With all the hoopla surrounding Oracle, PeopleSoft and Larry Ellison, Karen Southwicks timing couldnt be better. Her in-depth look at Oracles past, present and future—focusing on Larry Ellison—is scheduled to come out in November.
We got our hands on an early copy of her book—titled “Everyone Else Must Fail”—and couldnt put it down. Chock full of juicy rumors, detailed reporting and a brutal look at Oracles past and present business practices, every Oracle customer—or competitor—should read this book.
So we set about trying to give you an exclusive preview of “Everyone Else Must Fail”—and thats what you see here. Weve opted to bring you a section from the latter part of the book, where Southwick looks at where Oracle and Ellison are going from here. She paints a bleak picture, suggesting that Oracles better days are behind them.
So read through our exclusive excerpt, and after youre done, stop by our Southwick will be hanging out all week, answering your questions about Oracle, Larry Ellison or any of her past books—including the detailed look at Sun and Scott McNealy she published back in 1999. —Editor
Oracle Peers over the Precipice
At the close of 2001, Jay Nussbaum, the executive vice president of Oracle who oversaw sales, marketing, and consulting in the services industries, left to join the consulting firm KPMG Peat Marwick. “Jay built and leaves us with a deep management team that is well prepared for additional responsibilities,” Larry Ellison felt compelled to write in an E-mail to employees announcing the departure.1 In fact, Oracles management team is woefully depleted. With the exception of Jeff Henley, virtually all members of the senior team who participated in Oracles turnaround and tremendous growth during the 1990s have left the company. They include Gary Bloom, Ray Lane, George Kadifa, Polly Sumner, Randy Baker, Pier Carlo Falotti, Robert Shaw, Jeremy Burton, George Roberts, and many, many more. Sandy Sanderson, who had been filling the void that Lane left as Oracles customer-facing executive, took a medical leave in August 2001 and wasnt expected to return. Henley himself is questionable. Rumors have swirled on occasion that the chief financial officer was leaving, causing Oracles share price to plunge. Although Henley steadfastly denies any intention to resign, he has sold his house in Silicon Valley and lives in Santa Barbara, commuting up to Oracle every week.
This leaves Ellison with the tricky task of running Oracle without a net of strong executives beneath him. “Oracle has moved from a team of B players led by A players to a team of C players led by B players,” Sumner says. Ellison now depends heavily on Executive Vice President Safra Catz, a onetime investment banker who acts as his chief of staff and is about as much of an enigma as her boss. She has shunned the limelight, even though Lane and others describe her as Ellisons “hatchet man” in carrying out what he wants done. But she has no experience running a company on her own and no public persona, hardly qualifications to be CEO. No one else inside Oracle leaps to mind, either. Ellison adamantly refuses to name a second-in-command, saying hes going to wait until its apparent that he needs one. So Oracles stakeholders—customers, partners, shareholders, and employees—are at the mercy of a nearing-sixty CEO who indulges in high-risk behavior and whose interest in his company is fitful. In late 2002, Ellison spent weeks at a time anchored off the coast of New Zealand, while the eighty-foot yacht that he paid for, Oracle, participated in the Americas Cup trials. Early on in the trials, Ellison was a crew member, but the captain, Chris Dickson, yanked him for a more veteran sailor. Ironically, Ellison had elevated Dickson to captain to replace someone else. The Oracle head capitulated meekly to being thrown off the boat, conceding that the captain must prevail.
Even if Ellisons energy level and commitment to being CEO remain high, no lone executive, no matter how capable, can single-handedly run an operation as complicated as Oracle and also focus on how to reposition the company for the future. While competitors like IBM and Microsoft smoothly transitioned their leadership from, respectively, Lou Gerstner and Bill Gates to Sam Palmisano and Steve Ballmer, and built up teams around them, Ellison coyly toyed with executives like Lane and Bloom. Although some observers still see Bloom, the CEO of high-flying Veritas, which makes software to store and protect data, as a possible outside successor to Ellison, Bloom proclaims that hes going to build Veritas into another Oracle and doesnt need to come back. “Before Larrys ready to step down, I have an equally good chance of making Veritas a similar-size company,” says Bloom. “I want Veritas to have all the prestige and respect Oracle gets.” In late 2002, Oracle wasnt getting a lot of respect. For more than a year, sales and earnings had failed to meet expectations.
It was only after Henley guided the Wall Street estimates down a couple of times that the company managed a quarter that wasnt worse than expected. In its fourth quarter of fiscal 2002, ended May 31, Oracle reported a 16 percent decline in sales and a 23 percent decline in net income. But those otherwise dismal results were slightly better than what had been forecast. Finally, in the first half of fiscal 2003, Oracle managed to grow new database sales—by 4 percent—but application revenue continued to decline, as did overall revenue. Between 2001 and 2003, Oracles revenues shrank by more than $1 billion, from $10.9 billion in the fiscal year ending May 31, 2001, to $9.5 billion in the year ending May 31, 2003. Even by 2004, revenues were still projected to be below the high-water market of $10.9 billion in 2001. While Ellison and Henley continued to blame the poor economy and the collapse in corporate spending after September 11, 2001, that reasoning was wearing thin. It was becoming obvious that most of Oracles problems were internal, related to its loss of management at the top, its alienation of everyone from customers to partners, its conflict-ridden culture that sucks energy into the black hole of corporate politics and last but not least, the flawed personality of the Oracle himself, Larry Ellison.
Two primary scenarios could play out at Oracle, each with differing ramifications. The first is if Ellison, for whatever reason, were to leave unexpectedly in the near term. The second is if he stays for the longer term. Its unlikely that Ellison would ever be forced out of Oracle, since he owns one-fourth of the stock and has a relatively weak board of directors. But given his propensity for fast jets, fast cars, and sleek yachts, some kind of accident is possible. Once, Ellison almost died in a surfing accident off Hawaii. Or he could decide that Oracle has become boring and simply leave to start a biotech company.
It is just those kinds of scenarios that cause the CEOs of most major companies to do succession planning. Not Ellison. One wonders if he can even conceive of Oracles existence without him. Other people wonder, too. “If Larry was incapacitated, the cult would dissolve,” says former executive Marc Benioff. “Its unclear if Oracle is a sustainable enterprise without Larry because his personality is so firmly entrenched.”
If Ellison went with no warning, definitely chaos would ensue at Oracle. “They arent prepared at all if he walks out suddenly,” says Lane. “Its better for him to stay in the short term because theres somebody with a vision.” Former board member Arnold Silverman agrees. “Without Larry, Oracle would go through a difficult period. There would be a lot of arm waving and flapping around. Maybe somebody would come in, grab the reins, and stabilize it.” Maybe, but who that would be is a mystery. Lane says hed go back if Ellison were out of the way, because Oracle would need a proven leader. “It would have to be somebody with a very, very different style than Larry. Id do it because Oracle is an incredible asset thats being destroyed,” he says. But other insiders tell me that Lane may have burned his bridges at Oracle by speaking out publicly against Ellison and by addressing the trade conference of competitor SAP, so returning as CEO is problematic.
Of course, the many ex–Oracle executives who head other companies, like Bloom (Veritas), Craig Conway (PeopleSoft), Greg Brady (i2 Technologies), Marc Benioff (Salesforce.com), and so forth, would be candidates, but whoever did it would face monumental challenges. He or she would simultaneously have to fix a troubled company, overhaul a counterproductive culture that has been a quarter century in the making, and fill the shoes of one of the most high-profile corporate leaders in the world.
In Ellisons absence, the other possibility would be a merger. A number of observers suggested that a Sun/Oracle combination could make a lot of sense, giving the new company ownership of everything from the server to the database to applications. Since significant competition exists at all those levels, its doubtful that antitrust concerns would derail such a combine. Suns McNealy is a charismatic CEO with a demonstrated ability to lead an unconventional company with a maverick approach. Sun and Oracle have the same enemies and the same essential strategy: focusing on products instead of solutions. Says Lane, “Sun could be Larrys exit path.
Together they can fight the other two integrated competitors: IBM and Microsoft.” Naturally, neither Sun nor Oracle would officially comment on this. Laughs Suns Bohlig, “Im sure some analyst every year is saying thats a possibility. We dont see it.”
If Ellison continues to lead Oracle, as seems most likely, the outlook for Oracle is murky. “If he stays, Oracle doesnt change,” says Lane. “Hes a very capable leader in terms of putting together a product strategy, expressing vision to the marketplace, and telling people what to do. But theres also a lot thats missing, like management style. Theres no team underneath him. Its basically a dictatorship, and everybody works in the hope that theyll get rich.” If Oracle continues to falter, the board might exert more pressure on Ellison to bring in strong managers beneath him, as he did in the early 1990s with Lane and Henley. “What people are looking for today from senior leadership is not simply vision,” says Gartner Group analyst Betsy Burton. “Oracle is out of balance. The yin has left, and only the yang remains.” But given Ellisons track record of running through executives, it might not be as easy for him this time to attract the best people. Even if Ellison were to step down as CEO and remain chairman of the board, as some scenarios have suggested, “I dont think topnotch people will go to Oracle,” says ex–board member Silverman.
“Who would want to be CEO with Larry still involved? Anybody qualified to do it wont do it.” With no new initiatives on the horizon, Oracle faces tough battles in expanding its core database market, which accounts for nearly all its profits, and in making applications a viable line of business by winning back wary customers. The database business is especially critical, since its hefty profit margins enable Oracle to support applications and application servers. “If I were sitting in Larry Ellisons chair, the first thing I would focus in on is, How do I regain my control of the database market?” Burton says. However, that may mean sacrificing price for volume. Worrisome for Oracle is the movement toward cheaper databases, a trend augmented by its own clustering technology. In 2002, Oracles low-end product, called Standard Edition, accounted for half of its database license revenue, up from about 15 percent just two years previously. “The SE product was designed to compete with Microsoft on price, which it does well, but Oracle never anticipated it would grow to half of its database revenue,” says analyst Charles Phillips, of Morgan Stanley (who later joined Oracle). The hope for Oracle is that customers will upgrade to the high-end product, Enterprise Edition, but Phillips says that migration path is not guaranteed. “The SE product is sufficient for even large customers” in many instances, he says. Although Oracle doesnt appear to be losing existing customers to IBM and Microsoft, those two “are certainly winning their share of new business,” Phillips adds. “Oracle still has the leading product that can span from very small to very large applications with the markets most reliable database.”
But count on more pricing pressure, both from competitors and from reluctant customers that have become more pricesensitive in a slower economy. Phillips forecasts that, at least in the near term, Oracles growth will be flat and profit margins will depend on controlling expenses.
On applications, Oracle has been losing market share to PeopleSoft and SAP, due to the quality issues that surfaced with the early release of 11i. Phillips believes that Oracle has fixed the technical problems but has a long way to go to repair the damage to its reputation from having mistreated customers.
Jennifer Chew, analyst for E-business applications at Forrester Research, says that any of the three leading ERP vendors can meet functionality and business process requirements and they are fairly equal on service. That means the decision comes down to intangibles, like with whom would you rather work, and there Oracle has hurt itself. “Attila the Hun looks kind compared to Larry,” she says. “Oracle needs to abandon the all-Oracle, all the time message.” It can still fashion a winning strategy on applications since its able to bundle so much more than SAP or PeopleSoft, she says.
“Because Oracle has so many other products, like database, toolset, and services, they can afford to discount very heavily on applications and still know that over the life cycle, theyll get plenty of money out of the customer.”
Oracle and Web Services
Where does Oracle position itself in the emerging Web services world? So far, it hasnt spelled out much of a strategy.
“Can Larry take it to the next step?” asks former board member Joe Costello. “I understand what the next step is at Microsoft, but there is no articulated vision at Oracle.”
Recently, Ellison has talked about moving into hosted applications. Instead of buying a suite of software that they have to install, customers would pay Oracle monthly fees to provide and maintain what they need from its own data centers.
“Guaranteed, you will never have to pay for another upgrade. You will never pay for another piece of software. You will never pay for another piece of hardware,” Ellison says, predicting that this could be a $1 billion business for Oracle in a few years. Cliff Godwin, senior vice president of applications technology, says Oracle has more than two hundred customers using its Oracle.com hosted solution. “We believe in hosting as a strategy and in software as a service,” Godwin says. “We will be putting out a lot of new hosted offerings. We want to build an economy around that and have other partners come in with value-added services, such as those with expertise in retail or banking.”
So far, however, the hosted business has proved only a drop in the bucket for Oracle, and smaller, nimbler competitors like Benioffs Salesforce.com are already there. “Its a pipe dream,” says Lane. “Its not in Oracles DNA to work that way, delivering a service month after month. Software development is very different than operating the applications for a customer.” He recalls a conversation he had with Ellison in 1999, when the on-line business was getting started. Lane told Ellison he needed to put a strong operational person in charge to make sure customer problems got solved. Ellison retorted, “Well put an NC on-site with a customer,” running the same applications. “If a customer calls in, well tell him to walk over to the NC. If the applications working there, go call your network provider. Its a network problem.” Its doubtful that many companies would want to entrust their ongoing software needs to a company whose CEO has attitudes like this.
“Oracle has had its best days,” maintains Meta Group analyst Will Zachmann. “Theres no way they can grow like they did in the 1990s. More likely, they will go into a decline.” Hes not as concerned as other observers about the succession problem. “Larry doesnt seem to be going anywhere, so I dont think the cult of personality is the big issue. Its how they respond to challenges from Microsoft and IBM. If they lose their core [database] business, the rest of it will crumble.”
Zachmann adds that Ellisons aggressive, expansionist management style “works as long as youre winning. It remains to be seen how well it works in a defensive mode where theyre not leading a market. There are no more quick victories.”
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