News Analysis: Oracle Waives Fees On Extended Support Offerings

Oracle President Charles Phillips pleasantly surprised Oracle Applications User Group (OAUG) Collaborate 09 attendees this morning during his keynote with the decision to waive Extended Support fees for a number of product lines through 2010 and 2011. As customers and prospects face one of the worst global economic crises, proactive relief on support and maintenance fees could not come at a better time.  Summary details of the program can be found in Figure 1.

Figure 1. Oracle's Revised Support Policies

(Source: Oracle Corporation)

Proactive change in support offering creates a win-win

Oracle's move to address the support issue may stem from a variety of reasons but the main focus centers around improving the vendor-client relationship for a few reasons:

• Responding to the global economic crisis.  Oracle has taken the initiative in listening to customers, partners, and industry watchers about customer reactions to the escalating costs of software maintenance.  Oracle's Applications Unlimited and Lifetime Support Programs have been successful in retaining acquired customers and have shown customers that acquisitions need not be slash and burn with minimal reinvestment.
• Providing more time for customers to adopt Fusion Apps. With the slow down, Oracle may be anticipating slower upgrade rates.  While no clear date and product road map has been communicated to customers, removing the price pressure on extended support fees provides customers with some breathing room on upgrade timing.
• Mitigating attention on high profit margins and its M&A strategy. After touting record profit margins near 50% and continuing its M&A strategy with the announcement to acquire Sun, customers have become concerned about the impact of less choice in the market.   This move may appease regulators and industry watchers and show that Oracle has some self regulating policies.

The bottom line - user groups should now determine the minimum R&D percentage of investment from revenues

Oracle continues to gain economies of scale with each acquisition.  The good news - Oracle has the capacity to reinvest $2.6B per year into R&D and the real dollar amount has increased from 1.9B in 2006.  While this is a large figure, the bigger and more important issue - what percentage of the maintenance revenues have been reinvested?  Here's where we find a slight drop from 12.6% to about 11.6% in 2008.  Consequently, like SAP's users and user groups, OAUG and the other Oracle users and user groups should begin to track the ratio of R&D dollars that tie back to the amount of maintenance revenue.   In fact, they may want to take a look at the SUGEN KPI's and see if they are applicable to Oracle's environment.  R&D spend from maintenance and the need for Third Party Support options will be the key ownership issues for the next 5 to 10 years.  In any case, the need for preserving and strengthening independent user groups will be one effective check and balance in the consolidating world of enterprise software.

Your POV

Do you feel Oracle made the right move?  What have your experiences been like with Applications Unlimited and Lifetime Support?  Send me a private email to rwang@forrester.com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

News Analysis: SAP and SUGEN Make Progress on Enterprise Support

Since SAP's announcement of its single tier Enterprise Support plan last July, customers have continued to express dissatisfaction.   In response to such complaints, the SAP User Group Executive Network (SUGEN) of 12 SAP user groups and SAP have been engaging in discussions around the value derived from this new offering.  This morning SAP and SUGEN announced an agreement on three key areas of the Enterprise Support offering:

• Defined list of key performance indicators to measure the results of SAP Enterprise Support (ES) services. As part of the agreement, the value of ES will be measured by through the jointly agreed SUGEN Key Performance Indicator Index (SUGEN KPI Index).
  Based on the press release and informal conversations, the four areas covered include business continuity, business process improvement, protection of investment, and total cost of operations.  No public details have yet been provided on the specific metrics but there is an expectation for customers to realize value within a four year time frame of the benchmarking program

  POV: The four areas measure how choice, value, and predictability of investment come together in the overall maintenance offering.  If successful, this represents a unique and transparent approach to demonstrating value in maintenance.  In the coming weeks, SAP users will want to seek details of the specific KPI's and determine how those KPI's will be measured on a consistent basis across different types of organizations.

• Joint benchmarking program to define and measure how SAP customers may derive value from ES. With agreement on the KPI's in place, a formal benchmarking program will be instituted to provide baselines to quantify value.   SAP and SUGEN have agreed on the parameters of the representative customer sample.  SUGEN will choose the customers.   Importantly, an independent party will validate results will conduct quality assurance and independent validation of the results.

  POV: Benchmarking remains the critical factor in this program.  SAP customers should pay close attention for balance in the representative customer sample.  Key variables include level of internal SAP competency, size of organization, complexity of environment, number of instances, industry, and geographic focus.   One can not overemphasize the importance of this program.  The results not only impact future maintenance fee increases, but also provide important benchmark data on SAP operations.

• Changes to the 2008 pricing program for current contracts that may will be migrated to ES. Based on the KPI program, SAP agrees to postpone subsequent price increases pending the realization of targeted improvements measured by the SUGEN KPI's.  These changes have been made to the 2008 pricing program for ES.  Instead of ongoing increases until 2012, the new program ends in 2015.  As stated in the press release "Starting in 2010, the price of SAP Enterprise Support for existing customers will continue to increase based on individual contract terms but will not be higher than a yearly fixed upper cap. This translates to an increase average of no more than 3.1 percent per year from 2010 onwards. The price of SAP Enterprise Support will be capped at 22 percent through 2015. "

  POV:  Two scenarios emerge.  Should the value of ES not be realized, then the price increase will not pass.  However, customers will more likely face a more gradual price increase to the 22%.   This may prove to provide some relief for recession strapped customers.

The bottom line - progress on Enterprise Support issue may result in a win - win for  SAP customers

Expect customers to take the news with cautious optimism.   Should the benchmarks succeed, customers may gain value.  Failure to meet targets meet a freeze on maintenance.  In any case, this is welcomed news and provides a hard fought win-win for the customer and the vendor-client relationship. Congratulations go out to SUGEN and SAP for coming to a common ground!  This shows the importance of preserving independent user groups and the role active users play in shaping the overall agenda.  The one thing left in the choice, value, predictability equation is choice - meaning a tiered maintenance program or access to third party maintenance.  With the less than positive Q1 earnings report announced today, let's wait to see how other chips will fall into place.

Your POV

Do you think SAP met its promise to SUGEN?  Will this help you with your commitment to SAP?  Do you feel SAP has now done the right thing?  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

For more POV's:

Dennis Howlett - April 28, 2009 "SAP software revenues plummet, announces new deal on maintenance"

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

News Analysis: Oracle Acquires Sun, Enters Open Source and High End Computing Markets

Oracle announces a $7.4B deal for SUN just a few weeks after the IBM deal fell through.  Oracle now controls a significant major open source alternative and a nice piece of the high end computing business.  These open source components have been viewed as the alternative to the dominance of the Big 4 or MISO (Microsoft, IBM, SAP, and Oracle).   Oracle also gains an innovation engine with the assets of Sun's Labs groups which pioneers a series of innovations that include potential enterprise solutions for the virtual world.  The deal puts Oracle on a continued path to acquiring deeper components of the enterprise computing stack.  Here's how the stack looks:

• Middleware - While Java and Solaris may appear to be the crown jewels in the deal, Oracle has managed to slowly buy out other stack competitors (i.e. BEA and now Sun) and integrate them into the Fusion Middleware suite of tools for custom development and its own Fusion Applications product lines.   Sun complements BEA.
• Database - Oracle takes out the low cost competitor to SQL server on the low end and gets a shot at converting them to Oracle DB instead of IBM.
• Hardware - Oracle gains another great recurring revenue (maintenance) base with Solaris.  This complements Oracle's large and profitable database installations on Solaris that would have fallen prey to the IBM DB2 team.

The bottom line- Oracle succeeds at post merger integration where others often fail

Despite skepticism, Oracle has made these acquisitions work from a financial perspective, with year-over-year quarterly profit growth that has generally been well above 20%. Some key success factors include:

• Acquiring companies for the recurring revenue. Oracle's first set of deals (i.e., PeopleSoft and Siebel) focused on installed base acquisitions that provided a strong foundation of support and maintenance customers. This base of recurring revenues provided Oracle with the room to continue strong R&D investment while reducing overall costs.  Oracle takes out another highly profitable maintenance base adding pressure to competitors.  In this acquisition it gains the profitable Solaris revenue stream while moving into a maintenance business for open source software.
• Eating its own dog food. In the late 1990s, Oracle made a major commitment to re-engineering its back-office processes using its own applications. As a result, Oracle has become highly efficient, with a ratio of general and administrative expenses to revenues of 3% to 4% - in most calendar quarters, one percentage point lower than SAP's and even lower than other large software vendors like Microsoft and Symantec.  Expect Oracle to put the Sun assets into its arsenal of tools for delivering software innovation.
• Mastering post-merger integration. With two former investment bankers at the helm, Oracle has one of the best post-merger integration teams in the business. Oracle's profit performance signals that it has been able to add new companies and their stream of revenues while keeping costs down.   Sun will provide considerable synergies in the short and long run.

Your POV

What do you think abou the acquisition of SUN?  Did you count on SUN as your open source stack alternative to the Big 4? Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org