i2 Technologies, Inc.

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i2 Technologies, Inc.

SEEDS OF A SOFTWARE TECHNOLOGY INNOVATION

DEVELOPING A BUSINESS STRATEGY FOR PRAGMATIC UTILIZATION

APPLYING EXPERTISE TO CREATE INTERNET TECHNOLOGY

TURMOIL FOLLOWING HIGH-TECH EXPLOSION

PRINCIPAL SUBSIDIARIES

PRINCIPAL DIVISIONS

PRINCIPAL COMPETITORS

SEEDS OF A SOFTWARE TECHNOLOGY INNOVATION

Before developing an interest in computer technology and founding i2, Sanjiv Sidhu followed in the footsteps of his father, a chemist who directed India’s system of government laboratories. Sidhu attended the elite Hyderabad Public School in southern India, and at Osmania University he obtained a degree in chemical engineering. He moved to the United States in 1980 and entered Oklahoma State University, where he received a master’s degree in chemical engineering. Sidhu started a Ph.D. program in systems and control engineering at Case Western University in Cleveland, but quit in his eagerness to enter the world of work. In 1984 he obtained a technical staff position at the industrial systems division at Texas Instruments (TI) in Tennessee, but as computer technology accelerated, Sidhu developed a passion for the potential of computer applications to solve business problems. In order to pursue this passion, Sidhu requested a transfer to TI’s artificial intelligence laboratory in Dallas. There he saw the potential of applying new artificial intelligence techniques to create effective supply chain management processes. In 1988 Sidhu left TI to experiment with supply chain management software applications. Supported by his then-pregnant wife, Lekha, Sidhu spent two years programming software in the couple’s two-bedroom apartment.

Sidhu’s innovations involved changing the way systems worked with data to supply materials to the factory floor in a timely and cost effective manner. The standard manufacturing resource planning (MRP) software started from the delivery due date and worked backward to determine the sequence of supply and production schedules. The limitations of this method included an inability to respond quickly to unexpected occurrences, such as a machinery breakdown, a material supply problem, or a customer order change. While the use of relational database programs had increased flexibility of MRP and enterprise resource planning (ERP) software, it retained limitations of data and methods based on rigid assumptions about production and supplier lead times. Sidhu was not concerned with replacing such platforms, but to develop complementary software that would improve flexibility and functionality by implementing a concurrent supply chain planning strategy.

To achieve this, Sidhu applied concepts of constraint propagation, a subdiscipline of artificial intelligence which focused on the limitations involved in completing a specific task in order to determine how to perform that task. Sidhu accounted for multiple, global supply streams and complex contingencies, and he considered the interdependence of the whole system of materials availability, the production process, and delivery logistics, as well as fixed constraints, such as maximum production capacity and delivery date. Through mathematical modeling, Sidhu replicated real-life production runs in a virtual environment. An algorithm search evaluated various manufacturing plans by processing thousands of these virtual production runs; then it offered a selection of the best options. Thus, the software eliminated the guesswork usually involved in production planning. Sidhu’s innovation potentially saved manufacturing companies the cost of holding excess materials inventory or the loss of business due to production delays. Other software capabilities, such as forecasting, auditing production capacity, recording due dates, and monitoring inventory, provided additional information for production run modeling. In effect, Sidhu’s supply chain philosophy facilitated the industrial shift from mass production to “order-driven” production.

DEVELOPING A BUSINESS STRATEGY FOR PRAGMATIC UTILIZATION

Sidhu formed Intellection in 1989 and began to offer software design services in supply chain management. Initially, he developed custom software based on a customer’s existing, proprietary mainframe or minicomputer system. Over time he developed a preconfigured template adaptable to enterprise resource applications. At this point Sidhu created a partnership with Ken Sharma, another TI alumnus. In marketing the software, Sharma contributed expertise as a manufacturing management consultant.

To start the marketing process, Sidhu and Sharma attended a trade show in New Orleans, but they found it difficult to convince potential customers of the validity of their method. Then, in 1991, Intellection found its first major customer in Timken, Co., a multimillion-dollar steel manufacturer. Very quickly after software implementation, Timken observed a 30 percent reduction in inventory, a 50 percent reduction in “cycle time” for steel bar products, and a 25 percent improvement for on-time delivery of finished products. Intellection found another customer in Solectron, a computer circuit board maker in Silicon Valley. Solectron purchased a $500,000 software package and recouped the investment within nine months through a 30 percent increase in inventory turnover and a 25 percent reduction in carrying costs. By focusing on the money-saving potential of their software, rather than the technical specifications, Intellection began to attract more customers. In the years that followed the company obtained business from a number of Fortune 500 companies.

COMPANY PERSPECTIVES

What makes i2 the supply chain company? We focus all our efforts on delivering solutions and services that bring bottom-line benefits to our customers. We’re passionate about leading the charge and setting the standards—for the new generation of supply chain management technology. It’s only through our customers’ successes that we can become truly successful as a company.

Intellection expanded by opening several offices nationwide which provided onsite consulting and customer training. The company formed marketing partnerships with other software sales and implementation companies, such as Baan, IBM, SAP, System Software Associates (SSA), and Marcam. These companies sold i2 software, given the brand-name Rhythm in 1992, in conjunction with other MRP and ERP products, including Oracle and PeopleSoft; in return, Intellection paid royalties on sales. With software packages priced from $100,000 to $12 million, depending on specific components, revenues doubled every year between 1991 and 1995, from $1.6 million in 1991 to $26 million in 1995.

The rapid pace of growth continued in 1996, particularly as the company, by this time operating under the name i2, pursued international expansion. In late 1995, i2 had its software and program manuals translated into Spanish, Japanese, German, and French. Over the next year, i2 opened sales, service, and/or support offices in Australia, Canada, Belgium, Denmark, Germany, the United Kingdom, Japan, Singapore, and Mexico. In 1996 overseas revenues accounted for 26 percent of revenues of $76 million. In 1997, i2 opened offices in Korea, India, Hong Kong, and Taiwan.

After an initial public offering of stock in 1996 raised funds to continue research and development and operations expansion, the pattern of success continued in 1997. That year i2 introduced an upgraded version of its software. Though new competitors in supply chain management software had emerged, including SAP, Oracle, and J.D. Edwards, i2’s upgrades were considered to be at least a year ahead of software offered by these companies. Sales to high technology companies, such as Dell Computer and Compaq Computer, supported i2 sales as well as its technology lead, as no one wanted their competition to have an advantage through the efficiency of the most advanced supply chain management technology available. As such, revenues more than doubled again, to $200.07 million in 1997.

APPLYING EXPERTISE TO CREATE INTERNET TECHNOLOGY

When the Internet evolved as an avenue for the conduct of business during the late 1990s, Sidhu saw the potential value that i2’s supply chain management capabilities might bring to web-based business transactions. In order to apply Rhythm technology to the needs of Internet operations, i2 acquired companies involved in Internet development. Notably, the acquisition of Smart Technologies provided i2 with external, customer-facing e-commerce technology to complement its back-of-the-house supply chain systems. Under the name “Intelligent eBusiness,” i2 launched Internet-based supply chain products which simplified customer order fulfillment through links to one or more suppliers. i2 intended the products to provide a single hub for online trading within an industry community.

The notion of facilitating online trading manifested in the development of TradeMatrix.com, introduced by i2 in October 1999. From the web-based platform buyers could search for the best price of a product based on volume of purchase, and sellers could provide accurate information as to order fulfillment. Working with major software and hardware companies, i2 developed a similar virtual trading hub for the semiconductor procurement in the electronics industry, HightechMatrix.com, introduced in January 2000. To support the transportation logistics element of supply chain management, i2 launched the online service FreightMatrix.com.

KEY DATES

1988:: Sanjiv Sidhu quits his full-time job to develop innovative supply chain software.
1989:: Company is founded as Intellection.
1991:: The company achieves its first successful implementation of supply chain software with a major customer.
1996:: Company, now known as i2 Technologies, Inc., initiates public stock offering; revenues reach $76 million.
2000:: i2 launches online trading and distribution products; revenues reach $1 billion.
2001:: The high-tech investment bust and product integration issues trouble i2.
2003:: SEC probe, NASDAQ delisting, and loss of market share exacerbate problems.
2004:: i2 introduces closed-loop supply chain concept into marketing strategy.
2005:: New CEO Michael McGrath restructures organization; NASDAQ relists i2.

To strengthen its position in the field of business-to-business supply chain transactions, i2 acquired Aspect Development, a major competitor, for $9.3 billion through a stock exchange. i2 gained a database management system covering 17 million parts from 7,000 manufacturers. Another acquisition, of Supplybase, Inc., gave i2 the capability, via the Internet, to match buyers with suppliers of custom parts and assemblies in the high-technology, automotive, medical, and consumer electronics industries. By providing much needed content for supply chain transactions, the acquisition of the two companies would shift i2’s role in e-commerce, from that of portal server and software provider to that of lead contractor for complete business-to-business vendor management projects.

Toward that end, in August 2000, i2 launched the TradeMatrix Network, Internet-based tools for publishing, searching, and managing content. The Discovery Content Management Solution Suite provided a 10,000-product template for the publication of product information on the web. Other capabilities included buyer search and match, customized pricing and contract terms, and collaboration with suppliers. The Supplier Network would provide users access to many of the largest maintenance, repair, and operations suppliers (MRO), accounting for approximately five million products, ranging from janitorial and office supplies to industrial and electrical raw materials.

TURMOIL FOLLOWING HIGH-TECH EXPLOSION

i2 experienced some success with its online marketplace tools, implementing a number of public and private systems; however, progress stalled along with confidence in Internet stocks and high technology in 2000. Disenchantment with the financial performance of high technology companies thwarted investment in the stock market, while disappointment with human limitations to effectively and quickly activate new technologies thwarted investment in large software systems. While i2 attained an achievement highpoint, reporting $1 billion in revenues for 2000, this event occurred along with these market changes and as major problems came to light at i2.

For i2, as for other companies, software implementations often stalled in large-scale, complex customization projects. At i2, such problems reached a climax in February 2001, when Nike missed its sales targets due to an inventory forecasting mishap. Though the software implementation by Cisco Systems involved products from other companies, Nike publicly attributed the problem to i2’s software. As a result of faulty data, Nike shouldered $2.25 billion in excess inventory. The situation caused loss of customer and investor confidence in i2 and the financial problems that followed.

i2’s attempt to address these new difficulties began with Sidhu’s resignation as CEO, though he retained the position of chairman of the board; company President Greg Brady became CEO. Brady attempted a 120-day turnaround plan that included layoff of 10 percent of employees in May 2001 and improvements to sales and service. Yet the damage had been done. After a continual, spectacular rise in revenues during the 1990s, i2 sales declined 12 percent in 2001, to $986 million. Moreover, the company reported an operating loss of $149 million, not including a $7.75 billion write-down in goodwill and termination of certain research and development projects. By April 2002 Brady resigned, and Sidhu resumed the CEO position.

Financial problems persisted as i2 lost significant market share. Potential customers purchased supply chain software from financially secure companies, even though those products did not provide the same quality of capability as i2 software. The company experienced a devastating second quarter in 2002, with a 52 percent decline in revenues, compared to the previous year, and a net loss of $757.4 million. In July, i2 announced another round of measures to reduce costs by at least 30 percent. These included layoffs of as many as 1,400 of 4,800 employees. i2’s focus on the Internet had impeded satisfactory customer service, so the move generated fear that concurrent product implementations might be hindered by staff turnover. i2 pruned nonessential products, closed offices, scaled back system support, and began to relocate some technology development to India.

Two events compounded the turmoil. First, i2 announced a Securities and Exchange Commission (SEC) probe into the company’s accounting practices, requiring a reaudit to begin from 1998. During the reaudit process i2 failed to file its 2002 annual report to the SEC, causing the NASDAQ to stop trading the stock on March 31, 2003, and to delist the stock on May 9. The following July, the reaudit revealed a total revenue reduction of $359.7 million in sales reported as earnings before payments were received. As much as $232 million represented potential future sales, however. Cumulative net losses increased to $297.1 million.

During its financial problems, i2 persevered in restructuring its product line to ease implementation and in restoring customer confidence. In March 2003, the company launched i2 Six, the newest version of its supply chain management software. Master Data Management, the key component to the success of the software, used existing ERP applications to derive critical data for supply chain planning. New features included faster information processing, industry specific templates, and a virtual modeling process that accounted for transportation and other supplier information in real time. i2’s Six software provided a tool kit to ease data integration and workflow development. Customer service improvements involved simplifying communications by assigning account managers to specific customers. Business optimization entailed follow-up to product implementation and flexible software license pricing. Also, i2 developed a plan to analyze persistent problem areas and institute change within 90 days.

With the release of Six Two software, Sidhu began to use new language to more accurately describe i2’s software capabilities, from simply “supply chain management” to “supply and demand chain management.” He emphasized the “closed-loop” approach to supply chain management, a next-generation technology that extended from the planning component to tracking and executing the plan through continuous feedback. With the closed-loop method, i2 sought to compete with broad-based ERP vendors, who had gained market share during i2’s retrenchment. i2 worked with Payless and Bed Bath & Beyond to develop these tools for retail companies, an area of significant sales growth and growth potential. While i2’s confidence increased with a new vision for supply and demand chain technology, customer and investor confidence remained uncertain, as revenue declined, from $494.9 million in 2003, to $389.3 million in 2004.

An infusion of capital in April 2004 supported i2’s goal to resolve the past and turn the company toward stability and profitability. Sidhu invested $20 million to cover a $10 million penalty to the SEC for i2’s accounting irregularities, and Q Investments, a major shareholder and convertible debt holder, invested $100 million. Along with investment came two new board members, one of whom, Michael McGrath, became CEO of i2 in February 2005. McGrath brought several years experience in software consulting, as a principle in a major consulting firm. Having followed i2 for many years, McGrath believed that the company had solid product viability, but the financial organization continued to trouble the company. Along with other cost-cutting measures, McGrath executed a 15 percent reduction in the workforce, from 2,000 people to 1,700. He sold nonessential data and content businesses, garnering $43 million. McGrath applied the funds toward total debt reduction of $210 million.

To generate revenue, i2 focused on its core competency, supply chain management, but with the intention of selling next-generation solutions rather than software licenses. i2 succeeded in selling small, manageable systems that could be broadened incrementally through implementation of complementary software until a complete custom system was in place. Even though i2 continued to lead in supply chain innovations, in order to compete the company needed to provide a more efficient means of delivering services and to provide extraordinary cost savings through complex customization. This meant offering clients a streamlined approach to integration with existing enterprise systems. Toward this end, in June 2005 i2 introduced the Agile Business Process Platform, software architecture for vertical market integration. The flexibility of service oriented architecture (SOA) carried potential to transform the field of supply chain management, so an early lead in this area gave i2 a competitive advantage. Other new i2 products and enhancements, such as its order cycle management process, order hub infrastructure, and transportation logistics capabilities, further solidified the company’s technological lead in handling complex supply and demand chain processes.

The combination of cutting costs and continuing supply chain innovations effected positive change at i2. The NASDAQ relisted the company on July 21, 2005, and i2 became profitable on the strength of new business. For 2005, i2 reported $43 million in net operating profit from $337 million in revenues. Profitability gave i2 maneuverability to position itself for growth. In February 2006, i2 acquired RiverOne, a supply chain software vendor with customers in electronics manufacturing services not served by i2. Also, RiverOne contributed collaboration capabilities to i2’s existing tools. Though the divestment of certain businesses at i2 caused revenues to decline to $280 million in 2006, positive evaluations of its products buttressed investor confidence, and the company’s stock value rebounded to around $30 per share in early 2007.

Mary Tradii