i2: Think Services Play, not Software Vendor

i2: Think Services Play, not Software Vendor

About a year ago, I wrote about my meeting with Azim Premji, Wipro’s chairman. One of the first topics we covered was the relatively modest number of new customers added each quarter by the fast-growing Indian services firms.

Mr. Premji responded by saying that his number reflects “net new customers,” or new business minus the closed accounts. At the time, Wipro had added 37 new accounts for the quarter ending December 31, 2006. Then he said something surprising: “I’d like to get that number to zero.” He said that chasing new business was very expensive and time consuming, and that there is no guarantee of a long-term relationship. He said that Wipro’s strategy is to focus on “must-have accounts.” Other Indian services firms have expressed similar opinions.

i2 becoming more like Wipro?

A few weeks ago, I met with a group of i2 Technologies executives, including Dr. Pallab Chatterjee, the interim CEO. During our briefing, I mentioned Mr. Premji’s comments to the i2 team. Dr. Chatterjee said that he was following a very similar strategy and is shifting i2 to a more intensive focus on serving the existing customer base with an expanded set of software and services. He then described some hosting projects as well as planning and fulfillment outsourcing.

We talked about how i2’s business had changed in the nearly 20 years that I have been following the firm. In the past, i2 often embarked on multiyear transformational projects. The customer would spend a year deciding on a vendor, then use another year or longer to complete the software implementation, and then use a third year (or more) to begin to achieve results.

Customers are no longer willing to wait three years for results. In my meetings with i2 executives, they are confident that they can compress the results cycle to a much shorter time period by focusing on a well-defined set of critical success processes, including “making plans happen,” “lean replenishment,” “supply continuity,” “deliver-to-order,” “matching consumer demand,” and “product profitability.” Each process is modeled after the total quality management (TQM) methodology and has a well-known customer as sponsor.

i2 has about 500 active customers (defined as paying maintenance). To serve the largest customers, i2 has formed 100 customer business units. The list includes companies that have worked with i2 for more than 10 years. The shift to more of a focus on services has been happening since the start of this decade, and can be seen in the company’s financial results. When i2 reported its 3Q07 results November 1, revenue from services and maintenance accounted for 50.2% and 34.0%, respectively, of the $66.5M reported in total revenue.

Will the new strategy makes i2 attractive to services vendors?

Dr. Chatterjee and team don’t have a lot of time to make the new strategy work; investors have been pressuring them to find a buyer for the company. They have to show that they can grow revenue and their market valuation. As I write this, i2’s market cap hovers around $266M. This is about the same as the revenue that the company expects to report for the fiscal year ending December 31, 2007.

The logical list of potential buyers or partners could include any of the major services vendors. Accenture was a key services partner during i2’s rapid growth phase. A deal with i2 could help build its nascent supply chain outsourcing process. IBM has been a customer and a partner. IBM executives will tell you that i2’s demand planning implementation at IBM’s PC division was the most successful supply chain project ever completed at the company. Tata Consultancy Services (TCS), also a long time i2 partner, has been the most aggressive of the Indian services firms in building a supply chain practice. Other firms, like Infosys, Satyam, and Wipro, may be interested in challenging TCS here.

What do you think?

Can software vendors make the transition to a more services-based business? Does i2 have time to make the transition, or will it be forced to sell or wage a messy battle with investors? Are the services vendors the logical suitors, or should JDA Software, Oracle, or SAP step in as partner or suitor?

As always, I welcome your feedback and ideas—brichardson@amrresearch.com.