WHEN SHOE MAKER GIANT NIKE HELD A BOTCHED i2 installation responsible for missing its 2000 third quarter estimate, it marked the turn in supply chain management (SCM) solutions company i2 Technology’s fortunes. The company, which until then had notched up an array of impressive customers, saw confidence and stocks plummet when Nike CEO Phil Knight famously asked, “This is what I get for our $400 million?” referring to the total cost of the integration project.

The Beaverton, Ore.-based sneaker maker saw profits drop by $48 million, year on year, allegedly due to the sort of inventory glitch that i2’s software was expected to solve. The Nike incident was just one of several that saw the business applications maker stutter on its path to the top.

In the heydays of 2000, however, naysayers would have been laughed at. Convinced that the supply-chain market would be huge, Sanjiv Sidhu quit a job at Texas Instruments in 1988 and wrote code in a small Dallas-area apartment. Started as a bootstrap company with no venture capital, i2 filed an immensely popular IPO in 1996; and Sidhu went on to become the richest Indian immigrant in the U.S., with a personal wealth of some $7 billion. The $9.3 billion mega-merger with Aspect Development, a supply chain services company followed in 2000, further pushing i2’s stocks to the roof. And then the bust happened. And with it i2’s bright star began to fall.

The situation came to a head when the SEC launched an investigation, provoked by claims of wrong financial reporting by former employees. A spate of resignations—ranging from head of worldwide sales Reagan Lancaster to chief executive Greg Brady—completed the rout. From historic highs of $120 in early 2000, the company’s shares plunged to $0.41 in late 2002.

The company failed to file its 2002 Form 10-K. A NASDAQ delisting notification followed. i2’s ticker symbol was changed to ITWOE until it fulfilled the requirements of the marketplace.

So what happened to the company that had once announced its goal of generating $75 billion in value by 2005? There are several theories explaining i2’s fall from the top, though perhaps only Sidhu can guess the real reason. One thing is clear though. After beating the drum for SCM loudest and longest, analysts reckon Sidhu may have missed a few tricks during the height of the tech bubble.

Flying too high
Sidhu is widely credited as being one of the first to recognize the opportunity in the supply chain space. Considered a brilliant technologist but a moderate businessman by most, industry insiders reckon Sidhu made a crucial mistake in positioning his company during the heights of the tech bubble. Excited as he was with the technology he helped create, Sidhu might have forgotten that one fundamental aspect of selling hi-tech—software can only be as complex or as simple as the user.

Despite gearing up his company to take advantage of new opportunities, the sudden bust found Sidhu’s business strategy wanting in many respects. Companies wanted results yesterday and i2’s complex projects demanded long implementation cycles. The long cycles saw i2 solutions becoming part of the problem rather than part of the solution. Extended time to ROI meant that i2 software made the very supply chain it was meant to address inefficient. The result—customer dissatisfaction.

Meanwhile, the explosive growth of the company over the previous years saw Sidhu take measures that would normally be contemplated over a longer time frame. Sidhu went on a very expensive shopping trip. But these high-risk acquisitions that would have reaped benefits during a boom time suddenly became dead weight, dragging i2 down.

Most analysts point the finger at i2’s aggressive expansion plan as reason for many of its current woes. “As in the old Icarus myth, i2 flew too close to the sun and got burned. It grew too fast and was unable to provide customers with promised functionality in a form that they could easily use. i2’s sales force over-promised and under-delivered,” says Karen Peterson, Vice President, Research Director and principal i2 analyst at Gartner.

i2’s aggressive expansion catalyzed what was always waiting to happen. It rendered i2’s cost structure very high. The company needed huge revenues in order to render its sales and development resources viable. And that sort of revenue growth never materialized. Added to that were persistent rumors of customer dissatisfaction with the company’s technology.

Negative Mindshare
In fact, customer dissatisfaction is at the crux of i2’s recent troubles. A research report by Nucleus Research Inc., a ROI analysis firm, was the final nail in i2’s post-bust coffin. The report quoted an unnamed i2 client as saying, “What killed ROI was the fact that i2 priced their modules based on an ROI calculation that they themselves estimated during the sales process. They forecasted saying this would lead $40 million in benefits. There are definitely benefits to the solution but their pricing is too high.” Another company, whose deployment was two years behind schedule because of problems with consulting and i2 software said it would independently evaluate ROI rather than rely on i2’s estimates.

Sidhu countered the allegations of customer dissatisfaction at a recent Goldman Sachs symposium. “I believe we took care of customers, improved customer satisfaction measures, actually improved product quality.” Analysts however feel that while Sidhu has successfully undertaken steps to turn the company net cash positive and has significantly decreased cash burn, i2 is yet to alleviate the pressure put upon it by the negative mindshare that it has developed within the market. “i2 had a huge amount of positive mindshare in the Supply Chain Management and B2B markets a few years ago. In many software selections, teams would select i2 merely because they were the de-facto leader. Today, that mindshare is exactly the opposite. Because of customer dissatisfaction and its reputation for complexity, prospects are concerned about partnering with i2,” says Pranav Kumar, also of Gartner.

“There are a lot of misconceptions about i2 that we take too long to implement. We typically do complex implementations that take time,” says Sidhu. He however agreed the company did not execute as well as it should have in the changing market conditions. “We have changed our business models to suit current market challenges. We now do smaller implementations and we are proving that we do those implementations faster than anyone else.” Sidhu assured. The million-dollar question is, will this be too little, too late? The reviews are mixed.

Playing Catch Up
For i2, a lot still hinges on its ability to attract enough revenues during what looks to be a pernicious downturn. The entry of various Enterprise Resource Planning (ERP) vendors who offered internal integration between ERP, SCM and Customer Relationship Management (CRM) appealed to many users who were wary of the difficulties of integration, further endangering the prospects of companies like i2.

Says Kumar, “Being essentially a one product company, i2 was hurt more than ERP vendors who had created a portfolio of applications, which helped them weather the slowdown better.” One way to go for i2 would be enter into niche areas in which neither itself or the ERP vendors operate. With companies like Rapt Inc. and DemandTech that compete with i2 in specific segments having fared significantly better than i2, Sidhu might want to look at strengthening his offerings in niche areas.

A decade and a half after inception, the industry has changed, and so has i2’s place in it. The industry has numerous players hack up the market. Meanwhile the company also finds itself competing with Enterprise Resource planning vendors who provide internal integration between various suites. Sidhu can take heart from the fact that i2’s current situation is not unlike the one faced by most companies in the enterprise applications software domain.

The key for i2 then, is to reinvent itself in view of the dramatically changed environment rather than trying to play ‘catch up’ with other vendors.