How Oracle gets customers to keep paying

How Oracle gets customers to keep paying

Summary: The digital ink was barely dry on my post highlighting Ray Wang's findings around software maintenancebefore I was fielding a call with one of Oracle's big customers. I mean big and with a name you'll all know as a national treasure.

SHARE:

The digital ink was barely dry on my post highlighting Ray Wang's findings around software maintenance before I was fielding a call with one of Oracle's big customers. I mean big and with a name you'll all know as a national treasure.

It turns out that at least some Oracle users are getting mighty tired of forking over a minimum of 22% for maintenance costs when they see what were quoted to me as 'obscene margins.' These are not just minnows but some well known names.

Welcome to the quiet customer uprising. SAP got a heavy dose of the customer backlash after raising maintenance fees last year. Is it Oracle's turn for 2010?

Just a reminder, Tom Wailgum has dug over this one suggesting Oracle makes 92% on maintenance. It needs that to bolster a business which is hemorrhaging profit to the tune of some $800 million in the remainder of the Oracle empire. If that analysis is correct, then these are not trivial numbers.

It has astonished me that every quarter, Oracle appears to defy gravity, reporting an ever increasing flow of maintenance revenue. How could it do that when Ray's analysis suggests a significant number of customers are considering third party maintenance while SAP has had a titanic struggle to get on parity with Oracle? It just doesn't compute, even after factoring in the maintenance streams coming from past acquisitions.

The line I hear trotted out is that Oracle has some great sales people who know how to keep the cash cow producing milk. But then you'd have to wonder: is SAP so poor that it can't do the same? I'm not a fan of sales people but SAP's co-CEO Bill McDermott could sell SMEG fridges to eskimos and make them feel pleased to have paid the premium. For all his faults as CEO and yes he ticked customers off, SAP's Leo Apotheker built one of the most efficient and formidable sales engines you'll find in any industry. Period.

So what is it about Oracle that makes them look so smart?

During our conversation, my correspondent told me that Oracle uses what I'll call 'sniffing' technology. I walked away from that conversation with all sorts of thoughts buzzing through my head. I have since checked the veracity of my correspondents' statement and have had what was said confirmed. Then a whole bunch of pennies started to drop. Having that ability means:

  • Oracle 'knows' what its customers are using.
  • It can be pretty sure whether the customer is handing over all that it should or otherwise.
  • It explains why in past analysis, Ray Wang estimates that Oracle audits only unearth about 6% of customers who are out of license to fee scope. That alone provides it license and maintenance fee leverage.
  • Oracle knows how and what to cross/upsell when the time is right because it can 'see' what the customer is doing and already knows about usage patterns across its customer portfolio.
  • It explains how Oracle was able to assemble a comprehensive case against TomorrowNow, biding its time until it could inflict the sharpest pain to SAP.
  • It may explain how it has managed to launch a similar lawsuit against RiminiStreet.

It is Oracle's right to protect its business by any legitimate methods at its disposal. But if that's at the expense of meeting customers' real needs at a price at which customers balk then they need a wake up call that reminds them who is filling their coffers.

The 22% and up margins Oracle enjoys enable founder Larry Ellison to compete and win in the America’s Cup with a $10 million + gravity defying space ship-like trimaran, “a boat that can squeeze 40 knots out of 20 knots of wind and might yet become the fastest racing yacht ever known“.

My sense is that customers are ready to give Oracle a sharp dose of what SAP experienced in 2008-9. My correspondent is far from alone and I have been told that customers are shedding their fear of Oracle. Some are prepared to speak openly about issues they see as tantamount to abuse of the vendor/customer relationship. Don't get me wrong here. I know many Oracle customers, devs and DBAs who love what Oracle offers. I also meet enough past and present Oracle people to know that they have just as many great people doing outstanding work as any other tech company. That's not the point. We're talking about a firm and industry level problem that will not go away. It just happens to be Oracle's turn to be put under the spotlight.

Despite all the great things Oracle has done in the past, customers are becoming disillusioned with the financial penalty. The word is:

  • Fusion will be heavily diluted in an effort to get something out the door in 2010,
  • JD Edwards' forward development has pretty much become stagnant,
  • There are growing concerns over Oracle's ambition to resurrect the ghost of Tom Watson as Oracle moves towards becoming the 21st century IBM, while
  • Oracle remains firm that it will not budge on 22%.

And that's just the tip of the iceberg. There is a growing laundry list of issues with which customers have concerns.

Regardless of how you cut it, water down any implied hyperbole, call it poison if you want that has been dripped in my ear, vendors play a very dangerous game when they under estimate the power of ticked off customers. And if it was just one customer then I'd shrug. But this is not new and Oracle is keenly aware of the implications. It is already deploying counter measures.

Related: Art of the software deal can get messy

I am told Oracle is trying to gain some measure of control over the user groups. It does that by offering financial support to events but...and here's the kicker...it wants to control the message. No surprise there but user groups that allow this to happen dilute their ability to push back. Those with which I have spoken tell a tale that sounds horribly familiar: we feel locked in, we are met with carrot and stick approaches when we try push back, we no longer feel empowered to speak with Oracle on anything that resembles an equal footing.

Is it any surprise then that I find the illustration at the top of this post appropriate?

[Original image found at: Life on the Edge]

Topics: SAP, Banking, Enterprise Software, Oracle

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

59 comments
Log in or register to join the discussion
  • Love it!

    I can learn a few things from these folk!





    http://fakesteveballmer.blogspot.com
    Windowsseven
  • interesting

    dennis, interesting read.

    but you have to smuggle in apple, microsoft or google into
    your headline somehow, otherwise no one will read your
    post. sad, but true.
    bannedfromzdnetagain
  • Perlow-class header graphic

    Fantastic
    jperlow
    • wow, mr. perlow

      you are really in a class of your own ...
      bannedfromzdnetagain
  • mission-critical db vs failed SAP projects

    Oracle gets away with it because they sell a mission-critical, irreplaceable, necessary product. The only time you hear about SAP in the news is with failed projects and stuff. Once you've bet your business on Oracle, you're going to pay them whatever they want. In the enterprise class, Oracle does things no other database except DB2 can do (and compared to IBM, Oracle's fees may be a bargain)...
    scott1329
    • Sort of true

      The DB argument is strong but it isn't unassailable. Companies do switch
      but agree it doesn't happen that often.
      dahowlett
    • Oracle does it better?

      Yes, there are things that Oracle does that other DB's don't, but there are also things that the others do that Oracle doesn't. It's not an even playing field by a long shot.. And SAP runs better and chaeper on MSSQL.. end of story.. if you are running SAP, do it on MSSQL and it will run faster and cost you significantly less..
      ursulus
      • Or DB2 for big Db's Oracle STINKS at large

        DB's
        TheBottomLineIsAllThatMatters
    • LOL now that is funny...we use both in fact

      Oracle lives on SAP and vice versa, but Oracle could learn a few things from SAP.
      TheBottomLineIsAllThatMatters
      • And Oracle has been trying to be SAP

        for years...and still haven't completed that task.
        TheBottomLineIsAllThatMatters
  • RE: How Oracle gets customers to keep paying

    Oracle is now going through one of their periodic service slumps in terms of having people at My Oracle Support who can actually solve problems. No way is it worth 22% for this kind of service.

    Allan Nelson
    anelson77388
  • More inter-vendor hypocrisy

    "...vendors play a very dangerous game when they under estimate the power of ticked off customers."

    Here we are again using the terms "vendor" and "customer" as if they're mutually exclusive groups.

    One company's customer is another company's vendor. And hypocrisy - perhaps even a little obscene margin jealousy - rules the day.

    When Oracle's big "national treasure" of a customer starts paring back its own padded margins and quits "overcharging" its own customers, then perhaps it'll be in a position to point fingers.
    josephmartins
    • Here we go again

      Yes, there is a symbiotic relationship but I can assure you I am not making
      this up. What the customer believes is another matter entirely and I will
      not simply push back with that argument since it is redundant to their
      beliefs in THAT relationship.

      You've got it wrong in your last para. When I am given full permission to
      release the name you might reconsider.
      dahowlett
      • I might reconsider, Dennis, but I doubt it

        I wouldn't suggest that you push it back at them so much as I would suggest that they should take a long hard look in a mirror.

        Whether they're padding margins in administration, consulting, maintenance, products or other services the skeptic in me "knows" that they're doing it somewhere within their organization.

        The perception of whether their margins are "reasonable" or "obscene", frankly, is subjective. There's no universally acceptable percentage.

        As an aside...

        While I'm aware that the following is an apples and oranges comparison, I cannot help but wonder if these same individuals complain about the obscene contracts of their favorite athletes - players who receive tens or even hundreds of millions of dollars for what amounts to playing with a ball.
        josephmartins
        • Philosophical

          I love these debates and yes they can be expanded. But then we'd fall foul
          of $ORCL's explicit 'divide and conquer' intent. Let's all be careful what
          we're doing here and what this might mean for clients.
          dahowlett
  • There is no lock-in anymore!

    What many customer have yet to realize is that the lock-in which is one core ingredient to high margins is actually all but abolished with
    IBM DB2 9.7 and EnterpriseDB's PostgreSQL Plus both being able to enable Oracle applications comparatively painlessly through built-in Oracle SQL and PL/SQL dialect support.

    http://tinyurl.com/Oracle2DB2Wiki

    Cheers
    Serge Rielau, IBM
    SQL Architect for DB2 for LUW
    srielau
    • Lock-in isn't about the specific application....

      It's about the system as a whole.

      While one can certainly design to a specific application, and be "locked into it" to some extent, it's the environment/system/implementation as a whole that ultimately "locks" one in. And that includes the collection of applications, integrations, custom widgets, workflows, repositories, etc.

      In that sense, Oracle and IBM are two peas in a pod and want to own as much of a customer's environment as possible.
      josephmartins
      • It's complicated

        ...like all marriages of a certain age. But yes - you are correct in the
        generality. It will be interesting to see just how far internet applications go
        in breaking down those dependencies...maybe quite some time away.
        dahowlett
        • Shotgun wedding?

          This sounds more like a shotgun wedding than a marriage. In the case of Larry Ellison he will use a shot from a 155-mm howitzer rather from rock salt from a 12-gauge.
          phatkat
  • And yet Oracle's support quality is declining

    We've become entirely disenchanted with Oracle's support after they took over PeopleSoft. Oracle's latest debacle is their recent move to an all Flash-based support portal which is incredibly unstable and error-prone. We've had Oracle consultants on site who when this new site is mentioned are more vociferous in their displeasure with the support site than we are, citing how the documentation that is stored on it is virtually unsearchable now.

    The sketchy support services we're receiving do not justify the outrageous support costs Oracle is demanding.
    ejhonda