing models to
just one. [CAC #3, 4]
24. Saved $1 billion; Im convinced we can save $1 billion, maybe $2 billion more. [CAC #3]
25. Microsoft? In Ellisons phrase, no fear, as Netscape became Oracles heat shield.
26. Ellison views Microsoft as distributing complexity, Oracle distributing simplicity. [CAC #7]
27. Ellison, in 1995, in Paris: grandly announced the death of the PC. Largely ridiculed then, Ellisons notion hardly sounds far-fetched today, as computing power doesnt have to reside on the desk top. Centralizing computing: analogy: not having water or electric power plants in each home. [CAC #4]
28. He is the only tech company CEO who has launched a business in the era of mainframes and taken it to client/serve and then to the Internet. [CAC #4, 8, 10]
29. The one fear on Wall Street: no succession plan, no heir apparent. [CAC #10]
See also: The 10 Competitive Analysis Componentsof the Ideal Type Analytic Model
a 30 page paper by PJJ/November 21, 2000
Competitive Analysis Component #1: Have a Competitive Standard for Comparison
Competitive Analysis Component #2: be Internet proficient from CEO to shop floor
Competitive Analysis Component #3: beat price point, avoid Internet black hole
Competitive Analysis Component #4: stay ahead of the event horizons
Competitive Analysis Component #5: be a navigator for customers
Competitive Analysis Component #6: Navigate as a Web Portal/Gateway
Competitive Analysis Component #7: differentiate or die
Competitive Analysis Component #8: serve the customer
Competitive Analysis Component #9: achieve power through communications
Competitive Analysis Component #10: execute lessons of BOTH old and new economies