Oracle is ramping up to put a full court press on its installed base to migrate their perpetual license on-premise solutions to Oracle’s subscription Cloud service offerings. During our recent webinar we discussed Oracle’s Cloud sales strategy in detail. By having their customers migrate to Cloud solutions, Oracle gets many benefits – one of which is the ability to raise subscription fees on subsequent renewal terms, typically either three or five years after the initial deal.
Oracle customers may find themselves with limited options upon renewal, because if they don’t accept Oracle’s Cloud renewal offer, their Cloud subscription service will be terminated. This would leave them without a solution since they will lack perpetual licenses to continue to operate their business processes and they would be forced to find a replacement on short notice — simply not practical in the current market.
The natural answer is to negotiate price protections for subsequent renewal terms, eliminating the potential of being faced with substantial renewal fee increases. Oracle has provided some renewal price protections to customers; however, valid concerns remain based on the fine print.
A few things to watch out for in your Cloud renewal:
Renewal term price protections are conditioned on the customer renewing the same quantities and products as of the last day of the prior term, which cannot be reduced during the prior term.
The key to remember here is that just like support fees for on-premise licenses, from Oracle’s perspective, Cloud subscription fees only go one way – UP!
So, if a customer has volume increases during the initial term, these get added to the total quantities and must be maintained in the renewal term to qualify for the renewal term price protection.
It also means that if certain Cloud solutions do not prove valuable, they are no longer required, or if there is a business downturn or divestiture during the initial term, failure to renew those solutions and high-water mark quantities will invalidate any renewal term price protections.
Oracle may choose to honor the price protections if a customer is significantly adding other Cloud solutions, but this would have to be negotiated with Oracle holding the lion’s share of the negotiation leverage.
Renewal term price protections are conditioned on the customer maintaining at least the same Cloud spend levels.
In some cases, we have seen Oracle agree to provide some flexibility to alter products and quantities, provided that the overall spend level is maintained or increased. This level of flexibility at least allows customers to swap out some products and quantities that may no longer be required as long as they are adding other products and quantities to make up the difference in price.
What this all means for customers is potential vendor lock-in. Let’s say a customer decides to subscribe to Oracle’s three product silos identified above (ERP, HR, and CRM), but just prior to the end of the initial term the customer’s users feel that Workday and Salesforce would provide greater value in HR and CRM, respectively.
Switching to those providers is certainly an option, but any price protections for renewing ERP will be lost unless there is a substantial increase for other Cloud solutions to make up the difference. Further, the price hike for maintaining ERP could be very substantial, and when coupled with the typically higher prices for Workday and Salesforce, it could become cost prohibitive.
It is for these reasons UpperEdge has recommended that clients develop a Cloud adoption/migration plan that is well thought out by a cross functional team to assist in avoiding getting caught in this type of situation — not just taking on additional Cloud solutions because Oracle is offering a great initial deal as a teaser.
Critical Recommendations for Oracle Customers:
- Be aware of Oracle’s goals and objectives
- Have a clear plan of what Cloud solutions you want to adopt and when you want to adopt them
- Identify clear and detailed commercial term requirements
Failure to do these can lead to some unfavorable and unintended downstream consequences that can be quite costly, in addition to the time spent in a long and frustrating renewal negotiation cycle.