Oracle Year-End: Where Rock Meets Hard Place

With Oracle’s fiscal year-end of May 31^st fast approaching and market demand rising (much of it pent-up from the last couple of years), many organizations are now looking to up their investment. Historically this is Oracle’s highest revenue quarter because it aggressively promotes “great deals” to drive sales.  As CIO.com points out, “the vendor and its customers are locked in the annual ritual of trying to get new deals done before the fiscal year ends on May 31.”

But when most organizations review their prior transactions, they may wonder how great those deals worked out to be. The problem is generally not with the quality of Oracle’s products, but rather with the relationship and commercial terms. The most common frustrations we hear from corporate customers involve:

• Inconsistent discounting on incremental purchases
• The cost-value ratio of support, given cumulative increases in fees
• Inability to eliminate or reduce support costs for products no longer in use.

Given that Oracle is once again talking up great deals and big discounts, it is worth taking a closer look at each of these factors.  Like most suppliers Oracle offers higher discounts as the overall list price increases on a particular deal.  On subsequent deals, especially for smaller purchases, these discounts can be substantially smaller than the original deal. Therefore, it is not uncommon for support costs on a particular product to be as high as double that of the same product licensed under a different ordering document.

Oracle also typically increases support costs by 3% annually. This is counterintuitive because each year the products become more stable through patches and updates; customers become more mature in their knowledge of Oracle products; and corporate IT environments become more stable. The increased stability reduces the effort required of Oracle to support its products and the value customers receive from their support agreements.

But still the costs go up. No wonder we hear claims that Oracle’s total revenues from maintenance and support are more than 90% pure profit. We call this situation, whereby customers pay more for less support, the RSVP (Reduced Support Value Paradox). RSVP contradicts basic economics and is the primary reason why CFOs constantly pressure CIOs to drive down support costs.

Lastly – and this is where customer frustration often peaks – is Oracle’s policy of linking support for all products licensed under a particular ordering document. That means discounts are determined for an entire bundle of products and list price volume included in a single purchase; and since support costs are priced as a percentage of the net license fees, the cost of support is also subject to this bundled volume. If customers wish to terminate a license, they may do so. But if they want to continue support for the remaining licenses under the ordering document, then Oracle re-prices the remaining products under its then-current prices and volume discount policies to derive a new net license amount that is used for determining the new support fees for the remaining products. The net result is that customers are presented with the option of either paying larger support fees on fewer licenses, or continue supporting the entire bundle (including products they are not using) per the terms of the original agreement.

This is the ultimate “rock and a hard place” dilemma for customers seeking to invest more in their Oracle platforms. They must choose between the following two options, neither of which is ideal:

A: Purchase more licenses to address both current needs and anticipated future requirements in order to achieve a greater discount and lower support costs.

B. Make incremental purchases as needed, but at lower discounts and with higher support costs, in order to avoid paying support for products that may never be deployed (i.e. shelfware) and where termination will not reduce support costs.

As you can see, Oracle has designed its pricing models to maximize its profit and boost its share of corporate IT budgets. For companies looking to improve their Oracle cost-to-value ratio, the worst thing to do is simply continue with the same approach, or think you can out-negotiate Oracle on your own. Remember: Oracle has created a highly complex set of rules to serve its objectives (not customers’ goals) and they are extremely skilled and experienced at playing the game they created.

So is there any hope for leveling the playing field and creating some alternative options? Yes, but it requires rethinking your approach and taking a holistic perspective of your past, current, and desired future relationship with Oracle. Further, you should study recent market intelligence and understand the various options and tactics at your disposal. Only then will you be able to develop a strategic plan to achieve your goals and focus on execution.