TomorrowNow Incident Brings Scrutiny to SAP, Oracle

Oracle’s pending lawsuit accusing arch-rival SAP of what amounts to industrial espionage has inadvertently brought both firms’ lucrative and controversial service and maintenance fees to the fore.

Both software giants’ attorneys were scheduled to lock antlers Tuesday in a San Francisco federal court but the festivities were postponed after the presiding judge fell ill. Assuming all the players are healthy and available, the legal theatrics will commence September 18.

Oracle  claims SAP  engaged in “corporate theft on a grand scale” by engaging in “systematic, illegal access to—and taking from—Oracle’s computerized customer support systems.” Meanwhile, last month, SAP CEO Henning Kagermann admitted that someone working for TomorrowNow engaged in “inappropriate” downloads of Oracle support materials but contends SAP did not access any of Oracle’s intellectual property.

While both the severity and consequences of these rogue downloads will come to light as the litigation progresses, customers, industry pundits and a small but vocal group of third-party software-support firms are left asking themselves what’s really motivating Oracle’s desire to trumpet these less-than-airtight allegations of brazen corporate malfeasance.

“The lawsuit freezes the market so Oracle is getting what it wants,” Vinnie Mirchandani, a former Gartner analyst and founder of the Tampa, Fla.-based IT consulting firm Deal Architect, said in an interview with “They’re stalling any deals SAP and TomorrowNow might have or could have with customers looking for third-party support for their applications. No corporate attorney is going to let his people buy from a company that’s involved in this kind of litigation.”

Undoubtedly, the TomorrowNow brouhaha has chilled SAP’s efforts to undercut Oracle for some of the high-margin service and maintenance contracts Oracle assumed it would enjoy following its January 2005 takeover of PeopleSoft, which had previously acquired J.D. Edwards.

Adding the PeopleSoft-J.D. Edwards coup to its own acquisition of Siebel Systems, Oracle instantly became a real threat to SAP’s stranglehold on the customer relationship management (CRM)  and enterprise resource management (ERP)  software markets and the bounty of services revenue that came with them.

SAP immediately responded by acquiring TomorrowNow two weeks later and introduced what it called a “safe passage program” to persuade organizations to migrate to its mySAP ERP software and NetWeaver platform.

Under this program, companies now pay a maintenance fee of 17 percent of the original price of their PeopleSoft and J.D. Edwards software licenses, not only undercutting Oracle’s standard rate of 22 percent, according to Mirchandani, but also priming the pump for future SAP applications down the road.

“Whether it’s 17 percent or 22 percent of your total license value, that adds up to millions of dollars every year for maintenance at most large companies,” Mirchandani said. “In the end, it comes down to the fact that maintenance is just too expensive. Just because you buy a Porsche, it doesn’t mean you go to the dealer every time you need an oil change. Besides, most software is very stable within five or six years. You just want to be left alone.”

But owing partly to the dearth of competent, third-party service providers like TomorrowNow, which boasts more than 300 corporate accounts, and customers’ inclination to stick with the devil they know, Oracle, SAP, IBM, Microsoft and virtually every other software vendor continues to make a killing off these iron-clad service contracts.

Last year, for example, SAP reported total sales of slightly more than 9.4 billion euros. But software licenses only accounted for 3 billion euros, or 33 percent, of its total revenue stream. Maintenance checked in at 3.53 billion euros, or 38 percent, and service revenue accounted for 2.72 billion euros, or 29 percent, of its total haul in fiscal 2006.

Oracle’s mix was similar. New license sales represented $2.48 billion, or 43 percent, of its revenue mix in its latest fiscal year while updates and support brought in $2.27 billion, 39 percent, and services tallied $1.08 billion, or 19 percent, of its total sales.

Punita Pandey, CEO of San Jose, Calif.-based netCustomer, knows all too well just how hard it is to take on the top-tier vendors for a sliver of this enormous service and maintenance pie. Two years ago, the third-party, software-support firm nearly went belly-up after a falling out with Oracle following its PeopleSoft acquisition.

For four-plus years, netCustomer contracted with PeopleSoft to provide behind-the-scenes support for most of PeopleSoft’s business applications. PeopleSoft negotiated service and maintenance contracts with its customers and then paid netCustomer what Pandey now calls an “embarrassing” flat, monthly fee to deal with software bugs or printing issues or whatever else went wrong for customers using PeopleSoft’s software.

But when PeopleSoft finally capitulated to Oracle’s will, Pandey balked at Oracle’s new and, presumably, even more embarrassing financial terms, turning her back on about 75 percent of her firm’s business.

“It could have been the end for us,” Pandey said. “We came close to death. But the thing is we’re entrepreneurs. It meant tapping into my savings and working for more than a year without a salary but I’m happy we made that call. Now we’re truly independent and have a level of experience and the infrastructure to compete with these vendors and give customers a real choice.”

netCustomer, which now has almost 100 employees and serves 15 customers, is among a relatively small number of third-party service providers bucking the odds to provide an alternative to customers infuriated by paying 17 percent to 22 percent of their annual software license every year for service or upgrades they often don’t need. Conexus Partners in Denver, Versytec of Nashua, N.H. and CIBER, based in Greenwood Village, Colo., are hoping to join TomorrowNow as elite third-party service providers.

“The majority of Oracle’s and SAP’s income in the past two years has come from this revenue stream so I can understand their reluctance to give it up,” Mirchandani said. “The margins are close to 90 percent so they’re addicted to it.”

While Oracle appears to have temporarily thwarted SAP’s big plans with TomorrowNow, both companies might have bigger issues to deal with once the lawsuit is resolved.

“Personally, I doubt SAP would be stupid enough to encourage or support any kind of malicious attack on Oracle,” Pandey said. “If anything good can come of this lawsuit it would be that customers would realize how they’re being taken advantage of by both vendors and take a look at other options.”

News Around the Web