At the beginning of 2002, as in years before, sales staff working for database and applications software giant Oracle were able to log into their electronic diaries and block out the dates when a holiday would be out of the question: Feb 28, May 31, Aug 31, Nov 31.
On those days, the financial quarters end, and it would be time to move in on any dithering customers and close those deals, come what may. Discounts would be rife, bonuses plentiful.
Not any more. When the software and database giant announced its latest quarterly results – revenues down 16%, net income down 23% – CEO Larry Ellison blamed the shrinkage, as have hundreds of CEOs before him this year, on the downturn in technology sector spending.
But surprisingly, and perhaps of greater significance in the longer term, part of the shortfall might have been be due to another, previously unreported, factor: late in 2001, Oracle took the bold step of banning, or reducing, the end-of-quarter and end-of-year discounts that wily customers have long come to expect. The first, big period to be affected was the fourth and end-of-year quarter, ending on May 31.
Oracle has not just cut the discounts. Under a new "one-rate" commission plan, sales staff will no longer receive such generous bonuses for bringing in big deals ahead of the quarter's close.
Oracle's decision follows a similar policy adopted by Cisco back in 2000 and 2001 (Infoconomist, February 2002). CEO John Chambers said that end of quarter discounting had damaged margins and credibility throughout the technology industry, and made revenues and earnings unpredictable.
In the second half of 2001, said Chambers, Cisco had broken the so-called hockey stick – when sales rise sharply at quarter and year ends – and had
achieved near perfect linearity of orders. That means, for example, that 10% of sales come in during the first 10% of the quarter, and so on.
Oracle's change of policy has not been made for those reasons along. At the end of its fiscal year in May 2001, Oracle sales staff were so desperate to close a $95 million (EU97m) deal with the state of California that enormous discounts were offered. And state officials, in turn, became so desperate to qualify for the discounts that they signed off on the deal without properly evaluating the contract terms. Now, the deal is likely to be cancelled, with enormous damage to Oracle's reputation.
Now, Oracle executives appear to have decided that Chambers is right – and in doing so, they may help to set a pattern that others in the technology industry follow.
"We think its a healthy change. What is high-pressure selling? It's nothing more than discounting a lot. There's no need to engage in that. It's not good for the company, and it's not good for the customer," Ellison said during the company's fourth quarter conference call.
One of Oracle's concerns is that informed customers come to understand the pressure that sales staff are under and exploit it, delaying purchases and hanging on for big year-end discounts. Cisco and IBM, among others, have cited the same concerns.
In the US, said one analyst, "there is a whole cottage industry of consultants that has popped up to teach people how to do it [get discounts]." Chambers, and now Ellison, argue that once customers stop expecting discounts, they don't ask for them. And they don't cram their orders in to a few days.
Does this mean that the much cited hockey stick effect is really about to end? That is very unlikely. Every technology company is under pressure not just to hit quarterly numbers, but to grow market share, and, in the case of smaller companies, simply to cover costs. In that environment, discounting will always happen.
And, of course, many products, both hardware and software, go through distributors and partners; these usually have the freedom, and enough margin, to offer their own discounts.
Even Oracle, with its strong position, will find it harder to make the policy stick than Cisco. Cisco, for example, is the dominant supplier in most of the markets in which it operates, meaning that customers may not be sensitive to single digit percentage price changes. In other markets where it less successful, Cisco's big competitors from the telecom sector are so short of cash that they are not discounting heavily.
For Oracle, it is more complex. In databases, its leadership is under pressure from IBM and Microsoft, while in applications, it often pitches directly against SAP, PeopleSoft and Siebel. In this sector, discounting, coupled with aggressive selling, is not so much normal as notorious.
To further complicate matters, software companies know that every dollar in licence revenue today may lead to another $5 or $10 in upgrades and services over the following years. Losing a sale to save a few cents on the dollar now doesn't usually make sense.