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Oracle and SAP are Big Software, but for how long?

Choked by the cloud, or death by a 1,000 cuts

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When Oracle announced disappointing third-quarter results in March 2013, executives at the company were quick to blame poor sales execution for a two per cent decline in new software licences and cloud software subscriptions.

It wasn't a symptom, they insisted, of underlying problems with the company’s product portfolio - or with customer appetite for those products.

“Our product portfolio is as strong as it has ever been and we won more than our fair share of deals,” Oracle president and chief financial officer Safra Catz told financial analysts on an earnings call. The problem, she said, lay with recently recruited sales executives: “Clearly we have work to do in training new reps on managing the sales process and the importance of establishing a quarterly rhythm with their deals.”

Some of those financial analysts disagreed. Their response was to question Oracle’s broader enterprise licensing model in general and its approach to cloud technology in particular.

“While management pointed to sales execution as the primary issue, we have a hard time believing that almost all the legacy software names are suffering from poor sales execution at the same time,” wrote Peter Goldmacher, an analyst at investment bank Cowen, in a research note.

“We believe that the primary issue is a fundamental shift in the technology landscape, away from legacy systems towards a new breed of better products at a lower cost both in apps and in data management,” he continued.

According to Cowen, software trends such as cloud computing are having a “deflationary impact on spend” and, as a consequence, “our confidence in the renewals business [of companies such as Oracle] is waning”.

That could spell bad news for Oracle, as well as its main enterprise software rival, SAP. Simply put, the shift to cloud-based enterprise apps of recent years is now so pronounced that, for many technology buyers - particularly those at small and medium-sized businesses - the cloud-based software-as-a-service (SaaS) model is simply a more logical option than on-premise apps.

Swallow the red pill and enter the Matrixx

Take, for example, US-based pharmaceuticals company Matrixx Initiatives, which manufactures over-the-counter cold and flu remedy Zicam. When executives at the company learned that Oracle’s support for the JD Edwards system it uses to run financial accounting was due to end, they decided to explore newer, cloud-based alternatives.

Over the course of his career in pharmaceuticals and consumer packaged goods companies, Matrixx chief financial officer Sam Kamdar has worked with many on-premise enterprise resource planning (ERP) systems. He says that he knew early on in the procurement process for a replacement that the company would not go down that route again.

“We considered an upgrade from Oracle, but my big concern was cost. I’ve worked with SAP in the past, and it’s a good tool, but it offers far more firepower than we need here at a medium-sized business,” he said.

“My experience with on-premise software was that, every time an upgrade was required, it was an orchestrated, resource-intensive activity. It’s an area I just didn’t want to have to worry about any more,” he added. “As a CFO, I considered total cost - the acquisition cost of a new on-premise system, the ongoing maintenance required, the need to employ IT staff to manage in-house servers - and decided that on-premise just wasn’t viable for us.”

At the same time, he said, a SaaS system was also attractive to Matrixx because it would make it easier for staff in its New Jersey and Arizona offices to access the same information, over the Internet. “And just because we’re a medium-sized company today, that doesn’t mean that our aspiration is to remain medium-sized,” he said, “so I liked the idea of SaaS because it was an approach that was scalable, that would enable me to add new staff to the system quickly and easily as we grow.”

In the end, Matrixx Initiatives decommissioned its JD Edwards system and migrated to a SaaS package from NetSuite.

Other technology decision-makers are reaching similar conclusions, said Chad Eschinger, an analyst at IT market research company Gartner. “Continual cost pressures on business drive the search for less capital-intensive alternatives and for opportunities to operationalise costs,” he explained, referring to the regular subscription-based payments, made out of operational expenditure, that customers give to SaaS providers.

“Rising maintenance fees, upgrade costs, end-of-support issues and business disruption due to ERP upgrades from suite vendors, such as SAP and Oracle, can strain budgets and encourage buyers to entertain other options and other vendor choices, especially when faced with costly maintenance renewals," he said.

This shift to the cloud - and to SaaS vendors - presents Oracle and SAP with a situation that many industry-watchers are referring to as the "innovator’s dilemma", after the influential 1997 management book of that name by Clayton Christensen. In the book, Christensen describes how successful companies that fail to adopt new technology or business models to meet customers’ future needs can quickly fall behind, their power and market position usurped by smaller, more agile competitors.

Taken at face value, then, that school of thought suggests Oracle and SAP - the two largest ERP vendors in the world - have had their day and face an uncertain future, as SaaS disrupters, such as Salesforce.com, Workday and NetSuite, snatch up deals from under their feet.

The truth, of course, is more nuanced. After all, both SAP and Oracle have made their own substantial commitments to the cloud model, both through acquisition and their own internal efforts. In December 2011, SAP bought SaaS human capital management (HCM) provider SuccessFactors for $3.4bn - 11 times its annual revenues - and the company has invested heavily in its own SaaS product, Business ByDesign, over a number of years - albeit with mixed results.

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