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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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Oracle's $3.4bn U-turn on cloud computing technology

And after several years during which cloud technology was dismissed by Oracle CEO Larry Ellison as “idiocy” and “nonsense”, Oracle paid $1.5bn for cloud-based customer service provider RightNow in October 2011, following up that deal with its $1.9bn purchase of HCM provider Taleo in February 2012. At the same time, it is aggressively pushing its Fusion Apps, available for both cloud and on-premise deployment, again with variable results.

These efforts suggest at the very least that executives at both companies are aware of the threat that cloud software poses and will not give up without a fight. At the same time, however, they are understandably reluctant to make any wholesale shift away from the on-premise model in which customers annually pay around 22 per cent of their initial licensing price in maintenance fees - a line of business that delivers profit margins in the region of 90 per cent. In other words, the two big ERP leaders are still deeply wedded to the on-premise software model.

At the same time, that commitment to on-premise continues among the two firms' largest enterprise customers: few are ready to ‘rip and replace’ existing ERP installations, which represent years of implementation and upgrade work and, in many cases, millions of dollars of IT investment.

However, there’s evidence that while many continue to use their existing on-premise ERP systems for core back-office processes, they’re open to the idea of plugging in more flexible, cloud-based software to address newer processes and emerging employee needs.

'Fewer companies ask ‘Why cloud?’. Now they ask ‘Why not cloud?’

Two such areas are sales force automation and human capital management, both focuses for Appirio, a seven-year-old, San Francisco-based cloud integrator that has helped over 500 companies implement SaaS applications from Salesforce.com, Workday, Google Apps and Cornerstone. These are not small companies, either, says Lori Williams, Appirio’s general manager of European operations. They include coffee chain Starbucks, beauty firm L’Oreal, pest control company Rentokil and automotive giant Toyota.

“Over the last year we’ve seen fewer and fewer companies here asking ‘Why cloud?’. Now they’re asking ‘Why not cloud?’ instead,” says Williams. “It’s about seeing value early from SaaS applications, rather than in 18 months or 24 months with an on-premise implementation. Big companies that are looking at a Salesforce or a Workday have baggage from previous systems that they’re trying to move away from. They’re looking for a different way. They’ve lived through the legacy way - the big, legacy, on-premise projects with lots of people and lots of money involved.”

That view is echoed by Chad Eschinger at Gartner: “Deployments are becoming larger and are requiring global-scale capabilities, moving historically from small or medium-sized business to thousands to tens of thousands of users within large enterprises.”

And, more ominously for SAP and Oracle, he notes a shift to SaaS being used as a replacement for existing functionality, rather than for new functionality. “SaaS’s cannibalisation of decade-old enterprise software systems is starting to accelerate,” he says.

For the best part of two decades, smaller tier-two and tier-three enterprise applications vendors have regularly talked about ‘taking on’ SAP and Oracle, but such talk was typically marketing hubris. Now, there’s a real sense that they can smell blood.

At Unit4, an enterprise applications company with a strong foothold in European public sector organisations, for example, UK managing director Anwen Robinson recently invited the two companies to “bring it on”, following two big customer wins that will see Unit4’s cloud-based software replace installations of SAP and Oracle.

The largest of these is a contract with the UK Department for Transport, where Unit4 will replace SAP in a share service centre outsourced to managed services company Arvato.

The second major deal sees Unit4’s Agresso Local Government ERP platform replace systems from Oracle and JD Edwards for 15,000 users of finance and human resources modules in London’s Tri-borough area (which includes the boroughs of Westminster, Kensington & Chelsea and Hammersmith & Fulham).

“These are milestone deals for us, but we’re seeing more and more - in both the public and private sectors - that there comes a point where people are simply not prepared to pay through the nose, year after year, for SAP and Oracle,” says Robinson.

If SAP and Oracle are outwardly maintaining their bravado, while talking up their own cloud capabilities, it’s clear that, behind the scenes, serious discussions are taking place about how they can realistically straddle both worlds of on-premise and cloud software and fend off the upstarts.

In a leaked email last year, for example, the head of SAP’s cloud business Lars Dalgaard - the former CEO of SuccessFactors - named Salesforce.com and Workday, “the two cloud companies most likely to hurt SAP’s customer base.”

That, of course, is a longer term view. For now, there are plenty of customers who are just not ready or willing to shift from large, on-premise ERP implementations. If that model is to fade away over time, it will be a death by a thousand cuts. Even cloud software’s biggest fans predict a hybrid future, with continued dependency on licensed, on-premise software for at least a subset of their core operations.

Adrian Simpson, chief innovation officer, SAP UK & Ireland, said it's precisely this ability to offer something more than an either/or choice, that gives the firm an advantage over the upstarts.

“SAP is unique in being the one software vendor that offers our customers the real choice between on-premise and cloud... We see the markets as completely complementary to each other and, as our recent results have demonstrated, we see real growth in both areas.

"A great example of our continuing innovation is this week’s announcement on SAP HANA Enterprise Cloud," he argued. "Now our customers can pick the right choice for them by either working with their hardware vendors to get on-premise SAP HANA solutions in their own data centres, or choose to implement a purely cloud based system supported and delivered by SAP."

Among small- and medium-sized businesses, however, many agree that the growth of SaaS looks set to continue at a heady pace - and while SAP and Oracle have primarily built their multi-billion dollar businesses on selling to large enterprises, market saturation at the top end of the market means that selling to smaller companies is increasingly important to them.

In their efforts to stave off the encroachment of SaaS vendors, they might be well advised to heed the warning of Clayton Christensen in The Innovator’s Dilemma: “Survival depends on being able to disrupt yourself. Once you let others disrupt your business, you are heading down the path to death.” ®

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