Proving that the applications market would remain competitive and innovative was key to Oracle winning the antitrust lawsuit launched against it by the US government. The government spent a year before launching its suit to determine if Oracle's hostile takeover of PeopleSoft would result in a duopoly, thereby violating US antitrust laws. After months of expert testimony, US District Court Judge Vaughn Walker ruled that competition was pervasive enough in the industry not to be undermined by Oracle's ambition. Free to proceed, Oracle finalized its takeover bid in December, paying approximately $10.3 billion (USD) for PeopleSoft.
Part Seven of the While Oracle and PeopleSoft Are to Fuse, Competitors Ruse—Leaving Customers (Somewhat) Bemused series.
Though the trial is over, scrutiny of Oracle has continued. Oracle, PeopleSoft, and J.D. Edwards customers are somewhat bemused, to put it mildly, about what the new number two applications provider will offer in terms of application services and functionality. The competition is anticipating "merger fallout" having devised programs to woo the disenfranchised with promises of attractive, low-risk migration platforms. SAP has even gone so far as to promise to maintain the competitor's applications as customers transition to SAP alternatives (see part seven). Indeed, such platforms may be very attractive to the 2,000 or so companies that currently run SAP, and PeopleSoft or J.D. Edwards applications.
Thus, Oracle is facing a new dilemma. It must maintain its current client base, which includes slightly ruffled Oracle E-Business 11i users, and retain its new one, comprised of former PeopleSoft and weary J.D Edwards clients, who are experiencing their second acquisition. To succeed, the vendor needs to make a dramatic turn and increase sales. Here the applications' part of its business should play a crucial role, being that it is the least susceptible to commoditization. To maintain its competitive advantage, Oracle must have notable points of differentiation, so customers will not determine what product to purchase based on price alone. Right now, Oracle's database and application server are very competitive but are in danger of commoditization, not only from IBM or Microsoft, but from the open-source likes of Jboss and mySQL. Unfortunately, the professional services and know-how rich application business side of Oracle has long been wallowing under the shadow of Oracle's two other favored "children," which seem to get most of the vendor's attention.
To be fair, the release of Oracle E-Business Suite 11i.10 should prove Oracle's seriousness about the applications suite. Oracle's marketing budget and headcount for applications business has increased notably. Unfortunately, these moves have been overshadowed by Oracle's lengthy bid for PeopleSoft, but Oracle is trying to get its message about Oracle E-Business Suite 11i out. During a recent Oracle OpenWorld user conference in San Francisco, California (US) Oracle E-Business Suite 11i.10 was the key message given to over 20,000 attendees. Moreover, the fact that Oracle just paid over $10 billion (USD) for an applications company should speak volumes about how serious it has become about the applications business.
The Oracle-PeopleSoft merger may also eventually mean a much closer relationship between IBM and Oracle, and not just in terms of IBM serving customers that are on its platform. Aside from keeping existing customers happy, Oracle will have to quickly rationalize its three different sales forces, which will involve a lot of "fancy footwork" and will likely entail confusion in the process. Therefore, Oracle might want to tap into IBM's experience in building out vertical capabilities through its industry-focused, solutions-oriented consulting—which Oracle has garnered, in part, through PeopleSoft's install base. Additionally, neither Oracle nor PeopleSoft have been known for championing their channel partners and encouraging independent software vendors (ISV) solutions, but Oracle must become much smarter about partnering if it is to be successful, especially in the mid-market.
This is Part Eight 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 Five discussed what Oracle gains.
Part Six presented Oracle's acquisition history.
Part Seven analyzed the SAP factor.
Microsoft and Other Competitors
A somewhat similar situation holds for Microsoft, which has a sizable SQL Server, BizWorks, Windows, Exchange etc. base within the bases of PeopleSoft and J.D. Edwards. This may also disappear before Microsoft's eyes. Still, it is not likely Microsoft can do much about PeopleSoft or J.D. Edwards, given they have a far greater competency than that of the Microsoft Business Solution (MBS) division, whose focus is still the lower-end of the mid-market. Simply put, the experience of Microsoft's team still need to grow to support the upper enterprise level. Moreover, the only likely eligible product that can replace some of PeopleSoft products, is Axapta 4.0, but its release date has been pushed back from 2005 to 2006. This regrettable development will not improve matters for Microsoft.
Yet, Sage/Best Software will likely be a bigger thorn in MBS' side, given it still has a larger channel and market share in almost all small to medium enterprises (SME) categories, which are areas where MBS is better able to compete. Entry level accounting, small business solutions, contact management/CRM, non-profit businesses, etc. are among the areas Sage/Best dominates. It has a well-crafted strategy to develop and acquire a very complementary slew of best-of-breed products, developing interoperability and a smooth upward migration path within its portfolio.
"Customer for life" and "to lose customers to ourselves" appears to be a rare, yet growing mantra and one would expect Microsoft to level the competitive playing field by acquiring customers, possibly through a takeover bid of Sage. Yet, that is not likely to happen, given MBS has little chance of gaining the European Trade Commission's approval. Sage is, after all, a UK-based vendor, and Microsoft does have a history of antitrust suits. It still faces scrutiny in Europe and in two US states. However, while Sage does dominate a particular market, its $1 billion (USD), or so in revenues is a very small step compared to Microsoft's giant footprints leading to its $10 billion (USD) earmark. Thus, while there are (somewhat ridiculous) speculations about Microsoft exiting the applications market if it experiences protracted, divisional losses and creeping organic growth, no one can really dismiss Microsoft all together. Like the owner of the New York Yankees, an American baseball team, Microsoft may very well go out of its way for any plausible acquisition, if that is what it takes for it to be successful.
Addressing the Next Frontier
Given all of these factors, we need to analyze why the 2007-2008 timeframe for Oracle's Project Fusion might coincide with SAP's plans for its Enterprise Services Architecture (ESA) blueprint—SAP's version of service oriented architecture (SOA). To some extent, SAP mirrors Microsoft's goals for the Project Green, Microsoft's next-generation enterprise applications architecture. The current, rapid pace of global business places a unique set of challenges on all enterprises looking to improve and automate their operations, and at the same time, remain poised to adapt quickly to change.
With increased competition, deregulation, globalization, compliance requirements, and mergers and acquisition (M&A) activity, enterprise software buyers increasingly realize that product architecture plays a key role in how quickly vendors can implement, maintain, expand or customize, and integrate products. Product architecture will do much more than simply provide technical functionality, user interface (UI), and platform support. It will determine whether a product will endure, scale to a large number of users, and incorporate emerging technologies to accommodate evolving user requirements. Today, most application vendors preach integration, and advanced functions and technology. This can offer users lessons for the future, and what should be part of the new enterprise architecture.
For a detailed discussion in this regard, see SOA-Based Applications and Infrastructure—The Next Frontier?
Vendors need to make a painstaking strategic decision, pick where they want to be, and execute their plans accordingly. To be part of the Big Few, vendors with $1 billion (USD) in revenues and at least 20,000 users, vendors must grow their client base at a faster rate than the market and their competitors, or find the capital to grow through acquisitions—which is not easy, given these difficult economic times. Also, they should target the anxious customers of competitors that are financially struggling or are undergoing troubled acquisition migrations. Many vendors take their flagship products through profound architectural changes, they must also justify to their customers why time is needed to grasp what the changes really mean. This may provide an necessary window to begin dialogue with a new prospect.
To be a boutique, niche vendor, vendors must focus on one or a very limited number of verticals or regions, and excel at serving those customers. If a vendor does not pick between these two strategies, it will face two outcomes. If it is lucky or has a solid value proposition, like a large customer base or a unique vertical solution, it will become a "collected company", owned by one of the Big Few, otherwise, it may face oblivion. If you are a publicly traded vendor and do not want to be acquired, think of some defensive moves that can prevent this fate. Consider going private (possibly through an infusion of private funding), repurchasing your outstanding shares to ensure majority voting power, maintaining only a necessary level of cash, resorting to the "poison pill" shareholders provision, merging with a peer to make any future acquisition awkward, and so on. Conversely, if you wish to be acquired, try to get your house in order by keeping your expenses in line, if not by growing the top line.
The recent turn of merger-mania events will have a deep impact on how customers will evaluate vendors and what kind of relationships they will have. We suspect that most end users organizations will weather this storm, despite some overcast skies that may be hovering above some PeopleSoft and J.D. Edwards' users.
If you are in the middle of implementation, you should, by all means, proceed and feel comfortable adding projects to existing modules. Users should expect a turnover among PeopleSoft employees, especially in consulting and project resources, and also expect a short-term drop in service levels. This will likely affect some projects, especially in some remote geographies where it may be difficult to get resources from other locations. Keep an eye on these resources and check the skill and experience level of the new staff assigned to your projects. Users should also familiarize themselves with Oracle's regional management and support structure, and ensure in writing that Oracle will honored any localization or customization that PeopleSoft included in their projects and proposals .
Customers considering major expansion or deployment projects should wait for more detailed product announcements or should contact the regional Oracle management directly. We recommend that companies upgrade to the most current product releases when there is a compelling business case, in order to avoid the potential loss of support for older releases, and to ensure flexibility when adding modules and integrating with other applications. Purchasing modules should also be limited to cases with a clear business need, and adoption should be limited to stable and proven products. If no urgent business project is forcing the upgrade, hold off until Oracle's plans for the particular product are very clear. If upgrading from a very old version of a PeopleSoft or J.D. Edwards product, and if significantly expanding the product footprint and user count, look into the option of implementing a current version of either PeopleSoft or Oracle from scratch, as it may be of comparable expense and provide a valid payback.
The market should favorably regard Oracle's new mindset, and its attempts to placate customers, since its offering combines comprehensive functionality, updated technology, and greatly improved product quality and usability. Larger enterprises seeking broader e-business capabilities should evaluate Oracle if they feel comfortable with Oracle's one-stop-shop offering and if Oracle has a good track record in their industry vertical. Oracle users should also benefit from an integrated database, development tool, and applications server, all of which have been recently upgraded—this especially holds for users that appreciate a single data-model that runs centrally, and uses grid computing.
Enterprises that favor a multi-vendor approach should still evaluate Oracle if the functional fit is good, but they will have to reckon with a challenging integration project. Existing Oracle applications customers should request a clearer product roadmap for applications they have or are interested in, in light of possible additions from PeopleSoft. Many users will also benefit from conducting thorough research by product version and by devising a decision matrix or framework that detail a timeline and options for customers. In doing so, this will commit on paper the reality facing J.D. Edwards and PeopleSoft customers and bring everything into a larger perspective. Project Fusion will not be ready for "prime time" for several years, and some customers will really have to understand that their moves and options might not be secure in the short-term, if they select Oracle.
On a more general note, the larger the install base is of the product, the safer the user should be. If not the new owner, then at least some implementation partners will have heavily invested in the software, and they will likely be glad to oblige users with ongoing support, possibly with an outsourcing arrangement. An installed base of even modest size should generate enough recurring revenue to support a development group that will enhance the product, at least enough to keep it viable in the current technological environment.
Although end user companies should continue to track the financial health of their vendors to help discern if the vendor will be a collector or one of the collected, the latest affair involving Oracle, PeopleSoft, and J.D. Edwards may prove that even a stable vendor can involuntarily end up being acquired. Thus, even a fairly solid balance sheet cannot guarantee that the vendor will remain intact a few years down the road. Users should not perfunctorily cross out a vendor just because it is not as big, and does not appear as financially viable as some of the behemoth vendors that usually appear on a shortlist. There are many recent success stories of nimble, highly focused vendors in certain markets, whose return on investment (ROI) has been much more tangible and faster than those of large, generalist providers. Ignoring these would only defeat the purpose of due diligence, and will only nurture the creation of a few complacent, large vendor oligopolies.
Yet, even if comfortable with a vendor's merger, users may want to take an aggressive negotiating stance, given vendors are likely more amenable to steeper discounts during transitional periods. Pay more attention to the clauses and fine print in the contract that guarantee future rights, maintenance terms and conditions, and the rights to additional capacity, so that future negotiation challenges can be avoided.
If a vendor is acquired, users should be sure to meet the new owners and make certain that management know their expectations and plans. Users must measure the vendor's commitment to support the user's technology for a specified time. Users must also keep a close eye on their actions, given that product enhancement and service and support strategy can sometimes change as early as three to six months after the acquisition. Also try to understand their product strategy and look for opportunities in their product portfolio. Those customers that reach out to the new owner, build a relationship, and agree to act as references will likely get significant attention, and they may receive some concessions concerning contract terms or pricing. Users should leverage user groups to be vocal about functionality improvements in the short-term and push for database and application server options for next-generation products.
The new owners' motivation in buying the product and vendor was the install base—that's you. Showing interest (and keeping both eyes and ears open) is how users can keep the relationship the way they want it. However, should the vendor be acquired in a hostile manner, and the new owner is trying to force migration to its platform, users should evaluate all the alternatives and not accept the new vendor' seemingly sweet deal at face value, since it might not necessarily be much different to migrate to another, more congenial provider. J.D. Edwards EnterpriseOne and World customers considering an upgrade should not commit to significant projects until Oracle reveals its long-term and detailed strategy for both product lines, in black white. They will either have to vehemently state their preference for non-Oracle platform support (at least as ammunition for negotiation) or start anticipating conversion choices for the 2008 Project Fusion timeframe.
Users that cannot wait long because they risk losing their competitive edge, should start evaluating alternatives now. For those considering the upgrade, possibly by switching providers, please bear in mind that "free" or heavily discounted upgrades of enterprise applications is not free at all. License fees can amount to almost 10 percent of the entire upgrade price tag. Training, change management, data migration, customization and modification migration (preservation), fit/gap analysis of new software, implementation, etc. costs can add up. If an end user company is overly concerned about the future offered by the incumbent vendor, it can have "peace of mind" by switching vendors. The real catch will be to discern the continuing cost of upgrades. In other words, decision about hybrid SAP-PeopleSoft-J.D. Edwards environments must not be led by sentiments. It should be a mathematical exercise that factors in all software life cycle costs.
In most cases, it is not sensible for companies to run critical systems without maintenance contracts, but users do have other options (see The Old ERP Dilemma: How Long Should You Pay Maintenance?). Companies with older versions of PeopleSoft products and do not expect to upgrade in the next three to five years may choose to investigate third-party maintenance vendors that promise lower maintenance costs. If staying with Oracle, users should avoid committing to multi-year maintenance agreements without the ability to cancel. Also, customers should ensure that maintenance costs do not escalate by more than a reasonable rate, such as the cost of inflation. They should also avoid maintenance and technology lock-in from any supplier.
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.