i2 Technologies Lives Life In The Fast Lane
S. McVey - October 18, 2000
i2 Technologies (NASDAQ: ITWO) is the largest and fastest growing vendor of supply chain management software, with $751 million in revenue over the last twelve months and a 105% average growth rate over the last five years (see Figure 1). Fueled by a powerful sales and marketing machine and aggressive strategies for corporate development and acquisition, i2 will maintain its lead through the end of 2000 and beyond.
i2's product offering consisted of only three applications as recently as 1996. Since that time, it has combined internal development with acquisitions of established vendors to achieve the most comprehensive supply chain management (SCM) offering of its peers, incorporating over seventy modules. Further, one may argue that i2's recent moves in product development and acquisitions have carried it beyond the realm of SCM. Many vendors of SCM software and other applications profess to have transformed into "e-business" or "B2B" enablers, but i2 is doing more than just talk about it.
One year ago, i2 announced TradeMatrix, a platform that promised a vague combination of solutions and content designed to improve the functions of designing, buying, planning, selling, fulfilling and servicing products or services over the Internet. Since then, TradeMatrix has found great favor among consortia of future-thinking blue-chip companies such as the Worldwide Retail Exchange, MyAircraft (Honeywell, United Technologies Corp., BF Goodrich), and many others.
To successfully invade the e-commerce software market, i2 needed to secure a beachhead. It found this in June when it acquired Aspect Development Corporation (see "IBM is not Enough: i2 Snatches Aspect and SupplyBase" ). In addition to legitimizing its claim in e-commerce, the acquisition helped revive i2's revenue picture, at least artificially (see Figure 4). With Aspect's revenues added in from the last three weeks of June, i2's total revenues jumped 84 percent to $242.6 million from $131.9 million in the second quarter last year. With twelve-month revenues topping $750 million, i2 was then on track for breaking the $1 billion barrier at the end of fiscal year 2000. Because i2 treated the acquisition as a purchase, it posted large non-cash charges this quarter of $208.9 million, which produced a net loss of $280.8 million, or $1.66 a share. The important thing to remember (as i2 is eager to point out) is that the second quarter would have been profitable had it not been for the acquisition.
Vendor Trajectory and Strategy
Those observers who interpret i2's recent acquisitions and alliances as attempts to compete with ERP or CRM vendors fail to understand its larger vision. i2 is determined to be the prototype for the next generation of enterprise software providers. That vision includes public and private Internet trading partner exchanges that go beyond mere buying and selling by incorporating all of the supply chain optimization capabilities found in its TradeMatrix suite. Participants in these future exchanges form a network that links both external entities and internal functions, ensuring that all operate at maximum efficiency. Certainly, software designed to this vision would challenge existing ERP and CRM products, but from a fundamentally different paradigm. That being said, i2 has just begun assembling the pieces it will use to realize its ambitious vision.
In the meantime, i2 is making aggressive strides in the business-to-business online trading market. Though its true capabilities are largely masked by hype, Tradematrix is now seen as a significant platform that provides infrastructure and optimization features for online marketplaces. (See i2 Adds More Verticals to Ra-b2b-it Stew ) Although its primary best-of-breed competitors, Aspen Technology, Manugistics, and Logility have taken similar steps into e-business, i2's market dominance and vast resources give it an enormous lead. i2 is able to compete on a par with the big ERP vendors - SAP, Oracle, and PeopleSoft - while posing a threat to native e-commerce vendors like Commerce One and even its new partner Ariba (see B2Big Deal for IBM, Ariba , and i2).
While i2's revenues may not be growing as rapidly as in its youth, there is probably little cause for alarm. i2 benefits from a broad, feature-rich supply chain management software suite, significant technology for applying its applications to Internet fulfillment, a growing slate of online trading networks, a large customer base (although smaller than Manugistics'), and a formidable capital position. Its market dominance makes it an attractive partner for e-commerce, EAI, portals, and other software providers that will further enhance its position.
Recent Major Events
Following is a summary of major events for i2 Technologies during the past year with respect to:
In March, i2 acquired B2B collaboration software makers Aspect Development Corporation and Supplybase in the largest software deal in history. In the short term, the Aspect purchase brings considerable online content to i2's Internet procurement markets, providing participants a wider selection of options and other marketplace services. Supplybase adds the potential of its technology and strategic sourcing of custom parts. Custom parts represent the most strategic component of procurement for large, complicated designs. (For more information see i2's Aspect Acquisition Not Overpriced.)
A strategic investment in Primavera Systems announced in September will afford i2 a stake in the market for engineering and construction management software as well as allow it to extend its solution base in anticipation of fulfilling its larger vision.
In March 2000, i2 was part of a sweeping strategic partnership with IBM and Ariba to accelerate the adoption of B2B technology. (For more information see B2Big Deal for IBM, Ariba , and i2.)
In May 2000, i2 signed an agreement with Hi-Spec Solutions, a software division of IT conglomerate Honeywell International, Inc., to deliver a combined solution for process manufacturing companies to optimize their extended supply chains and collaborate with suppliers and customers. With sufficient investments of capital and manpower in the alliance, and finding the right way to market the joint solutions, i2 can expect to capture a significant number of process manufacturing clients and even wrest market share from Aspen Technology, the leader and competitor of Honeywell on the process control solutions side. (For more information see i2 Enlists Honeywell in Process Industry Play.)
In July 2000, J.D.Edwards, recognizing the impact i2 was having on the e-business marketplace, allied itself with this marketplace juggernaut by offering its OneWorld enterprise application suite through i2 Technologies TradeMatrix platform. The announcement, however, does not address the complexity involved in integrating ERP and supply chain management in a collaborative environment environment. (For more information see i2 Technologies' Latest Offering: J.D.Edwards OneWorld.)
The acquisitions and alliances during the past year are intended to increase i2's competitive position over the next 2-3 years against ERP giants such as SAP and e-commerce solution providers such as Commerce One. Other best-of-breed SCM vendors are now effectively out of the running given i2's recent growth and successful shift in product strategy toward inter-enterprise supply chain networks. Manugistics is seeing a revival of sorts brought on by favorable response to its marketplace offerings but this will not be enough to pose a serious threat to i2. Aspen Technology is enjoying tremendous demand for its products but this is confined primarily to process manufacturing industries, an area that i2 largely ignores. The remaining pure play SCM vendors like Logility, Adexa, and SynQuest will continue to find customers for their more targeted products, in some cases stealing them from i2, but will operate in the interstices between the larger enterprise vendors.
Among ERP vendors, SAP and Oracle are i2's main competition in the advanced planning and scheduling (APS) space. Prior to SAP APO, i2 and the other SCM vendors could count on license revenues from selling superior APS modules to clients frustrated by the lack of depth found in ERP systems. Even today, the best-of-breed SCM vendors on the whole have better APS functionality but the gap is shrinking. In the longer term (3-5 years), i2 will decisively overcome ERP vendors that fail to adapt their enterprise-centric solutions to serve the needs of future trading partner networks.
i2's dramatic growth has won attention from leading magazines and the broader IT community, a feat not duplicated by its peers in the supply chain management software industry. During 1999 i2 was ranked 44th on FORTUNE magazine's list of the top 100 software vendors. (See Fortune Smiles on i2 Technologies.)
The editors of Semiconductor International, a leading technical publication covering the semiconductor industry, awarded top honors to i2 Technologies for its RHYTHM suite of semiconductor template solutions. (See i2 Technologies Garners Semiconductor Award.)
In August 2000, FORTUNE magazine again honored i2, placing it eighth on its annual list of the fastest-growing companies in America. Recognition by the popular press has fired enthusiasm for i2 among investors and given it a market capitalization on a par with SAP, Siebel, and even Yahoo! Inc.
Strong financial position and commanding market presence: Strong revenues, low operating margins, and record earnings have become synonymous with i2 and have brought the company huge capital gains on Wall Street. In contrast to its competitors, i2's growth was largely unaffected by last year's Y2K remediation spending and general economic downturn. In addition, the acquisition of Aspect Development with its additional revenues halted the declining rate of revenue growth it has witnessed over the past four years (see Figure 4).
Aggressive sales and marketing organization: i2's direct sales force headcount stood at 700 (est.) at the end of 1999, more than twice that of its nearest competitor. At 34%, investment in sales and marketing as a percentage of revenues is higher than the industry average.
Rapid product development: i2 has successfully remade itself into an e-business software provider with TradeMatrix (10/99) and quickly grew a myriad of vertical offshoots such as HightechMatrix, RetailExchange.com, and the alluringly titled FinancialSettlementMatrix.com for streamlining payments and other financial processes of banks and their trading partners. i2's ability to reinvent itself to provide a basis for churning out new products is evidenced, in part, by its consistently high percentage of license revenues (see Figure 2).
Product flexibility: RHYTHM provides the capability to satisfy a wide variety of functional requirements and business rules through its custom modeling language, OIL (Object Integration Language). Also, i2 offers a series of vertical industry templates, which allow customers to jump-start their modeling effort.
Delivering on vision: While able to conceive and articulate architectural visions, i2 has been less successful at delivering fully developed, bug-free applications to support them. Clients and third-party integrators often discover the gap only after the implementation is well underway. TradeMatrix is i2's most ambitious vision to date.
Business consultants know application, not industry: Business consultants, though skilled in RHYTHM applications, often lack industry-specific knowledge. This is in part due to the rapid growth of the company and the inevitable learning curve faced by new staff. i2 relies heavily on implementation partners such as Andersen Consulting and PricewaterhouseCoopers.
Reporting capabilities inadequate for many core applications: It is frequently necessary to integrate with a third party reporting tool that provides the flexibility to fulfill customer requirements. The additional and sometimes unplanned for development can be costly and delay project timelines.
Product Technology: i2 must win the race between transaction volume size and static memory size allowed by existing platforms - a consequence of RHYTHM's memory-resident nature. Results of i2's proprietary heuristics and algorithms can be compromised when extensive modeling flexibility is utilized.
Acquisitions: i2 continually demonstrates its willingness to make strategic acquisitions (Think Systems - '97, ITLS - '98, SMART - '99, Aspect - '00) in order to expand its product offering to new market segments. With its formidable capital position and market capitalization, i2 will continue to acquire or strategically invest in CRM, EAI, and Internet companies as it expands its suite. (80% probability)
Subscription revenues: To date, i2 has not generated significant revenues from optimization services offered through TradeMatrix. We expect subscription revenues to increase as TradeMatrix matures and more services are added. As subscriptions ramp up, i2's revenues will remain solid through sales of its core TradeMatrix products and maintenance fees. (70% probability)
Growth projection: i2 can expect 40-50% average revenue growth over the next 3-4 years. Though this is less than in previous years, it still compares favorably to the rest of the supply chain management market players. (For more on this, see i2: Is the Boom Over?.) (70% probability)
i2 should continue existing initiatives in the mid-market to increase market share. These include: both internal development to scale down core applications and partnerships with ASPs and other web technology software companies.
To improve client delivery, i2 needs to focus development efforts on reducing the complexity of its product suite and on integrating acquired technologies. RhythmLink, i2's enterprise application integration (EAI) platform for both its own modules and third-party products such as SAP and PeopleSoft, fails to deliver fully on its promise of seamless integration.
To achieve better penetration into the automotive and CPG (Consumer Packaged Goods) markets, i2 may want to leverage its success in electronics/high technology: Over half of i2's revenue is confined to the electronics and high tech industry (57%). Its low penetration into other industry segments conflicts with its stated objectives, especially in the case of automotive (see Figure 3).
i2 has made a host of acquisitions over the last several years and has supplemented acquired products with those developed internally and in collaboration with partners. In response to this growth, i2 has reorganized its business units around new product categories but more needs to be done to simplify the presentation of its product capabilities to the marketplace. Customers express consternation over the seemingly endless array of products now available from i2 and the company's decision to use the name TradeMatrix for the entirety of its suite only adds to this confusion.
Due to the breadth of its product suite, web initiatives, strong financial standing, and comprehensive vision for the future of e-business, i2 should be on every shortlist for users in a wide range of industries, especially electronics/high tech and semiconductor.
The TradeMatrix implementations to date are evidence that i2 has put together a viable Internet-based framework for buying and selling. Users should temper expectations, however, when considering the use of TradeMatrix to plan and optimize critical parts of their manufacturing operations and collaborative demand forecasting. These functions exist in the conceptual phase compared to i2's core TradeMatrix products. Companies that lack the stomach for large-scale joint development work should stick to i2's applications for demand planning, transportation planning, and manufacturing planning/scheduling or at least wait for successful reports from the early TradeMatrix implementations before buying.
Customers who ultimately do select i2 should consider the following tactics:
- Secure third party integration support from a services firm with i2 expertise. For e-business projects, smaller systems integration firms like Brightstar Information Technology Group and Origin B. V. may be both cheaper and more tech-savvy than storied consulting dynasties like Andersen Consulting and PricewaterhouseCoopers, but often lack sufficient resources.
- Identify user reporting requirements early in the engagement. This is particularly important with companies like i2 that seem to offer clients everything including the kitchen sink. Users should fix the scope of the implementation before consulting i2 to avoid adding components that are not critical to the business requirements.
- Test key business flows thoroughly and report software problems early. i2 is a large organization with many client demands on its developers and business consultants. Early identification of bugs and diligent reporting will ensure the project is completed with a minimum of time and cost overruns.