Enterprise Software Migration Alert: Is SAP the Alternative?

The SAP Factor

There is a sea of complexity stemming from Oracle's acquisition of PeopleSoft. From the onset, the deal was hardly clear sailing. Eighteen months of struggle that took boardroom drama to the courts was finally resolved in mid December. Oracle argued successfully during its antitrust trial (US Department of Justice versus Oracle Corporation) that competition and product innovation would not suffer from its acquisition of PeopleSoft, formerly the second leading business applications provider in the market. The deal closed in December, at what some considered a inflated cost of $10.3 billion (USD).

Part Seven of the While Oracle and PeopleSoft Are to Fuse, Competitors Ruse—Leaving Customers (Somewhat) Bemused series.

The schematics of the merger are far from simple, both company- and client-side. Corporate culture, logistics, and development will have to be assessed and restructured. Client-side, Oracle must navigate customers through likely increased maintenance fees, different migrations, and the steep learning curve of the new service oriented architecture suite, Project Fusion (see part one) to bring users on shore. Not only must it convince Oracle users dismayed by the quality of Oracle E-Business 11i, but it will have to contend with disenfranchised J.D. Edwards clients who are experiencing their second acquisition, first by PeopleSoft, now by Oracle. Oracle revealed some elements of its post-acquisition plans during a conference held in January at Oracle headquarters (which included an audience of over 17,000 worldwide members joining via Web-cast and phone). The announcement included the new organization of the application, product and global support plans, and discussion about the market share. However, questions are lingering, such as Oracle's infrastructure commitments.

Given these elements of uncertainty, SAP might therefore benefit the most by Oracle's merger transition—an ironic turn of events as Oracle's merger is an attempt to uproot SAP's current number one holding in the market. Currently, SAP remains the undisputed market leader, with nearly $10 billion (USD) in revenues, whereas Oracle, PeopleSoft, and J.D. Edwards have a combined (approximate) $5.3 billion (USD) in applications. Moreover, SAP's market share has only soared since Oracle's move, and to further capitalize on recent events, SAP also announced it will market "sweetened" migration deals to PeopleSoft and J.D. Edwards' users on its fairly unified and tightly integrated suite. The suite runs on possibly the widest choice of platforms and technologies, and this, coupled with its openness to both the J2EE and .NET camps, may prove quite enticing. SAP also has the advantage of having the broadest cohesive offering, without a need for any disruptive acquisitions, and it also does not have any major, poor market sentiments like Oracle has repeatedly inflicted upon itself.

Even if only a tiny percentage of PeopleSoft customers defect from Oracle, SAP's leadership in the market may still be bolstered in the future. SAP will be able to complete more easily against only one competitor, than it would if PeopleSoft and J.D. Edwards were still in the contest. However, market share is not the only factor in determining the winner. SAP and Oracle have had their figurative noses bloodied by the likes of Lawson, Deltek, QAD, Intentia, Glovia, Adonix, Unit 4 Agresso, Epicor, and IFS (to name a few), on more than one occasion. Thus, it might not be inconceivable to see SAP acquire a tier two vendor that is deeply embedded within divisions of its larger customers—especially given SAP's failed attempt to acquire Retek, which was scooped up by Oracle instead. Through acquisitions, SAP could create its mid-market solution for certain industries, thus replacing its native mySAP All-in-One, which is still developing industry solutions for larger mid-market enterprises.

Moreover, SAP's Safe Passage program changes the paradigm by providing a support contract for the current, non-SAP applications as customers migrate to SAP's products. This targets 2,000 or so companies that currently own both SAP and PeopleSoft/J.D. Edwards applications and these companies are certainly the most likely candidates to be interested in this offer, since many of them have likely been mulling over consolidating and standardizing vendors (see Standardizing on One ERP System in a Multidivision Enterprise). Moreover, SAP has a vested interest in protecting this group of customers from any additional penetration by Oracle.

Unlike most migration programs, SAP is offering to be responsible for the maintenance of its existing, fierce competitor's implementations, as users make the transition to SAP alternatives. This approach should provide customers an attractive, lower risk, non-Oracle future option if required, because it combines lower cost maintenance across all three installed product lines without the risk of using a third-party provider. An added pressure for Oracle is that SAP's standard maintenance fee comes in at 17 percent, rising by either 2 percent or 4 percent, if customers want extended service on older, expired product releases. It is also interesting to note that SAP has gone through a transformation during last few years. It has changed from a prickly, arrogant leader to one that has been carefully listening, without feeling slighted, to the critical voices of the market and adjusting its moves accordingly.

Oracle is hoping to assimilate current PeopleSoft's base and create more application and indirect database and server revenues, but what if customers decide to go to SAP instead? Also, at the same time, because of IBM and Microsoft's fierce competition in the database market, and because of IBM, Microsoft, BEA, Sun, and the many others in the enterprise application integration (EAI) and middleware/application server markets, Oracle might not post excellent results in its other business either—especially in this continuing, timid economy, and because of possibly lingering negative market sentiments towards Oracle. Interestingly, Oracle itself was the beneficiary of a muddled merger when it had a windfall of Informix database customers after IBM acquired Informix and subsequently attempted to move those customers to its own DB2 database product. (See IBM Buys What's Left of Informix),

This is Part Seven 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 Eight will discuss Challenges and make Recommendations.

Oracle's Risk

The point is that with potentially strained cash or increased debt, and possibly disappointing results in the future (through other likely acquisitions), Oracle may become vulnerable, and even a possible takeover target itself. Currently, Oracle may seem to be on top of things and acting from a position of strength. It has $9.2 billion (USD) of cash, and realistically, is an unlikely takeover target because its founding CEO still retains the majority of ownership. Additionally, credit agencies have not changed the company's ratings, deciding it was still strong, despite Oracle's $10 billion (USD) debt. However, Oracle may be betting its entire business on this acquisition. Namely, its huge cash reserves may be quite depleted after the acquisition goes through, but the vendor hopes the debt will be replenished in two years through profitable future quarters and from the bigger opportunities that the larger install base should bring. However, for the first time that many can remember, Oracle's balance sheet now carries negative, tangible shareholders equity.

However, Oracle is not the same company it was when its previous changes took place early in the 1990s. It is much more mature, with a longstanding, impeccable financial position, with an undisputed platform on its products' leadership. Oracle E-Business Suite now consists of a more stable, broad applications portfolio, built on a common data model and the company has recently established internal processes that now make it less fickle and more responsive to customer issues.

The best example of this is Oracle's transition from its previous, radical statements about the acquisition, which included the brazen proclamation of stopping the PeopleSoft family in its tracks, to a much softened one, offering to continue to support core PeopleSoft products for ten years (albeit it would stop marketing the acquired software). This shift was due to pressure from PeopleSoft customers, and based on the advice of co-president Chuck Phillips, the consummate diplomat Oracle hired from the investment bank Morgan Stanley in 2003 to execute its expansion plans.

There are some indications that Oracle's customer service and focus have significantly increased with the addition of Phillips, who has apparently filled the void after the departure of the former, well-respected president Ray Lane (see How Detrimental Can a 2nd-In-Charge's Departure Be?). Along similar lines is the appointment of John Wookey as senior vice president of applications development. A new realism, helped by favorable communication from Oracle's top brass, has lightened the mood of the install base and emphasized Oracle's seriousness about the applications business.

How IBM and Microsoft Fit in?

On another, and perhaps more significant level, the acquisition is about promoting Oracle's database, middleware, and development tools, which are a greater part of Oracle's revenue than its applications business. Oracle and IBM are fierce competitors in that segment, but back in September, PeopleSoft aligned itself more strongly with IBM. It signed a five year billion dollar deal to incorporate WebSphere, IBM's middleware and tools offerings, into PeopleSoft's applications, treating IBM DB2 as its preferred database. Now, with Oracle's takeover of PeopleSoft, the IBM relationship appears to be dead, and, in the long run, a key Oracle objective in the PeopleSoft deal might be to migrate both the PeopleSoft and J.D. Edwards product lines to Oracle technology.

Like Microsoft, IBM has the wherewithal to buy almost any enterprise applications vendor, but does it have the desire to deal with the implications of such an action including strained partnerships, where many application vendor partners become competitors? Is it prepared to deal with the inevitable competitions within its own global services consulting division? On the other hand, can it sit still as its large DB2, WebSphere, Lotus Domino, iSeries, etc. install bases within PeopleSoft and J.D. Edwards are being converted to Oracle?

Still, not all is lost for IBM, which, beside BEA and some open-source providers like Jboss, remains possibly the only major independent and "vendor-agnostic" application server platform. IBM WebSphere will remain attractive to the huge number of independent software vendors (ISV) who might be wary of SAP and Oracle (not to mention of Microsoft Business Solutions) extending their application scope, and encroaching on their turf. And, if WebSphere's popularity continues to grow, Oracle will have little choice but to continue supporting those newly acquired customers who demand the platform be supported, while giving the "or else" alternative.

Further, Oracle could use J.D. Edwards products (and indirectly IBM) to better penetrate the middle market. At least, Oracle has been in communications with Quest, the J.D. Edwards advocacy group, something that even the customer-friendly PeopleSoft fell flat doing. But, ongoing support for the IBM DB2 database is of particular interest to 3,000 J.D. Edwards World users, given its historical roots on IBM AS/400 and iSeries midrange systems. iSeries even ships with its own version of DB2, and, lo and behold, Oracle does not even offer a version of Oracle Database 10g for iSeries. This further demonstrates that this vast market remains a foreign entity, and Oracle will have to maintain some relationship with World users and IBM, in order to understand what has ever been done to the product, and how to go forward.

At the end of the day, there will still pervasive integration opportunities throughout the consolidating market for IBM and its multi-partnered consulting group. Acquisitions only increase the need for middleware and integration patchwork, which is an area where IBM will gladly oblige. IBM, more than Oracle or SAP, has become the master of middleware infrastructure and vertical industry consulting, with WebSphere, the Tivoli enterprise management system or the Rational software development tools.

When it comes to the former J.D. Edwards systems, Oracle does not want to "throw out baby with the bathwater". It is often the case that in the IT sector even archrivals have ongoing alliances in areas that suit them both. Possibly the best example is that of SAP and IBM, who virtually compete on the middleware front through NetWeaver and WebSphere, but IBM is SAP's largest consulting practice in the world, with a multibillion annual revenue.

This concludes Part Seven 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 Eight will discuss challenges and make recommendations.

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