WT, appreciate your response and fully agree that the valuation is all-important, and it will be based on Oracle's future execution in applications.
Interesting point you made on why it was so easy to wring a billion in costs out...and does this imply they are good, or truly horrible managers at Oracle?
I am including some clips from a long article. Even after clipping its still a lot to read. But I think it provides good insight into the question you raised. It talks about Lane's contributions, Larry's re-inserting himself, and Lane's departure. Each reader will form their own conclusions.
My conclusions are that Larry Ellison is an egocentric business genius who gets alternately enthused and then bored by his business. Right now he is hyper enthused. There is no denying he has an uneven track record.
I buy into his vision and will ride with him as long as he is enthused and active in the business, hence my long position.
Happy Thanksgiving to you,
Clip and link follow:
Brian
ecompany.com
Oracle Chow, for bloated corporations. Directions: Take hard look at own company. Use own product. Save $1 billion.
Back in the beginning, 1977, Ellison had gotten Oracle off and running by writing what became one of the most successful software products of all time, a relational database that allowed corporations to store and analyze much of their most important data on any kind of computer system. But Ellison became increasingly distracted by his extracurricular activities, and Oracle nearly foundered in 1990 when auditors discovered that its sales force had been concocting sales in pursuit of commissions. After Oracle had to restate reported earnings to a loss, its stock plunged nearly 80 percent.
Ellison got involved again, firing some miscreants and later hiring Ray Lane, a former Booz-Allen & Hamilton consultant, to help run day-to-day operations. Lane, later named president, got much of the credit for the company's subsequent recovery. Eventually, Ellison went back to spending a lot of his time wearing $3,000 suits, squiring long-legged women, playing tennis, and tweaking Gates.
[clip]
What really makes [Ellison] giddy is ….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. Just as the Internet can eliminate the middleman between buyers and suppliers, it also can eliminate the layers of management that stand between a CEO and his troops. Although much has been written about the Internet bolstering individual freedom, the global network also represents a major advance in corporate command and control.
Which, in Oracle's case, means more power for Ellison. For example, those unruly sales managers who got him into so much trouble in 1990 can no longer cut backroom deals with customers or strike private compensation agreements with salespeople in faraway Munich or Boston, secure in their knowledge that headquarters won't have a clue. All the terms, including sales contracts and commissions, are spelled out in 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. Since he's a self-described "hyperquant," that has enormous appeal to him. So much appeal that during the past several years he took control of the company again, to the point that Ray Lane had little left to do, which led to his abrupt resignation in June. "I love running the business now," Ellison says. "I love getting involved in every detail of the business. 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."
In June, Oracle reported that profits for the fiscal year ending May 31 had jumped a stunning 61 percent, to $2.1 billion, far outpacing its 15 percent revenue growth. Its operating expenses were, indeed, nearly $1 billion below where they would have been if they had grown at the same rate as sales. How did this happen? "This is where we come back to the dog food," says Ellison, beaming as he sprawls on a sofa chair in his headquarters suite. "We make premium dog food, and it tastes great. I saved a billion dollars and I think we'll save another billion this fiscal year and, you know, the stock is up 400 percent."
News flash: Ellison may be exaggerating a bit about the billions. But let's start at the beginning, when Ellison first tried to eat his own dog food -- and found it revolting.
In 1997, Ellison decided to spend a few months finding 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. "The earliest revelations were that I've never even seen the applications, because the applications don't provide any information," he says. 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. Ellison remembers trying to find out how many people work at Oracle. Because the data was scattered around, he says, the answer was simple: "Like, I don't know. How much did we sell to Michelin last year? Well, I don't know."
Ellison found these knowledge gaps galling. "I'm the CEO of the number one company in the world providing technology to manage information," he says. "I said, 'Well, this is insane. We've got to build a global system, we've got to unfragment our data.' "
But building global real-time systems to tie together corporate data was very hard to do with the network architecture of the day, way back in 1997. Applications had to reside on both desktop machines and servers. Such systems became hideously complex and glacially slow as they were expanded. To replace or change an application at Oracle, for example, the information-technology staff had to tinker with each of the company's 40,000 desktops.
For this sad state of affairs, Ellison blames -- as usual -- Bill Gates. "He was distributing complexity," Ellison says of the Windows operating system; his tone could hardly be more indignant if Gates were distributing crack cocaine. Ellison had long preached 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. But he couldn't get over some obstacles, including the lack of a common language uniting computer systems around the globe and the lack of high-speed connections to quickly provide the data being processed by applications residing on the big servers.
The Internet came to Ellison's rescue. "It's an incredibly low-cost form of global communication that allows you to centralize complexity but distribute the information all over the world," he observes. Ellison saw the Internet as salvation, and immediately ordered the company to rewrite its databases and software-development tools to run on the global network. Oracle's first Internet-ready database, 8i, was shipped in March 1999, and became the standard for running big websites and corporate intranets.
But in delving into his applications business, he made another disturbing discovery: Oracle didn't even have some of the applications needed to run electronic commerce. "We discovered that there were huge holes in our applications," he recalls. Oracle didn't have marketing, supply-chain, or logistics systems, among other things. As a result, its sales force -- sort of on its own -- decided to resell products from other companies to offer a complete suite of the software needed to run an online business.
To Ellison, this strategy wasn't likely to produce the ultimate payoff promised by e-commerce, which is to automate most of a corporation's transactions. In his vision, an online marketing application 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. This kind of automation and seamless integration would allow corporations to work at maximum efficiency, with the lowest IT costs, the fewest employees, the greatest market intelligence, and the maximum speed.
Ellison argues that stitching together applications from half a dozen vendors "can't possibly work," because so many moving parts have to be constantly upgraded and integrated, always by consultants. "The equivalent would be you want a best-of-breed car, and you really love the Honda suspension system, and the Mercedes engine, the BMW exhaust system, and the General Motors air-conditioning, and the Ford brakes, and you bought all of these different parts, and then it's your job to put them together into a car. Unless you're an engineer, you've got a problem. You can hire an engineering firm to do it, and that's exactly how companies run right now. They buy marketing from BroadVision and sales from Siebel and service from Clarify, accounting from SAP and supply chain from i2. And IBM is going out and saying, 'We have 130,000 consultants to help you put it together.' "
Ellison believed companies would realize that this "Frankenstein" approach to e-commerce involves "a lot of pain, a lot of time, a lot of uncertainty. So about three years ago," he says, "it was very clear to me that we had to build a complete suite of applications; we had to build a sales system, a marketing system; we had to build it such that it is a global system, put it on the Internet. And then we had to roll it out inside of Oracle."
The first step was to dismantle the 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. "Not only did we have 70 separate accounting systems in 70 different countries, but all of those countries hired IT departments to change them in different ways," Ellison says. He decreed that there would be two data centers, one at headquarters and a backup in Colorado Springs, Colo., and one global database for each major function, such as sales and accounting. But knowledge is power, and Ellison was asking his managers to give it up. Passive resistance broke out everywhere. "We had to make numerous management changes. I mean, we had to send a Navy Seal team in to blow up the Canadian data center," Ellison recalls, laughing.
To reduce the resistance, Ellison consolidated all of Oracle's e-mail systems first. The performance of e-mail was highly visible. When the global e-mail system went live at Oracle's headquarters data center last spring, the managers saw the light. Ellison says the managers would say, "Wow, that was easy -- and it's better?" And he would tell them, "Oh, it's a lot better, and a lot cheaper." Oracle then 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. Eventually, Oracle lumped applications into 11 "modules"; each module has a specific function -- order management, for instance, or Internet-based procurement. The 11 modules were integrated into a single suite called 11i, which Oracle began selling in May.
Gary Roberts, Oracle's senior vice president, ticks off the tangible benefits his company has reaped from all this centralization: 250 fewer IT staffers; 2,000 fewer servers (which will be auctioned off using Oracle's business-exchange software); an 80 percent reduction in leased space for computer operations by the time Oracle switches over to the two data centers in December. Last fiscal year, he estimates, Oracle saved $200 million in IT costs. "That's the equivalent of a company producing $1 billion of sales at a 20 percent operating margin," he notes. Other savings from consolidating global operations amounted to $50 million. Roberts thinks he can squeeze spending down to $300 million this year compared with $600 million two years ago. One big cut: By the end of the year, when all employees are up and running on 11i, he plans to slash the U.S. staff that supports Oracle's desktop computers from 450 to 50.
The grand total savings for fiscal year 2000 -- $1 billion -- is a suspiciously round number. And then there is Ellison's track record for blowing smoke. So what's the proof? Well, Ellison points to Oracle's operating expenses: They were nearly flat last year. If they had risen at the same 15 percent rate as revenues, they would have been up an additional $948 million. And Oracle's operating margin was accelerating as the year went on, rising almost on a straight line from a 1.5-percentage-point increase in the first quarter to a 13.8-point jump in the final period.
More evidence: Head count fell by nearly 2,500 to 41,320. Overall, the productivity of Oracle's employees, measured by sales, rose 22 percent last year.
Analysts say Ellison probably is overstating his progress somewhat by crediting the entire margin gain to the Internet. Charles Phillips, who covers Oracle for Morgan Stanley Dean Witter, says at least one-third of the margin improvement comes from a shift in the sales mix to higher-margin software products from less profitable consulting services, and from the layoff of a bunch of consultants as major software installations for customers came to an end last year. But Ellison argues that demand for Oracle's integrated, Internet-based applications is the driving force behind the sales shift, and lessens the need for consultants.
Application sales jumped 61 percent in the fourth quarter to $447 million, while consulting revenue fell.
[clip]
How does pricing get done now? "We have a single global Web store," Ellison says. Prices "go directly from me to the customer. The interesting thing about the Web is that you can make it policy and it really is policy." Oracle used to have 250 people whose sole job was to review requests for discounts. "Now we have four," says Ellison.
Of course, many Oracle salespeople didn't like the concept. A lot of them didn't want Oracle to publish prices at all. "They love the idea of being asked, 'How much is this Oracle product?' and saying, 'How much you got?' I don't want the field spending time wheeling and dealing. This is ridiculous. That's not their job. Their job is to understand our products in-depth and understand where our technology can be applied with a good return for a client." If that tramples on the salesperson's art, so be it. "A lot of the creativity is gone," Ellison says. "We don't want to be creative. You want to be creative? Write a novel."
[clip]
Ellison became so enthused about the rewards of management-by-computer that he eliminated Lane's $100 million headquarters budget last year, wiped out most of its functions, and distributed some others to division heads. And you wondered why Lane quit? (Lane declines to comment on his departure.)
[clip]
But Oracle's one-stop-shopping approach appears to have strong appeal, at least to startup and middle-market companies, because of that tantalizing prospect of more seamless automation. Hostcentric, a Web-hosting company in Houston, bought 11i last spring and is working its way through the modules, installing them one by one. Doug Allen, Hostcentric's CIO, says the suite's up-front cost wasn't any less than buying the pieces from different software providers. "But it's the ongoing cost of ownership, when you don't have to manage different releases from different vendors, that is going to make us more successful." Allen thinks Ellison's vision of automating most of a company's customer interaction isn't a pipe dream. "If we can automate 85 percent, that would be pretty good," he says, adding that he expects to achieve that goal next year.
[clip]
Ellison: "We'll get another billion [expenses] out in 2001. I mean, I'm as close to guaranteeing it as the SEC will allow me to do before they put me in jail." |
