B2B Analysts
About the Company   Services   Research   Pressroom  
Short Takes
Profit Optimization

San Diego and New Zealand

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?


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.


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.

To see other recent Short Takes, click for a listing.