How Oracle gets customers to keep paying

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.
Written by Dennis Howlett, Contributor

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]

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