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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........................................
1
2.. Outlining Oracle’s “here’s 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 world’s
dominant software company, and wiping out the competition just as it marginalized
Sybase and Informix.
Oracle’s 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 entrant’s 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
(couldn’t 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 cover’s sub-head reads “Oracle’s
Larry Ellison May Be a Braggart, but He Really Did It—Thanks to the
Web. Here’s 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 Ain’t 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 what’s 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 (Microsoft’s market) to giant servers and databases
that run the Internet and the electronic-commerce platforms being built
on it (Oracle’s 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 Microsoft’s 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
won’t 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.
It’s 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 Oracle’s 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 didn’t like the operations
end of things. In 1997, he nonetheless decided to find out why Oracle’s
applications business, mainly accounting, ordering and sales software
that ran on its own databases, was having problems. He didn’t
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 don’t provide any information.”
[CAC #2]
11. Reason for his mantra of going from complexity
to simplicity: Ellison: “
The purchasing system, for example, couldn’t 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 couldn’t’ 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: “I’m the
CEO of the number one company in the world providing technology
to manage information. I said, ‘Well, this is insane.
We’ve got to build a global system, we’ve 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 company’s 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 Ellison’s rescue,”
enabling him to finally get around and
over #13 and #14. In Ellison’s words:
“It’s 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, Oracle’s 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 didn’t 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 “can’t
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 Oracle’s internal fiefdoms:
“Each of Oracle’s 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 Oracle’s 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 don’t
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) Oracle’s 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 company’s 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
company’s 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. “Oracle’s 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
didn’t have a compensation plan, because sales managers hadn’t
approved them yet, Ellison responded: “The managers don’t
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.
[CAC #10]
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 Ellison’s 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 Microsoft’s
I that it’s giving customers what they want in one seamless package
then yes, it’s 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. “There’s 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 CEO’s 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 Oracle’s applications customers
thus far have been smaller businesses or divisions—or newer ones
that don’t 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. Oracle’s response, under Ellison’s 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 Microsoft’s 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 Oracle’s 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 Ellison’s 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 Ellison’s 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, Oracle’s software can help executives do
this. And finally what better place to try this out that an Oracle
itself?” [CAC #10]
23. Some of Oracle’s results: 97 e-mail
servers to two; 140 global pricing models to
just one. [CAC #3, 4]
24. Saved $1 billion; “I’m convinced
we can save $1 billion, maybe $2 billion more.” [CAC #3]
25. Microsoft? In Ellison’s phrase,
no fear, as “Netscape became Oracle’s ‘heat shield’”.
[CAC #10]
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, Ellison’s
notion hardly sounds far-fetched today,” as computing power doesn’t
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”
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