Tennis, Anyone?
After he lost to Alinghi, Larry told the audience at Oracle
Applications Group that he was taking up tennis. The question is,
what does he do with that expensive boat?
Summary
OAGs are always about messaging, and there were two big messages
at this one. In 48-point type was "Our products are cheaper."
Between the lines and slightly less crisp was, "We can't compete
head to head any more, so we're not going to play. We'll sell apps,
but we won't play the standard apps game." Probably a wise
move, but it leaves the question, "What will they do with that
expensive product?" Answer. Slash cost of sales
and hope it works out. Net, net, it will mean a drop in market share
over the short term and, just as important, a rotation to the mid-market.
Highlights
As always, the OAG sets the direction for the next year. Here's
the capsule version.
- Primary reason to buy: "Our product suite running on Linux/Intel
has a much lower TCO (total cost of ownership) than the competition's."
- Sales direction: "Finish upgrading the 75% of the customer base
that has started upgrades, then sell new products into the suite."
- Big new product news: "None. Our products are fully integrated and
therefore cheaper to run." But buried in the breakout sessions
were some fairly nifty apps innovations, and there was an
extension of Fast Forward to business process buyers called Business Flows.
- Organizational news: "We are segmenting the sales force, so
that we will have a group dedicated to applications, and we're
investing heavily in e-sales."
- Quote of the week: "We don't send you an army of consultants
to drink your coffee and eat your doughnuts. Our consultants work
over the Internet. They sit in our shop and eat our doughnuts."
The remaining highlight. Larry did his traditional keynote in person, flying
home from New Zealand and a loss in the America's Cup Challenge match to tell us
that his product is cheaper.
The Real Story
We believe that Oracle is taking a big, bold gamble on its applications
business. Having concluded that their apps are essentially a commodity
and that there is no practical way to pick up share with the current
suite, they've decided to de-emphasize applications, selling what
they can, where they can, but focusing more on selling profitably
and selling the full set of Oracle products than on selling profusely.
It's a gamble that could pay off. If everything works right, they
could steady apps sales, while transitioning to spaces like the
mid-market that their product now suits well. But even if it doesn't
(and the smart money's on the other side), they'll force the competition
to reassess the rather expensive way they go to market.
The key element of this move is net-based delivery of sales and
consulting, a good idea in the long run, but one that the market
may be slow to accept.
Questions remain. Why retreat from the application business when
your product suite is essentially solid? Is such a radical move
needed, and if it is, why take it now? What are the odds that it
will succeed? And could it have been done better?
To answer these questions, we need to understand
a little bit more about what Larry is doing when
he's not sailing yachts.
The Oracle Rule
Larry has a rule. Go to market with a clear edge, a difference
that your software has that everybody can understand, an edge
that clearly makes software
better.
This rule has been a bit of a problem for him in the applications
market, because Oracle applications don't have much of an edge.
They're a commoditized product in a market that has lost faith in
loud new claims.
At this year's Oracle Applications Group conference, however, Oracle
came up with a bold and possibly brilliant solution to the problem.
Don't say anything about the applications. Instead, say that your
whole solution (Oracle DB, app server, applications, Linux/Intel)
runs cheaper.
This is a radical move. The applications market has always been
about making businesses run better by automating business processes.
Not at this conference. Here, automation is just a necessary evil,
a pure cost, and what Oracle is selling is less evil than the other
guys'.
But following the Oracle rule has effectively turned Oracle away from
its applications.
A New Sales Process
Oracle has the courage of its convictions.
If apps are a commodity, you want a cost of sales appropriate to
commodities.
So Oracle is doing something about that dratted
cost of sales in apps. First step, Oracle has decided to
create a separate sales force for apps. Second, they have significantly
beefed up their remote sales and delivery arm, called Oracle Direct.
The first step leaves a rearguard, while Oracle turns to other fronts. The
second step improves the margins of the sales they get.
Will this work? If you mean, will it increase market share, the
answer is no. Will it arrest the slide in applications sales? Probably
not. But will it increase profits by grabbing the sales Oracle deserves
with a significantly lower cost of sales? Probably. Short
term, I think the dedicated sales force is a bad idea. Long-term,
lower cost of delivery will keep them ahead in the margins race,
though it might slow growth.
Why won't it help increase share? There are two problems,
a short-term problem and a long-term problem.
Short term, the problem is obvious. You never want to reconfigure
your sales force, because it causes pipeline disruption. At the analyst day
conference, worry about this was much in
evidence, and many were the somewhat unconvincing attempts to allay it.
Disruption will be minimal, it was argued, because this change
has been going on for 18 months and will just be finalized January
31. But if I read the rather confusing statistics correctly, the
1/31 deadline ("either close the current deals or lose them")
affects half the new apps sales force. This is a lot, well more than
enough to cause significant pipeline disruption, though the potential
disruption is
mitigated by the fact that many "new" apps reps will have continuity
because they will stay with companies where they are now reps.
Even with significant disruption, if the move is the right move,
there may be no time like the present. But for it to be the right move
now, there needs to be a long-term benefit. Unfortunately, even
when the reconfiguration is done, you're left with a big
long-term problem.
Moving to Remote Sales
Some 5 years ago I had a long talk with Ray Lane about
this subject. Ray had recently eliminated the separate Oracle applications
sales force and given every representative responsibility for selling
all products. I told him that it was a bad idea.
"Applications are specialized. You need a knowledgeable
salesperson. The buyers are different. The sales process is different," I said.
(Larry said much the same thing at the conference.)
Ray convinced me I was wrong (a tough thing to do). Essentially,
he said, you need the coverage that an account rep system gives you.
"We need to have a person on point everywhere we have a
database, because many of our database customers naturally look
to us on the apps side. If we had a separate apps sales organization,
we just couldn't get the coverage, and we'd miss sales," is a rough
transcription, without that air of authority that Ray has.
Larry, to give him credit, understands Ray's position.
His solution to the coverage problem? Beefing up Oracle Direct.
Oracle Direct has been characterized by analysts as a telesales
and lead management program. It may have been that once. But now
it's much more. Oracle Direct is a full-cycle
program for doing remote sales; it includes sales calls, demos and
pre-sales consulting. The idea is to do as much as before, but reduce
face-to-face time. The idea even extends to the post-sale. Oracle
is now trying to host as much as possible and also do much of its
service and consulting remotely.
Clearly, the economics of this are great. A demo specialist can
only do 3 live demos a week. But they can do 5 demos a day over
the web. And it isn't just the economics. As a consultant, the only
time I got doughnuts at a client site was when I paid for them (and
gave some to the clients). But I do see why people warm to the
thought of stay-at-home consultants, eating other people's doughnuts.
Great as the economics are, though, I think it's a net loss.
It could only be a net gain if remote sales,
demos, and delivery were roughly as effective as they are in-person. I
just don't see how that can be. People have evolved a
set of rules for playing the apps game. Under those rules,
you take a significant hit when you do things remotely.
By any conventional standard, therefore,
this is a significant move away from the apps customers.
It isn't a pure loss. You can, as I said, do more demos if your
demo artists are sitting at your desk eating your doughnuts. And you can
more easily shift resources to high-profit items (like e-mail servers) if
the resources are working the phones rather than traveling.
There are, moreover, companies that might
well prefer to buy and be serviced this way if they think they're getting
a better deal. And finally, even though there are fewer app salespeople, they
are better at their job, and so their close rate will be higher.
Still, if the conventional wisdom is right at all, it will
mean a loss of market share. Why? Because the rules of the
apps business say that apps are intrinsically a high-touch business.
A High-Touch Business
The apps business, you see, is
pretty darned irrational. People regularly buy
when they shouldn't buy, don't buy when they should, buy the wrong
product for the wrong reasons, and after all this, fail to make
it work. And they spend a lot of money doing it.
When you have a high risk of doing the wrong thing, and if the wrong
thing is seriously expensive, you rarely make the decision without
a professional that you can talk to.
The same holds true after the stuff is bought. These implementations
are idiosyncratic, and the people who actually put them in don't
typically have a lot of experience with all the uncertainties. The
hours are long, the risk to them personally is high. They look to
somebody experienced to help them. That consultant over there may
be eating your doughnuts, but he's been there and done that and
he can tell stories about how it was elsewhere. He (or she) is someone
you can bond with.
I'm not saying that it should be so. And I'm not saying
there isn't a better way. But the way everybody plays the game,
they acknowledge the need for high touch, and they build the
costs of high touch into the cost of doing business.
The Golden Eye and the Tin Ear
Not that Oracle has ever been afraid of going against the
conventional wisdom or changing the rules.
Larry Ellison has one of the best eyes in
the business for the direction of the software market. He can
see that the apps business is becoming a commodity business (obviously,
a low-touch business). And he can see, too, that he wins big if he
can play by a different set of rules. Besides, even if he turns out
to be wrong, he improves margins.
So, I thought, after a long day of listening without believing,
I'll suspend judgement until Larry's keynote.
The keynote is always the highlight of an OAG.
You get the season's pitch in inimitable Larryspeak. It's cogent,
it's really smart, it's funny, and until the spotlight is gone and
the bodyguards lead him away, it's utterly compelling.
But this year's speech was not heartening.
Larry may have been right (ultimately) about issues of cost
and issues of integration. But for my money, it takes a tin
ear to tell an audience whose life is in apps that they're
in a commodity business. Ad that's what Larry did.
Larry sounded more worried about Microsoft than SAP — at
an apps conference. He sounded more excited about an e-mail server
than about daily business intelligence — at an apps conference.
He talked a lot about Linux — at an apps conference.
Larry likes to answer questions from the audience, an audience
that always reminds me of the engineer on board a freighter, up for
a moment on deck, wiping the grease from its collective forehead,
before descending to another year of patching and upgrading. There's
always at least one question like, "Within the recently released
update to the pricing algorithms, there's a rule about date effectivity
that doesn't apply in certain Asian countries...when will you be adding
a new rule."
This year after the talk, there was a very long pause. Later on,
one member of the audience asked him what he was going
to do after losing to Alinghi? He said, "I'm taking up tennis lessons,
starting Monday." When Larry loses at a
very expensive venture, he makes the best of it and goes on to another game.
Much of this apps conference seemed to me to be precisely that.
Making the Best
For Oracle apps, making the best of it seems to be selling what you can, but
doing it profitably. He may indeed lose market share, because he can
touch fewer people. But he has an excellent product and a selling machine
in Oracle Direct
that can yield much higher margins than his competition.
The effect, after all, of selling this way isn't simply, "You lose more
competitions." Much of the art of applications sales is picking your
spots, and to a great extent your choice of spot is influenced by your
cost of sales.
With Oracle Direct as a bigger and bigger front end,
Oracle will be able to reach some customers
that would have been qualified out under previous regimes, because the cost
of sales would have been too high. They can afford to follow up on certain leads
that would have been discarded, afford to give demos that would never have been
given, and so on.
These customers who would have been qualified out clearly fall into two
categories: mid-market customers and existing application customers who want
small add-ons. If this move succeeds at all (and it will some),
I think you'll see a rotation in Oracle revenues toward these customers.
Notice, too, that this rotation doesn't preclude a move back into
old-rules competition at some later date. In fact, this whole
shift may simply be a holding action.
Remember, Oracle has been
hampered for three years by its inability to get customers to upgrade effectively.
At OAG, they announced that 75% of the customers had now gone live on 11i or were
in the process of doing so. So this problem is getting somewhat smaller. But
that 75% number also seems to be somewhat deceptive. If
Oracle was at all smart this year, they took a leaf from the PeopleSoft book
and counted any customer as
upgraded if even one instance or one module was upgraded. So the real
number may be closer to 40% of seats upgraded, or even less.
With a number like that, it may not make sense to play the standard
apps game. With no way to distribute innovation, why go to market with
business leadership? With no way to demonstrate benefit, why try to go head
to head with companies whose more mature product has more demonstrably happy
customers?
Oracle may have turned away from the apps market, but
they haven't stopped development.
Buried underneath where almost no one could see it were some very
nifty innovations. Demo'ed to the whole convention was a new version of the
daily business close, now called daily business intelligence,
quite a good idea and (I believe) technically
challenging. Buried in sessions were things like a fairly reasonable approach
to improving data quality (please don't yawn, it's important) and some
innovations in supply chain management that are still some distance off,
but potentially powerful.
Larry, in other words, may have left his losing boat in New Zealand,
but somebody there is still working on it, and it's still a pretty good boat.
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