FRAMINGHAM (07/17/2000) - The Internet changes everything, as Oracle Corp.
Chairman and CEO Larry Ellison is fond of saying, endlessly.
It's certainly changing Ellison's company.
In Oracle's just completed fiscal year, executives claim to have squeezed out nearly US$1 billion in costs, as part of a plan to change the company into an electronic business. They've done this by adopting "Internet technology" - by using Oracle's own Web-based business applications, by creating new business practices using this software and consolidating data centers.
The scheme has its risks. Oracle will rise or fall on how well its newest applications, for managing customer relationships, perform on the company's intranet. Any glitches will be embarrassingly public and could put the brakes on Oracle's fast-growing applications sales.
And some outsiders are skeptical that the billion dollars in lower costs is because of an "Internet-enabled miracle." "It's not the case," says Laurie Orlov, research director for e-business applications at the Forrester Research market research firm in Cambridge, Mass. "Larry will make the claim that this [lower cost structure] is because Oracle is e-business. Maybe 20 percent is due to that, that's my guess. But 80 percent is due to just doing things more efficiently."
Orlov cites the data center consolidation as one example of better efficiency, and likewise with the shift to a new e-mail system. "They had a terrible e-mail system for years," she says. Orlov says there's a limit to moving the sale of expensive, complex software products to do-it-yourself Web sites, such as Oraclestore. "The idea of placing million-dollar orders on the Web just hasn't happened," she says.
Savings due to e-business transformation is for most companies still an opportunity, rather than a reality, according to Orlov.
Still, the accompanying graphic plots Oracle's revenue over eight quarters, along with operating expenses, showing a slight increase of the latter as revenue continues to dramatically increase. The result: Oracle's operating margin - a percentage figure that indicates how well a company is doing in controlling costs - jumped nine points, to 30 percent from 21 percent in fiscal 1999, a strong gain.
In true Oracle fashion, the company is turning its success into a new marketing tool: Customers are brought to Oracle's glittering Redwood Shores, Calif., campus headquarters and given in-depth briefings on how the company's Web-based applications and a new computing infrastructure are saving money, slimming down costs, and keeping the number of employees unchanged, despite strong growth in database and applications sales.
In fact, the move to transform Oracle was doing so well by early spring that Ellison decreed the company will squeeze out an additional $1 billion in costs by the end of fiscal 2001.
The total cost figure of $2 billion for fiscal years 2000 and 2001 represents improved productivity due to a changed cost structure, says Oracle Chief Financial Officer (CFO) Jeff Henley. "As we grew our revenue [in fiscal 2000], we didn't grow our head count or our expenses," he says. "We kept more of the money we took in. In business, that's always a good thing."
Total operating revenue grew 15 percent, to $10.1 billion, in fiscal 2000, up from $8.83 billion the year before. Total operating expenses grew only 1 percent, to $7.05 billion, up from $6.95 billion. The impact on operating income, which is roughly the pretax profit from sales, was dramatic: 64 percent, to $3.08 billion from $1.87 billion. "Effectively, this means we're getting $2 billion falling to our bottom line," says Henley, who emphasizes the figure is a goal, not a guarantee.
All companies have costs, such as salespeople salaries, advertising and office supplies. These costs usually increase as the company's revenue rises and as it hires more people, increases advertising, expands office space and so on. Using Web applications, and consolidating servers and data, has changed the way Oracle's costs are incurred, and lessened the need to hire new people. In some areas, staffing has been reduced.
Two years ago, Henley says, Ellison decided Oracle would use its own products to exploit the Internet's potential, a decision that has led to a top-tobottom rethinking of how the company does business. One of the first steps was a Web-based corporate expense report. According to Henley, employees now get their reimbursements paid directly into their bank accounts a week faster than was possible with the old paper system. More importantly, the accounts payable department, which processed all the paper, cut its head count by 25 percent.
As other browser-accessible applications began to be used, Oracle began consolidating hundreds of servers and databases into one or two main sites. The company has just finished consolidating its e-mail system. Instead of 97 servers and 120 databases, Oracle e-mail now runs on two big, clustered servers with four databases. Instead of 60 full-time IT staff just for e-mail, there are now 12, says Gary Roberts, senior vice president of the company's global information technologies group.
By also converting from a client/server e-mail model to an Internet model, support costs are dropping dramatically. "In our old e-mail environment, we'd get 3,000 problem calls a month [to our help desks], just for e-mail problems," Roberts says. "With our Internet model, I get less than 250 per month: There's not much [a user] can do to mess up a browser."
The same logic has led to a goal of moving 65 percent of Oracle's 41,000 employees to a browser-only desktop. If that's achieved, Roberts calculates he can cut the 450 desktop support specialists to 100, and save $60 million per year.
The corporate network was also studied, to make sure it could support the increased Web traffic. In some cases, Oracle added more bandwidth and reconfigured the network to improve throughput and reduce network latencies.
The company inventoried more than 100 custom-built applications it used to run its business, such as lead tracking, of which there were several variants.
Roberts recalls Ellison asking at a strategy meeting on applications architecture, "If we need all this stuff to run our business, why isn't it in the [Oracle Applications suite]?"
The IT group's internal applications support staff began working with software engineers on the product side to shift needed features and entire programs into the 11 and 11i releases of the suite. Several internal sales programs are now a module in the 11i release, called Oracle Sales Online. All features can be accessed with a Web browser.
Business processes are being re-examined and changed when necessary to fit the Web. "We're forcing ourselves to standardize our business practices, so there is only one way to take an order," says Ron Wohl, the executive vice president who oversees development of the Oracle Applications product line. "We're not automating old business practices."
As Oracle's own sales and marketing staff began using the new applications, costs associated with these areas began to plummet. During the earnings teleconference last month, Ellison told analysts that marketing seminars for customers had been shifted from hotels to the Web, and cost per person had dropped from $220 to $1.50.
In addition, the support staff has grown typically 30 to 40 percent per year as the company has grown. "But in 2,000, we added zero people, and we plan to add zero people this year," Henley says.