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JDS Uniphase outsourced some key enterprise software at the height of the tech bubble. Amidst a brutal retrenchment, that deal is about the only thing that's worked out as planned.
Almost five years ago, JDS Uniphase Corp., a go-go growth company that made super-high-tech optical components, signed a deal with Oracle Corp. to outsource its enterprise resource planning software, using an application service provider model that was supposed to be the next next thing in corporate information technology. It was a marriage made in hype heaven.
Then everything went south. The telecom-equipment business withered, taking JDSU with it. The company's $636 million in revenue for 2004 is less than half its 2000 sales, and JDSU now employs only 5,500 people, about a third as many as it did during the bubble-era glory days. JDSU stock is trading at a recent $3.14 per share, just a tiny fraction of its all-time high of $153.42, in March 2000. Meanwhile, the ASP model of software provision, now known as "software as a service" or simply "application hosting," failed to conquer the enterprise market. Most large companies still buy and manage their own enterprise applications.
Company | JDS Uniphase Corp.
Corporate Headquarters | San Jose, Calif.
CIO | Al Etterman
Revenue (fiscal 2004) | $635.9 million
Net Loss (fiscal 2004) | $115.5 million
Stock Price | $3.14 (Jan. 4, 2005) 52 week high-low: $5.89$2.84
On the cost-cutting side, JDSU managed to reduce its IT staff by about a third by outsourcing the hosting and management of its database and ERP software to Oracle. But that's not all: The deal also allowed the company to eliminate hardware, minimize disruptions from upgrades, and centralize service and support for users for all that software; Oracle now handles almost everything to do with routine operation of the company in terms of orders, financial data, human resources and so on. Every JDSU employee around the world can use the Internet to access a single installation of Oracle database and ERP software hosted on servers in Austin, Texas.
The hosted strategy has served the company well, says Juergen Rottler, executive vice president in charge of Oracle's On Demand software-as-a-service unit, in part because the arrangement has been flexible enough to cope with both rapid growth, before the bubble burst, and with the ensuing slowdown.
The offensive angle to outsourcing, preached by Etterman as a way to kick-start the company, is based on creating closer relationships with customers. For starters, the single, centralized database allows JDSU to share information across the company in real time, which helps make it easier for customers to do business with the firm. For example, a customer buying a variety of different lasers and attenuators that are manufactured at different facilities can generate a single purchase order and receive a single shipment. "We need to be aggressive in our approach to advancing technology and improving the customer experience," says Etterman. "I'm responsible for multiple functions to improve customer experience, and I work with and for customers."
But the real payoff will come if the software can help JDS Uniphase sell more sophisticated (and profitable) products than its traditional offerings, which have increasingly become commodities. Created through a series of high-profile mergers and acquisitions in the late 1990s and early 2000s, JDSU grew by selling optical components and modules to makers of high-end telecom equipment. But the company has staggered over the past few years as customers scaled back purchases in the face of overcapacity fed by a prolonged downturn, just as the technology behind its products was becoming more commonplace. These days, communications products represent about 50 percent of sales; the rest comes from specialized optical products used to create things such as high-tech paints that change with the light and forgery-proof identification marks for currency and pharmaceutical-product labels.
Still, it is the communications gear that is expected to drive any recovery, and that remains a very tough market. "Prices dropped a lot on their components, and they will never again see sky-high margins on things like long-haul transceivers," says Chris Dzurinko, a senior equity analyst with American Technology Research Inc., in San Francisco. "They really get whipped around by customers higher up the food chain. Big companies like Juniper Networks and Cisco Systems have leverage over their smaller suppliers, and their tight inventory management has made life hard for JDSU."
Many of JDSU's problems confront the entire optical-component sector. JDSU, which had a net loss of $116 million in fiscal 2004 (ended June), after taking substantial write-offs in 2001 and 2002, looks relatively less troubled when viewed alongside its top two competitors: Avanex Corp., which includes operations acquired from Corning Inc. and France's Alcatel, has lost money for years, and Bookham Technology PLC, which bought units of Nortel Networks Corp. and Marconi Corp. PLC, also continues to struggle. JDS Uniphase has made its own mistakes, with quality problems plaguing the components it provides for big-screen television manufacturers, and slow integration of some acquisitions into a coherent strategic plan.
Now the industry is pinning its hopes for a recovery on the introduction of higher-end, integrated products. "They have to go up the value chain to get their margins back," says Dzurinko. "The more you can move up the value chain and get better margins on what you sell to the Nortels and the Siennas, the more you are relevant." The opportunity is there, he says, as the equipment makers have cut their research-and-development budgets in the face of their own problems, and may therefore share more design work with their suppliers. "If [JDSU] can build subsystems to spec, that's the Holy Grail."
The centralized ERP and database software is supposed to help in this effort by coordinating JDSU's geographically dispersed design and production facilities. Even after a grueling two-year retrenchment that vaporized thousand of jobs and closed more than two-dozen manufacturing sites, the company operates at 14 locations, including an increasingly important manufacturing plant in Shenzhen, China. "The single, consistent database is critical if we are going to have rapid growth," says Enzo Signore, JDSU's director of product marketing. There are signs that this may happen, he says, citing the example of workers at the Shenzhen plant who recently started production on a new productwithout special trainingby using design specifications drawn up in California and made instantly available on the global network.
That kind of performance, says Etterman, shows how the hosted software can power the company's drive to use technology in support of the business strategy. But no matter how well the Oracle project has worked, there are some things Etterman says he would not consider outsourcing, including the human intelligence of the business-systems analysts who maintain the relationship between the technology organization and the functional units. "We're morphing those jobs to be less technology focused," he says. "We would never outsource them, because they are critical to making the business work."
This was the big idea, circa 1999: Corporations would rent their enterprise software from Application Service Providerseither traditional vendors or purpose-built companieswhich would charge customers based on their usage of remotely hosted and seamlessly integrated suites of products. The reality, however, has been steady but unspectacular growth for hosted enterprise software, as cautious CIOs continue to work through concerns about underperforming applications and financially shaky service providers, along with larger cultural issues such as the wisdom of parking one's critical data outside of one's immediate control.
"There were all kinds of lofty predictions for the market, but the optimistic feeling didn't take into account the barriers to adoption," says Amy Konary, an analyst with IDC who has followed software-as-a-service for several years. But those barriers have been steadily eroding, and the growth curve is getting steeper. U.S. companies spent $2.3 billion on hosted software in 2003, according to IDC, a 35 percent jump from the previous year. "It's making some waves, and a lot of people are paying attention today," says Konary.
Some of the previous obstacles to CIO acceptance have been overcome, such as performance issues arising when software written for client-server environments was used on the Web. Now more applications are designed with Web delivery in mind, and that trend should continue; as many as 60 independent software vendors signed up in 2004 for an IBM program that helps make their products work better in a hosted context.
Oracle On Demand has been Oracle's fastest-growing business segment for several quarters in a row, Oracle's Rottler maintains. "We are seeing significant demand across our entire customer spectrum," he says, including the middle market, where customers tend to purchase highly standardized, utility-style services for Oracle applications, as well as larger, global enterprises. JDSU remains one of On Demand's flagship customers, even in its atrophied state. "We have maintained a significant level of business with them as their business has changed," Rottler says.
Still, only about 30 percent of IT managers surveyed by IDC are using some sort of software-as-a-service. Among the leading enterprise customers for software services are users of products from Computer Sciences Corp., which are specifically designed for such industries as financial services, says Konary. Another key player is Salesforce.com Inc., the upstart vendor of customer-relationship-management services on the Web, which has started to gain favor within divisions and regional units of large companies.
Even so, the market is not developing quite along the revolutionary lines predicted a few years ago. Most companies of any size, including JDSU, prefer to own their software licenses rather than rent them. "This is still not the pay-by-the-drink model," says Konary. That's true for software hosted by vendors such as Oracle and SAP, and by third parties such as Usinternetworking Inc. and Corio Inc. Salesforce.com also charges a flat rate for its services.
CIOs still have questions about customization and integration in complex enterprise environments, says Konary, often viewing their particular combination of packaged and legacy systems as too complex for anyone else to manage. The question of security still bothers some companies, too. How real are those issues today? "They are real until you sit down and look at what's new out there in terms of security and software maturity," she says.
The decision to create a single-instance architecture was made shortly after the seminal 1999 merger between JDS Fitel and Uniphase Corp., which formed the basis of the current company, and JDS Uniphase went live on its hosted Oracle software in May 2000. As new companies were acquiredJDSU was built from more than 40 different mergers and acquisitionsthey were brought onto the system in short order. Given the service's steady performance, any initial concerns about such issues as security and performance have long since faded away, says John Abel, the company's director of global information technology.
JDSU has increased the functionality of its hosted systems over time. "Oracle gives us the core backbone of what we need, and we have added complementary systems that are hosted at the same location," says Abel. "We started with the core ERP, and added things like our own, internally built data warehouse." Centralized applications for finance and order processing were added in 2002, concurrent with an upgrade to Oracle 11i. "The upgrade was like flicking a switchit was completed over a weekend for all our sites at one time," says Abel. "There was no real business downtime."
The partnership with Oracle has endured as JDSU has changed its business processes to accommodate lower-cost, offshore manufacturing and altered its product mix. Along the way, the IT group's business-systems analysts have looked for ways to leverage the hosted system. One example: An analyst suggested that more of the information available online to customer-service representatives be made accessible to the customers themselves; the result was an online order-status function that allows customers to check on the progress of their orders without making a phone call, which means savings for JDSU and faster service for customers.
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Abel's advice for companies considering a move to hosted software is to plan carefully. Switching a major software system to an outsourcing provider can mean making a big transition all at once. "The key is to test, test, test," he says. "Don't do it during your busiest quarter, or at the end of a quarter. Make sure you have enough support coverage to handle issues for the first 60 to 90 days. The goal should be to have things in a steady state before you reach the end of your first quarter."
JDSU will continue to look for ways to outsource software, he says. "We will look at doing more. At this point, we think it's fairly routine."