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Battle Booty from Oracle's Victory Over PeopleSoft

Written By: Predrag Jakovljevic
Published On: May 30 2005

What Oracle Gains

A new customer base; increased market share; expertise; immediate; recurring revenue sources; and new and overlapping products are now a part of Oracle's booty from its battle to acquire PeopleSoft. The long and arduous merger bid came to a close in December with Oracle giving approximately $10.3 billion (USD) from its war chest to PeopleSoft, to become the world's number two leading enterprise applications software company. At the end of January, Oracle forecasted its pro forma earnings and growth. Its earnings per share growth will be 24 percent for fiscal year 2005, and it is targeting earnings per share growth of 22 to 28 percent for fiscal year 2006. Oracle also reported that the PeopleSoft acquisition is on track and will contribute to the company's (pro forma) earnings growth in both fiscal years 2005 and 2006.

Part five in the While Oracle and PeopleSoft Are To Fuse, Competitors Ruse— Leaving Customers (Somewhat) Bemused series.

The deal does not, however, immediately speed up or focus Oracle's enterprise applications business. Oracle's E-Business Suite is on one side, and PeopleSoft's Enterprise, EnterpriseOne, and World products, is on the other, and all have a significant overlap in functionality, albeit with some differing best-of-breed features. For a true synergy to happen, Oracle must further clarify its applications vision and strategy, particularly exactly how it will exploit these three PeopleSoft products. Oracle intends to produce new releases of PeopleSoft products, but has not yet given more specific plans, and thus customers should expect only modest enhancements in the foreseeable future.

Keeping PeopleSoft's customers will take a lot of diplomatic customer management and savvy engineering. After all, when offered a rival database company, Informix, in the late 1990s, Oracle's CEO reportedly said there is no point in spending money on acquiring a company whose customers know it is going nowhere; instead, one should spend to acquiring the customer base. Yet, for Oracle the trouble may lie in that these users have shunned Oracle's applications in the past in favor of PeopleSoft or J.D. Edwards. In other words, if these folks have selected PeopleSoft over Oracle thinking that the first was a superior product, why would they want to go for the latter now? Some may have even taken a disliking to the vendor or product during the selection, or during the protracted, hostile merger saga.

Yet, Oracle has made some of its priorities clear, as the merged product set will be based on Oracle E-Business Suite 11i, which, to be fair, is the position the vendor maintained from the very beginning. On the other hand, it will slowly incorporate extensive, almost best-of-breed functionality from both the original PeopleSoft product line and the former J.D. Edwards applications. The challenge will be to do that without triggering the same kind of highly disruptive growing pains it encountered with its bug-ridden release of Oracle Database 6 and the early releases of Oracle E-Business Suite 11i, whereby the first all but brought the company to the brink of bankruptcy.

This is Part Five of an eight-part note.

Part One detailed the event.

Part Two presented the competitive response of SAP and Microsoft.

Part Three detailed how competition involves infrastructure.

Part Four was a reality check.

Part Six will cover Oracle's acquisition history.

Part Seven is the SAP factor.

Part Eight will discuss challenges and make recommendations.

PeopleSoft Strengths

At first glance, PeopleSoft should certainly add to Oracle's strengths in certain functional areas, such as human resource (HR) and human capital management (HCM); customer relationship management (CRM) and call center management; supplier relationship management (SRM); and in some areas of enterprise performance management (EPM). In addition to Oracle's strongholds in financial services, (such as retail banking), media, or high-tech manufacturing within larger enterprises, PeopleSoft has also been adept at selling to federal, state, and local governments; telecommunications; healthcare; financial and education institutions; and to the real estate sector and mid-market manufacturing (via former J.D. Edwards), where Oracle has been far less successful.

With the PeopleSoft acquisition, Oracle immediately becomes an undisputed market leader in HR applications, with an approximate 70 percent market share among Fortune 1000 companies. Oracle may also very well be the overall leader in North America, although if SAP continues its upbeat results, this may become a "neck-and-neck" race to become the number one provider. Conversely, PeopleSoft will benefit from Oracle's technology infrastructure layers and business process management (BPM) applications. Also, in addition to leveraging Oracle's traditional strengths in financial applications, PeopleSoft and J.D Edwards may also be able to fill their gap in their functional applications for product lifecycle management (PLM). All of these will translate into new cross-selling opportunities down the road.

Nonetheless, this merger will not make Oracle the dominant force in the Asia-Pacific or the Europe market. In terms of the European market, neither merging party has made a dent in SAP's position in many countries like Germany, Spain, or Italy. Oracle has long been below the critical mass in terms of reference sites and presence in Europe, except in some segments within the UK and France. However, Oracle's positions will likely improve, given its complementary strengths in certain regions. In terms of market share and local application support, Oracle has been strong in the Middle East, China, and South Korea, while PeopleSoft was somewhat stronger in Australia, Japan, New Zealand, and other APAC regions.

Platform/Infrastructure Wars

Oracle's acquisition has really been more about the markets adjacent to business applications. Database, application servers, e-mail collaboration servers, system performance management and monitoring, and middleware are areas in which Oracle competes and hopes will be fertile grounds to up- and cross-sell to PeopleSoft customers. The opportunity to expand Oracle's infrastructure market share is enormous. Most enterprise applications no longer run directly on an operating system, such as Microsoft Windows, UNIX, Linux or OS/400. Enterprise applications are now written to run on an application server, which allows different applications to share resources and interact with each other more easily.

The PeopleSoft acquisition should propel Oracle to the top position of the J2EE application server market, where it still trails IBM and BEA, which are both deeply embedded within the PeopleSoft install base. Thus, these developments prove that the battle between Oracle, Microsoft, SAP, and IBM is not only about applications, but is also about the vast technology stack that lies beneath the applications. Additionally, former J.D. Edwards World product users are IBM shops, and currently many PeopleSoft EnterpriseOne customers are running over Microsoft infrastructure technology. There should be little doubt that Oracle would ultimately like to move those customers to its own technology stack.

Taking all of this into consideration, one should not be surprised that Oracle has revealed other choices for consolation during its 2004 antitrust trial at the US District Court in San Francisco, California (US). Its list included high-profile competitors like the middleware rival BEA Systems; database competitor Sybase; the leading business intelligence (BI) provider Business Objects, and other notable business applications players like Siebel Systems and Lawson. These acquisitions will make Oracle rank number one or two in each respective segment. Given the breadth of the PeopleSoft merger, however, Oracle has its hands full at this stage, and will likely remain busy for some time to come.

Merger Challenges

Ultimately, Oracle should not gloat over its shrewd move to gain the critical mass within the applications market. After all, it has drawn the market's consternation and has likely caused some PeopleSoft users to perceive Oracle as a less-than-customer-friendly vendor, if not such a product. Moreover, just as Oracle's controversial "one-stop-shop" and "no multivendor interconnectivity" mantras seemed to end, its new market position may tempt the vendor to inundate customers with new chants about what is best and force its wall-to-wall technology stack. Oracle recently became amenable to admitting that a multivendor world exists, and has closed the chasm through its independent user group, Oracle Applications User Group (OAUG) (see Oracle Makes A U-Turn at the "All Things to All People" Exit). It needs to continue this path and listen to customers needs.

Even if one forgets about Oracle's unfriendly demeanor and its inflammatory pre-merger statements, and even if one believes that Oracle has discovered some functional jewels within the PeopleSoft's portfolio, Oracle will still face some hurdles, particularly in integrating its new products. Time will tell how Oracle will transition from battle mode to merger-integration mode and how it will maintain its healthy operating margins during PeopleSoft's absorption.

PeopleSoft and Oracle have had sharply different cultures, with a legacy of destructive sales and marketing tactics used against each other. They have also priced their products using different models, and have seen applications in a different light, so to speak. PeopleSoft has perceived applications as business functionality that has been software enabled, whereas Oracle has a data management-centric approach. Again, it will take time to determine how quickly and how successfully Oracle can blend the functionality of the distinct PeopleSoft and J.D. Edwards products into Oracle E-Business Suite without disrupting its own code base or encouraging mass customer defection. In the future, Oracle might try to simplify and rationalize the disparate licensing and maintenance schemes, but it should not try to force existing PeopleSoft customers to re-license, although it may not continue to offer former PeopleSoft's revenue-based pricing on subsequent purchases.

This concludes Part Five of an eight-part note.

Part One detailed the event.

Part Two presented the competitive response of SAP and Microsoft.

Part Three detailed how competition involves infrastructure.

Part Four was a reality check.

Part Six will cover Oracle's acquisition history.

Part Seven is the SAPf.

Part Eight will discuss challenges and make recommendations.

About the Authors

Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years experience as an executive in the software industry. Thompson has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce, and the impact of technology on industry.

He can be reached at Olin@ProcessERP.com

Predrag Jakovljevic is a research director with TechnologyEvaluation.com (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.

 
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