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It is being reported online that Oracle has started a significant RIF (reduction in force) process in their consulting division. ZDnet’s Irregular Enterprise has a post about it today that brings up some good points. As a former Oracle consultant I wanted to weigh in as I think this is a worthwile subject to understand for folks thinking about on-premise software.
I went through several RIFs while employed with Oracle Consulting. The key thing to understand is that Consulting was told, in no uncertain terms, that it had to meet the same operating margins as software and maintenance, ~40%. Consulting charges $200 – $400 and hour for resources to work on implementation, yet it had a hard time meeting these margin goals. That gives you some indication of how profitable on premise software and its annual maintenance fees are when a consulting division at these prices cannot keep pace!
Also, fewer and fewer are the organizations willing to spend top dollar for consulting help. In some cases you could hire two consultants for the price of one Oracle consultant and muddle through fine. This makes it more and more difficult for Oracle to maintain the margins in consulting that it earns in software and support. But customers have a point here. It’s not like the early days of ERP/CRM suites anymore. There are plenty of resources around now who understand these systems and who have done multiple implementations. Our NetSuite implementations for example average less than 100% of the price of first year licenses.
It’s important to understand, before heading into an on-premise software/implementation/support contract that the inmates have taken over the on-premise asylum and put the visitors, er customers, to work for them.
Salesforce.com on for example, and other SaaS firms, operate at much lower margins, under 10% in salesforce’s case and for NetSuite the operating margin is still negative. Businesses of all types should expect good operating margins, but does it really make sense to have operating margins approach 40%? This is a sign that the market is no longer competitive, that in fact a lot of on-premise software companies have locked in their customers and they can extract a pound of flesh as they wish. Not a good position to be in, if you are a customer.
How have they achieved lock in? Customers have spent so dearly to buy, implement and support the software over the years that all the players in the market know that to even suggest changing is waste of time. No one wants to have to bury the investment they have made in Oracle, SAP, Sage, Microsoft, etc.
Meanwhile small and medium enterprises are taking full advantage of less expensive software/implementation/support from a wide variety of SaaS vendors. It’s a real weakspot in the operations of many companies that they continue to escalate their commitments to on-premise software vendors that have done nothing but hustle them year after year. Oracle’s operating profits may be great news to the buyers and sellers on the stock market, but eventually the customers have to take notice and ask “Why are contributing to our own mugging?”
(Cross-posted @ Sightings in SaaS)
Perhaps Oracle’s operating margins are better because they are a better operating company. Salesforce.com has an SG&A of around 50% compared to Oracle’s 22%. Oracle spends a much higher percent of revenue on R&D than the average SaaS company. Total cost of ownership over a 5 year period is typically fairly comparable between SaaS companies and on premise. I don’t think operating margin is an accurate assessment of value delivered to a customer.