Oracle defends its 90% maintenance margins
March 16, 2010 by Jonathan Gross
ERP lawsuits involving Oracle, SAP and others have the potential to reshape the lucrative ERP maintenance fee marketplace. Manufacturing AUTOMATION asked lawyer and ERP consultant, Jonathan Gross, to break down the issues.
Imagine that you owned a chicken that laid one golden egg after another. Then imagine that a thief broke into your barn every day and stole your precious golden eggs. If you caught the thief, you’d probably sue his pants off and consider administering other, less legal forms of punishment. And that’s exactly what Oracle is doing to Rimini Street, TomorrowNow and SAP– the suing part, that is.
In two separate lawsuits, Oracle claims that Rimini and TomorrowNow stole its intellectual property (IP). Adding insult to injury, Oracle says that these companies then used the stolen IP to compete against it in the ERP maintenance and support market. SAP, which acquired TomorrowNow, is claimed to have been complicit in TomorrowNow’s theft.
Oracle’s Alleges “Massive Theft”
According to the lawsuit, Oracle’s customers were given passwords so that they could access Oracle’s maintenance and support databases. Those customers allegedly then turned around and gave the passwords to Rimini & TomorrowNow.
Oracle admits that nothing was wrong with this, as long as access rights weren’t exceeded. You’ve probably guessed that Oracle thinks that the defendants crossed the line – though, you probably wouldn’t have guessed that Oracle is alleging massive corporate fraud and theft of confidential information.
Oracle says that TomorrowNow and Rimini used these customer access passwords to unleash computer crawlers and robots that, in turn, scoured Oracle’s databases. One of the more specific examples in Oracle’s lawsuit against Rimini claims that: “from November 18-24, 2008, Rimini Street used an automated crawler in an attempt to [illegally] download approximately more than 800,000 files from Oracle’s Technical Support website”. In some cases, says Oracle, the invasion was so extensive that it caused its databases to crash.
The fact that the Rimini and TomorrowNow/SAP lawsuits are based on substantially similar allegations isn’t accidental. Seth Ravin, a founder of TomorrowNow, went on to start Rimini Street after SAP acquired TomorrowNow. SAP has since shut down its TomorrowNow operations and has admitted that some of TomorrowNow’s downloads “may have erroneously exceeded… right of access". SAP says, however, that Oracle’s allegations are overblown.
Vendors Losing Their Grip
The lawsuits’ impact extends well beyond the parties and the allegations. Potentially at stake: the future of the competitive market for ERP maintenance and support services.
The maintenance market is similar to the Gillette razor and blade model. Generally, a company needs to buy maintenance services from its ERP software vendor. Unlike the Gillette model, however, the vendor doesn’t use the ERP software as a loss leader.
With respect to maintenance fees, vendors typically charge their customers between 18% and 22% of ERP license fees annually. So, a midsized company that paid $300,000 for an ERP package would, for example, have annual maintenance fee obligations ranging between $54,000 and $66,000.
Although the price tag seems hefty, it wouldn’t be so bad if companies received equal value in services. However, according to Forrester Research – a technology and market research company – 85% of SAP customers fail to see the value in their maintenance contracts. I wouldn’t be surprised if other vendors are experiencing similarly low satisfaction rates.
The price and value disconnect seems to be confirmed by the vendors’ own financial results. Companies like Oracle and SAP report 90% profit margins on their maintenance services. By going straight to their bottom lines, the revenues clearly aren’t being used to fund maintenance services.
End-user discontent has started to boil over. With companies increasingly holding their IT assets to account, they’re no longer willing to pay whatever the vendors demand. End-users are now taking their fight to the vendors through different channels.
One such channel is through user groups. A collective voice helps companies shape vendor policies and practices. For example, an SAP user group recently convinced SAP to back-peddle on a planned maintenance fee rate hike.
Another channel is through individual company pressure. Greater numbers of companies report that they’ve successfully negotiated lower maintenance fees. According to a recent Bank of America/Merrill Lynch report, 58% to 60% of companies succeeded in negotiating lower maintenance fees with SAP and Oracle in Q3 2009. The success rate for SAP represents about a 5% increase from Q1 2009. Astoundingly, the Oracle success rate represents a 20% increase from Q1 2009.
Although the small size of the survey raises questions about the report’s accuracy, the key take-away is that negotiating success is on the rise.
The influence of third-party services – like those offered by Rimini – can’t be ignored. These cheaper alternatives are helping to break the incumbents’ stranglehold on maintenance services.
High Lawsuits Stakes
The Oracle lawsuits, however, are probably having a chilling effect on the third-party maintenance market. New entrants aren’t rushing into a business knowing that the first piece of mail might contain an Oracle lawsuit surprise.
And, if the thought of a lawsuit is cooling the market down, an Oracle win could freeze it over. If the courts decide that the support and maintenance files were stolen, Rimini and other third-party providers would have to learn new ways of providing their services.
These new methods will probably have a higher cost structure. If they didn’t, companies would be using them now. Any increases in the costs of service will probably be passed on to the end-users in the form of higher rates. The higher the rates, the more difficult it will be to persuade a company to switch providers.
The third-party support model is a pure price play. Despite their claims to the contrary, these providers can’t offer the same quality of support as the vendors. Do you think that Rimini knows the Oracle product as well as Oracle?
Also, for the reduced price, the third-party providers offer a more limited range of services. For example, they don’t offer product upgrades. So, a contract for fewer services becomes less attractive as prices increase.
If Oracle loses the lawsuits, it’ll be interesting to see how the market shifts. You can be sure that potential new entrants are standing by licking their chops. Plenty of companies are hoping to plant their stakes into the lucrative maintenance market, including consultancies and value-added resellers.
To stay competitive, some ERP vendors might reduce their prices. Others might try to protect their market share by drafting more onerous contract terms. And others might adopt an “if we can’t beat ‘em, join ‘em” strategy. This latter group could, for example, try to develop a maintenance and support resale model.
The future shape of the maintenance market is anyone’s guess. The best advice to end-user companies: take advantage of the negotiating power while you’ve got it.
Jonathan Gross LL.B., M.B.A., is a lawyer and consultant who specializes in aligning business with IT, selecting IT systems and implementing IT systems. He can be reached at firstname.lastname@example.org and followed at http://twitter.com/Pemeco.