By now it is common knowledge that Oracle is fully committed to becoming the largest cloud provider in terms of revenue. Oracle’s recent quarterly earnings have shown steady and impressive cloud growth with increasing margins and profitability. They have also turned the corner in having cloud revenue now surpass the decline in new on-premise software license revenue. Listening to Larry Ellison, Mark Hurd, or Safra Catz leaves no doubt as to Oracle’s intention to win the cloud land grab currently going on. But what is their strategy for winning, and how might it affect your organization?
Acquire Other Cloud Providers and Market Share
Looking into the past can reveal many insights. Around the turn of the century, Oracle was the dominant database provider and was receiving a tremendous amount of its business via reseller deals from the ERP providers, such as PeopleSoft, JDE, Siebel, SAP, etc. Oracle could see first-hand where the market was going with respect to business applications but was behind the leaders with respect to its own business applications. However, they were cash rich as the dominant leader in database technology and therefore had the resources to acquire ERP providers to not only complete its application portfolio, but to buy market share.
Oracle’s recent acquisition of NetSuite follows a similar pattern. Oracle has been claiming that they are the only provider offering an end-to-end, fully integrated ERP suite in the cloud, yet they acquired cloud provider NetSuite. But the acquisition is aligned with Oracle’s modus operandi – buying market share and taking away an acquisition opportunity from its competitors.
Oracle knows that the cloud decisions made by organizations today will have a long tail as the cost of switching to another cloud provider in the future is cost prohibitive. So acquiring market share locks in new customers and ensures future revenue growth. It also has the added benefit of consolidating the cloud provider market and preventing would-be competitors from acquiring market share and accelerating or enhancing their cloud offerings.
Adopt Aggressive Cloud Sales Compensation Plans
We learned from Oracle’s FYE 2016 earnings call that Oracle’s sales teams only receive sales quota relief on cloud deals. Further, Oracle claims that they have implemented a compensation plan that allows salespeople to make more money selling Oracle’s cloud than any other cloud solution in the industry. Assuming these are true statements, one can see how this tactic would attract the best salespeople as well as instill a cloud-first sales culture.
We have seen this play out firsthand with many of our clients. Organizations with long standing on-premise Oracle licenses, who have no real desire yet to migrate to the cloud, are being aggressively approached with cloud deals from Oracle to move new workstreams to the cloud as part of a package with the additional on-premise licenses they need to account for growth. In almost every scenario we have seen, Oracle is willing to offer higher discounting on the on-premise licenses if packaged with a modest cloud purchase, with the net fees over a 1, 3, or 5-year term less than the on-premise license purchase alone. It is a bundling strategy designed to incentivize its install base to begin utilizing Oracle’s cloud, with the hope that they will eventually migrate more of their workstreams to the cloud over time as they begin to realize greater benefits and value.
Never Lose a Deal on Price
Oracle’s cloud margins continue to grow at an incredible rate, having already reached 62% in the last quarter and with a stated goal of reaching 80% over time. With all of the infrastructure investment already paid for by Oracle, each new cloud deal after sales commissions goes right to the bottom line, boosting profit margins. Additionally, with cloud deals having terms of anywhere from 1-5 years, the leverage and ability to re-negotiate future renewal pricing enables Oracle the opportunity to recoup any money lost to aggressive pricing in securing the initial deal.
Going back for well over a decade, we have not seen Oracle lose a competitive deal on price alone. That does not mean Oracle will always offer the best price, quite the contrary. But for organizations that know how to maximize leverage and have the fortitude and discipline required during negotiations, in most scenarios Oracle will eventually offer the most competitive price relative to its competition.
Adopt Aggressive Audit Tactics
Over the past couple of years, we have seen a spike in clients requesting assistance in resolving Oracle audit compliance claims. Putting aside the validity of these compliance claims for a moment, in virtually all of the ones we have seen, Oracle has offered to make the audit go away with a new purchase that includes a cloud deal. Similar to the above, Oracle will present a much more cost favorable resolution to the audit by including a cloud investment with the on-premise license purchase, even in situations where Oracle’s proposed cloud solution does not address the audit compliance claim.
We should also note that in many cases Oracle has not even bothered to substantiate its compliance claims despite repeated requests to do so. Oracle has simply used the audit as the basis for a FUD campaign (fear, uncertainty, and doubt), which then allows its sales team to come in as a white knight with a far more attractive cost to resolve the dispute rather than going through the audit team as a way out of this audit mess, which was manufactured by Oracle to begin with.
Understanding Oracle’s cloud strategies can prove valuable in preparation for Oracle’s advances, developing your own negotiation strategy with Oracle, and identifying effective methods for countering Oracle’s tactics.
We have a wealth of experience advising clients in negotiating with Oracle and would love to receive your feedback and thoughts. Please do not hesitate to post a comment. You may also contact me directly at [email protected] if you would prefer a more discrete discussion regarding your specific circumstances.