If you have purchased Oracle software before, you are most likely familiar with how Oracle has set up different silos with on-premise licensing. These silos were primarily applications, technology, and engineered systems (i.e., Exadata). This meant that your discount for each silo was determined separately based on the list license fees for a particular purchase within a silo. Many customers were frustrated by this practice as they viewed Oracle as one integrated strategic partner with multiple product offerings. Oracle even markets itself to customers based on this strategic partner premise and the value their solutions can bring to address customer challenges across a wide enterprise spectrum.
But when it came to contracting, Oracle took a transactional approach to customers based on the spend level within each silo. Even if a customer was buying $50M in list price application license fees, if they were only spending $10M in technology products like database licenses, they would have to conduct a separate negotiation with Oracle’s technology practice sales reps for any required technology licenses. Oracle has never really addressed the rationale behind this policy, but one can deduce that a primary reason is Oracle’s internal sales policies and maximizing its revenue from every customer based on arbitrary policies that Oracle created.
Silos vs. Pillars
In the cloud application space (SaaS), Oracle has taken this to a new level. Oracle now refers to these as pillars instead of silos and has created multiple pillars within SaaS applications. Some of these cloud application pillars include ERP, HCM, and CX (i.e., customer experience). Just like the old on-premise silos, the discounting must be negotiated for each pillar based on the list price of cloud services within each pillar that is being purchased.
What is striking customers as odd is why Oracle has introduced more product pillars within the SaaS landscape. After all, Oracle has stated multiple times that they took all of their on-premise software and re-wrote the code to work in the cloud. If there were no separate application pillars for on-premise licenses, what is the rationale for introducing multiple pillars within their cloud applications offering?
It’s not as though Oracle had to license code from a third-party for some of its cloud applications and pay a certain software fee royalty for each cloud sale. The only rationale we can deduce is that this arbitrary policy increases Oracle’s revenue for each transaction and incentivizes customers to sign-up for more cloud subscriptions within each pillar as a means to maximize discounting. We do not see any benefit to customers associated with this policy.
Will Pillars Increase Your Oracle Spend?
All enterprise vendors deploy sales tactics that incentivize customers to invest more into the relationship, but Oracle’s tactics seem particularly aggressive as the pressure to drive cloud sales intensifies. Further, we believe this policy may actually hurt Oracle, in that customers will wait until they have enough demand within a particular pillar to maximize their negotiation leverage before signing a deal with Oracle. This prolonged sales cycle could also turn customers away and encourage them to consider competing solutions. Since Oracle claims to have the only complete ERP cloud suite and there is a cloud land grab occurring, it seems odd to enact sales policies that may actually drive customers away or delay their purchases, thereby allowing competitors time to catch up and capture market share that could have already been claimed by Oracle.
We believe Oracle’s Q4 earnings may be very revealing and we will be following up with additional blogs analyzing Oracle’s sales tactics and policies and the potential impact for customers and for Oracle’s sales numbers.