Back in June of 2018, we reported on Oracle’s change in financial reporting and what Oracle doesn’t want you to know. Since then, there have been several shareholder lawsuits claiming that Oracle misled shareholders about the nature of its cloud revenue. We stated that, based on our market intelligence, we believed Oracle was trying to mask poor cloud performance and low customer adoption rates. Here are the reasons that led to our hypothesis:
Lacking Application Innovation and Compelling Business Case
Oracle is not really an application company — they are a technology company that acquired their way into the application space for profits. Think about it. When was the last time Oracle announced something truly innovative with one of the many application companies they have acquired over the years? I can’t think of one either.
Oracle is a database technology company and their success was created by having the best database in the world. But all of their applications have come through acquisition in an effort to buy market share and capitalize on the recurring support revenue stream. Most of the innovative talent that built those applications eventually left Oracle and moved on to new challenges at other start-ups, like Workday. Application innovation is just not part of Oracle’s core culture.
Oracle claims to be the only complete cloud ERP provider. They achieved this by rewriting all of their on-premise applications to work in the cloud allowing customers to do the same things they do today but now in the cloud. Where is the innovation in that? If a customer is going to take on the cost, time, and business disruption to migrate their on-premise applications to the cloud, they expect new features and functionality that will provide greater value to their business to justify the move. In speaking with many Oracle customers, other than the fact that the cloud has the potential to cost less to operate and maintain, Oracle has been unable to provide a compelling business case for migrating.
Poor Cloud Application Performance – Missing Functionality
Customers who have adopted Oracle’s application cloud solutions (SaaS) have had many challenges realizing the performance that was promised. Some customers have said that their deployed solutions were not stable or lacked the same functionality as their on-premise solutions which they claim Oracle led them to believe existed. In other cases, customers who were still in the evaluation stage found Oracle’s product demos to be unconvincing. We have worked with customers that have deployed Oracle’s SaaS applications for over 6 years now and have yet to hear a success story that did not require much more work than anticipated to implement and go-live.
Cloud Deals Brought on by Duress?
This does not apply to every Oracle cloud deal to be sure, but Oracle’s policy of providing sales quota relief only on cloud deals has led to the deployment of very aggressive sales tactics. The following scenarios are at the heart of the shareholder lawsuits:
Audit or Threat of an Audit
Oracle claims there is a potential compliance issue that will cost the customer millions of dollars. This can be done either after an audit has been completed (even though the compliance claim may be in dispute) or prior to initiating an audit based on some sort of claim that Oracle believes constitutes a compliance issue. Oracle creates a big fuss and may even threaten to terminate licenses or launch into a full-scale audit unless the fees are paid immediately. Then the Oracle sales rep steps in and says they can significantly reduce the compliance fees owed or eliminate the audit if the customer makes a purchase that includes some sort of cloud service.
Incremental Growth Purchase
A customer has experienced organizational growth and needs to purchase additional licenses to account for an increase in users or business metrics. Oracle deploys a very transactional approach, so the initial offer for on-premise licenses is not very competitive. Since the purchase is due to account for growth, the customer risks an audit if they do not make the purchase.
Similar to the first example, the Oracle sales rep steps in and says they can significantly improve the pricing if the deal includes a cloud services purchase. We have learned that some customers sign up for cloud services with no intention of ever using them simply because the overall cost was lower when compared to buying just the additional on-premise licenses they required. This is very similar to cable companies providing a lower overall price if you bundle cable, internet, and phone, even if you have no desire for the phone line.
The issue with these two scenarios is that these deals do not represent true customer demand for Oracle’s cloud solutions. CEO Safra Catz has cited that the increase in support revenue demonstrates customers’ commitment to (and value realization from) Oracle’s support services. But everyone knows that is not really an accurate statement since most customers do not have a viable alternative. Oracle is looking to use these sales revenue increases as proof that customers are adopting Oracle’s cloud solutions.
These scenarios are what Oracle means when they refer to cloud sales to existing on-premise customers as new workstreams. It is code for an existing customer buying a cloud solution they did not require and that is not replacing a current Oracle on-premise product solution. Oracle’s hope is that the customer will use the cloud solution since they have the right to do so, then find value, and in the future, renew and expand to other cloud solutions. This is a key distinction between true customer-driven demand vs. a coerced trial period that may lead to demand.
To be fair, we have worked with a number of customers who are replacing legacy systems and have selected Oracle’s cloud services as their replacement solution. But these have largely been net-new customers primarily in the small- to mid-size market, as opposed to Oracle’s large installed base or displacement of competitor solutions.
We will not weigh in on the legal merits of the shareholder lawsuits, other than to say this does not help Oracle’s public perception for closing more deals while also creating another distraction that may impact the focus of Oracle’s sales team in executing to its strategy.