Is Oracle Finally Seeing Clearly?

Missteps and market shifts leave Larry Ellison and Ray Lane scrambling to halt a slide

Raymond J. Lane should have been kicking back during his June getaway to the ritzy Caribbean island of St. Bart's. But instead of deciding between mai tais and daiquiris, the president of Oracle Corp. found himself pondering a much bigger problem: how to revive Oracle's sagging business. The software maker's product-revenue growth had dropped into the single digits, profit margins were narrowing, and the stock price had stalled. Lane knew something dramatic had to be done. The conclusion he reached while sunbathing: "I had to get closer to the action."

Closer he got. Within days of returning home, Lane split Oracle's 10,000-person sales force into two teams. One team would focus on selling database software--the programs that store and retrieve corporate data and make up the bulk of Oracle's sales. The other would sell Oracle's applications, programs designed to help companies track inventory, schedule manufacturing runs, and balance the books. Lane also cut out two levels of management and placed himself directly in charge of U.S. sales operations.

Startling moves? Not at Oracle. Lane was just following the lead of his boss, Oracle Chairman Lawrence J. Ellison, who in February assumed command of the company's troubled applications division. Now, both of Oracle's top executives have their sleeves rolled up and are elbow-deep in operations. "I realized it's going to take both of us to fix this--Larry in products and me in sales," says Lane.

Lane and Ellison are among Silicon Valley's sharpest executives. Yet even this dynamic duo will have its hands full putting Oracle back on the fast-growth track. For years, the company has dominated the database business, commanding nearly a third of the $6.6 billion market and chalking up 30%-plus growth nearly every quarter.

But a series of missteps and market shifts has left Oracle struggling. A sweeping reorganization of the sales force last fall backfired, disrupting operations and contributing to anemic, 3% growth in database sales during the quarter ended last November. Then came the downturn in Asia, which accounted for 14% of Oracle's 1997 sales but fell to 11% of sales last year. And while Ellison was distracted by pet projects such as network computers and week-long sailing trips on his yacht, seismic shifts were occurring in the software industry--especially in Oracle's bread-and-butter database business.

GERMAN BEHEMOTH. The market for these programs began to mature, slowing to just 7% growth in 1997. At the same time, corporate customers began aiming more of their spending at Internet software and applications. Oracle began expanding into hot-selling applications years ago, but it still hasn't been able to catch up with Germany's SAP, the industry leader. SAP has $2.25 billion in applications revenue, or three times as much as Oracle's applications sales.

Now, the red flags are flying. When the company reported its yearend numbers in June, it became clear that earlier signs of a slowdown were no fluke. Even though Oracle's net income was up 13%, to $955 million (excluding acquisition costs), on a 26% gain in revenues--to $7.1 billion--most of that was buoyed by Oracle's service business. Growth of the company's crucial software sales had skidded to 9% from 26% a year earlier. Oracle's stock is flagging, too: in the mid-20s, far from its peak of 42 last year.

Ellison is by turns apologetic about the mistakes of the past and fired up about Oracle's prospects for the future. He concedes that he should have gotten a grip on the applications business earlier. He saw the problems last fall but says: "I thought I could delegate." And he realizes that focusing so much on network computers hurt his company. He should have been talking about how databases are essential for Internet computing. "It was a huge communications gaffe, and I blame myself for it," he acknowledges.

Now, a chastened Ellison is embarking on a plan that includes a reorganized sales force and a laser focus on Internet computing. Rather than taking on Microsoft Corp.'s Windows software with the network computer, he's launching a blizzard of Internet-ready software that can be accessed from any kind of computer. What's more, he's delivering on the Net-savvy software he's been promising for three years.

First up is a new version of the company's applications, Oracle Applications Release 11. The software relies on Net communications and uses Web browsers for viewing information stored in corporate databases--the first enterprise application suite to do so.

ONE LANGUAGE FOR ALL. The big bang, though, is scheduled for the fall, when Oracle will release Oracle8i, the most massive overhaul yet of its database. Oracle8i is equipped with the popular Java programming language, so companies can easily build applications that fetch data with a simple mouse click and run on any type of computer through a browser. That offers potentially huge savings on programming and training. "It's the biggest change we've made to the database since we created it 20 years ago," says Ellison.

Together, the products usher Oracle into the Internet Age, but will they return the company to its former go-go growth? Chances of 30%-plus spurts are unlikely, say analysts, but they figure that the Net products, coupled with the sales revamp, could deliver healthy growth rates again. Up until now, the Internet has not driven a lot of extra demand for databases. But that could be changing with the rush to electronic commerce. "There's a latent bubble of database demand," says analyst Charles Phillips of Morgan Stanley Dean Witter, who forecasts 1999 revenue growth of 23% for Oracle.

Ellison is betting that the Internet focus will boost applications sales and help Oracle catch up with SAP. The undisputed leader, SAP had 15.6% market share last year, compared with 4.9% for PeopleSoft and 4.8% for Oracle, according to International Data Corp. What's more, in spite of the slowdown in Asia, the German juggernaut's revenues grew 60% in the first half of this year. To accelerate growth, it has doubled its field-sales organization, to 2,000 in the past two years, vs. 1,500 applications reps for Oracle. And its focus is unwavering. "Oracle does so many things," says Paul Wahl, CEO of SAP America. "For us, it's business applications, business applications, business applications. Nothing else."

Even hotter than SAP right now is PeopleSoft Inc. Its product revenues grew 76% last year, to $705 million. PeopleSoft sells a narrower range of applications, but it makes up for that with a single-minded dedication to customer satisfaction. That philosophy was key to Corning Inc.'s decision to choose PeopleSoft applications over Oracle's, even though Corning had already standardized on Oracle databases.

Oracle doesn't have to play catch-up in databases. In the market for high-powered ones, IBM and Oracle duke it out. But it's Microsoft that might end up giving Oracle fits. Microsoft has been in the database market in earnest for just three years, but it has amassed 15% of the market.

So far, Oracle has been more than Microsoft's match, beating it even in the market for databases built on top of Microsoft's Windows NT operating system. But since Microsoft can design its SQL Server database to work tightly with NT--the fastest-growing platform for database sales--it could gain an edge. And the SQL Server database is about half as expensive as Oracle's in price/performance comparisons. Soon, analysts say, Microsoft could start grinding away at the underside of Oracle's database empire.

That's another reason it's crucial for Ellison and Lane to get Oracle running like a well-oiled machine. Analysts agree that the company's products aren't the only problem: Ellison and Lane must also fix sales and marketing. And that's not just a matter of redrawing the organization chart. It will require big changes in Oracle's notoriously combative culture so that database sales representatives are not at war with the applications staff. "They've got too many cooks trying to stir the broth and stab each other in the back at the same time," says analyst Josh Greenbaum of Hurwitz Consulting.

No wonder Lane's key move on July 8 was to separate the combatants. He divided the sales force into database and applications organizations. Now, he plans on doubling the size of the application sales force, to 3,000, by next May. He's also training them to sell applications that address business needs, such as helping a manufacturer stock just enough parts in a fast-changing market.

Still, Lane cautions that it could take two more years before customers begin to see Oracle as not just a technology supplier but a trusted partner as well. Guess he'd better not plan on hitting the beach anytime soon.

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