I2 in 1996 went from $20 a share to $111 a share in 2000 and then to 41 cents in 2002. “Writing off the value of acquisitions that never lived up to their promises caused I2 to lose nearly $8 billion in 2001. Revenues in 2002 showed that I2 never really had a billion dollar business. In 2001, according to the restated financial information it cost I2 about $1.32 for every dollar of revenue. Including all operating charges and expenses, in 2001 it cost I2 $9 for every dollar in sales. In 2001-2002, I2 sold more “service-like” items (maintenance, product enhancements and upgrades, and customized contracted software). Service being the slow impoverishing factor. Between 1999 and 2002, $950 million in software license fees required the company “to perform services that are essential to the functionality of our product.” I2 products were complex hybrids requiring time and expertise to install, tailor, and integrate into customer’s information systems. The software was difficult to sale in high volumes. Once installed, Customers claimed to realize major cost savings and large returns on their I2 investment. A large part of I2 technical organization was located in India, where costs were lower. CEO, Sidu said, “After growing 97 percent in 2000, total revenues fell 12 percent to $986 million, and in the second quarter, I2 reported its first quarterly pro forma loss.” I2 need a wider group of satisfied and loyal customers; Sidu classic MBA style management solution shifted away from establishing a horizontal product platform with established short term and long term contracts, towards cost cutting measures, he says, “As customers slowed spending, we reduced our quarterly cost structure by more than $100 million from the first to the fourth quarters. We reorganized our operations, reduced our workforce, refocused sales forces, consolidated offices, reduced discretionary expenditures and began transitioning more research and development to India, where we have a 3:1 cost advantage over developing in the US.” Large profits result from the manufacturing of products and then follow with service contracts. However, when times become bad, revenues collapse and customer stop buying new products. The companies most likely to survive are those with a loyal and satisfied set of customers who pay recurring fees over long-term contracts for product updates, bug fixes, customization, and other services. If product sales do not resume then the service and fees will not be enough to save the company. “What I now realize, all too painfully, is that this potential failure to buy puts the revenues of software products companies as considerable risk” - short term for 3-5 years. Services revenues during the I2 boom grew faster than the product sale revenues. “Software companies can double or triple their revenues over time through accumulation of contracts for services and custom software, including maintenance, even if new software product sales lag behind in growth.” “Over the lifetime of many enterprise software products, 70 percent or more of the total cost to a customer comes from service and maintenance fees and only 30 percent from the original product sale.” The product verses service tension occurs because “they know they must eventually move toward selling more labor intensive and less profitable service.” “It is also possible for software product companies to gravitate too much toward services and ruin the potential of their product business.” Many times customization is required to get customers; the service portion of these revenues rise; installations and upgrades become more complex because they have to include the enhancements. It takes to time to establish a standardized product.[Learn More ...]

&Links