It has been a painful journey for Oracle’s applications software business to January 2005. The uncorking of champagne that marked the completion of its $10.3 billion, 19-month hostile takeover of application rival PeopleSoft on 7 January would have seemed unthinkable around the year 2000 when its management team was split by internal warfare, and the premature release of the atrociously ‘buggy’ E-Business Suite 11i almost killed its ambitions in applications stone dead.
If a single meeting changed that potential outcome, it took place on an afternoon in 1998 when Oracle founder and CEO Larry Ellison reluctantly agreed to pick up the applications torch.
Under intense pressure from Ray Lane, the company president at the time, to somehow “turn a bunch of ‘sucky’ applications into something that the Oracle sales teams could actually sell”, he demanded Ellison sack the loyal but uncharismatic head of applications development, Ron Wohl, and appoint an outsider to lead the division – a division that was turning into the ugly sister of the company’s hugely successful database business.
Surprisingly, even to Lane, Ellison made a watershed commitment. As he later recounted to Matthew Symonds, author of the Ellison biography, Softwar: “I [told Ray], ‘Okay, I’ll be Mr Applications. I don’t want to do it… I really don’t.’ Order management, tax tables, accounting – are you kidding me? I’m working on parallel server [database technology]. I didn’t want to go from computer science to accounting. I thought that understanding and automating all these business processes would be dull and duller. It just wasn’t a book I wanted to read.”
What happened next goes directly to Ellison character – and stands as a pointer to how the PeopleSoft saga might turn out.
He threw himself into the world of automating and engineering business processes. And in doing so, the direction of his renewed ambition for Oracle (not to mention an ego that could not accept the prospect of Oracle failing in such a high profile sector) was set for the next half decade and more.
The drama that has unfolded has been intriguing – a mix of wild ambition, gung-ho business tactics and technical innovation as Oracle (not for the first time) has moved from providing customers with a product that was unfit for consumption, to the gradual establishment of an applications portfolio that is as technically robust as it is broad.
With the E-Business Suite it first released in May 2000, Oracle had rebuilt the applications code almost from the ground up to create, under Ellison’s vision, an Internet-centric, integrated set of core business applications. Almost 40% of the modules were new and they all shared a single, unified data model. Unfortunately, Ellison, renowned since the early days of Oracle as adhering to the product release principle of, ‘If it compiles, ship it’, did just that.
The first version of the Oracle E-Business Suite 11i contained over 5,000 documented bugs. Oracle itself did not install the product until the beginning of 2001 and even then it found that the mission-critical order management system was so incomplete that the company was unable to place a single order for a fortnight. Others in the same boat had different problems. International courier DHL found it was unable to complete transactions in euros, putting its planned roll out of applications to a dozen European divisions back by several months.
There was a pattern here: Oracle had been through a similar crisis with its database software in the early 1990s when it introduced version 6 of the product.
While the birth of 11i may not have taken the company to the brink of bankruptcy as that incident did, the damage to the company’s reputation in the applications sector was long-lasting. It meant that Oracle has faced years of hard technology and marketing graft to establish the credibility of its applications product line. At the same time, the 11i launch debacle gave the competition the open space in which to run.
Above all, it enabled Germany’s SAP to put even more distance between its leadership position in enterprise applications and Oracle, putting the number one slot miles out of Ellison’s reach. It also allowed PeopleSoft – a company from the sleepy town of Pleasanton, 33 miles east of of Oracle’s home in Silicon Valley – to build itself into an applications powerhouse from a base of HR and accounting software. For PeopleSoft to move into the second place was about as much as Ellison’s ego could stand. In fact, with Microsoft simultaneously growing its applications business through the acquisition of Great Plains and then Navision, it was clear what might happen next.
By the first quarter of calendar 2003, Ellison was frustrated that the technology he had nurtured over almost half a decade was heading for third or even fourth place in the market. For five straight quarters, applications revenues had fallen (eventually it would be 10 consecutive quarters).
The poor economy was not helping PeopleSoft either; it was in just as bad shape. But then in June 2003 it moved to protect itself; to ensure it established a credible hold on the number two slot in the market, it bought rival JD Edwards.
Ellison has often expressed the sentiment that only the top two places in any market mattered – all other vendors are ultimately to be marginalised. When he was in the Unix database wars, he had pushed Ingres and then Sybase into that third position.
So with PeopleSoft reinforced by JD Edwards, Ellison knew he had to move quickly or quit the market altogether.
The takeover fight that broke out after Oracle’s bid for PeopleSoft only a week after the JD Edwards announcement is well-documented. What is more interesting now that Oracle has won is how well it will manage the acquisition – both from a company and customer standpoint.
The questions that will be preoccupying PeopleSoft customers and Oracle’s existing customers are simple: Is Oracle – a company with no history of major acquisitions, run by a management team that has never steered a company through any major takeover – capable of digesting the largest prize in the history of software? How can it meld the functionality of the still-distinct PeopleSoft and JD Edwards (JDE) products into its E-Business Suite without disrupting its own code base or encouraging a mass defection by the acquired companies’ customers?
To keep PeopleSoft’s customers is going to take a tour de force of customer management and engineering. After all, as Ellison himself said when he was offered rival database company Informix in the late 1990s, there is no point in spending money on acquiring a company whose customers know it is going nowhere. Instead, he counselled, spend it on acquiring the customer base.
Oracle has made some of its priorities clear. The merged product set will be based on Oracle 11i, the company has said from the outset. However, it will incorporate extensive functionality from both the PeopleSoft product line and the JDE applications. The challenge will be to do that without triggering the same kind of highly disruptive birthing pains it encountered with Oracle 6 and 11i.
Of course, Oracle is not the same company it was when these previous sea changes took place. It is much more mature. Its E-Business Suite now consists of a stable, broad applications portfolio, built on a common data model. The company has established internal processes that now make it less volatile and more responsive to customer issues; its financials (thanks to the lucrative franchise built by its database product) are in good shape.
What concerns customers of PeopleSoft and may send them flocking into the arms of SAP, Microsoft or the scores of vendors that are pushing up from the mid-market (Sage, SSA, Intentia, Exact and others) is the nature of Oracle’s plans. At the outset of the acquisition these were radical.
Ellison’s initial statements indicated that Oracle would stop the PeopleSoft lineage in its tracks. It would continue to ‘support’ the core PeopleSoft product for 10 years, but his company would stop marketing the acquired software. Under pressure from PeopleSoft customers – and under advice from president Chuck Phillips, the consummate diplomat he had hired from investment bank Morgan Stanley in 2003 to execute his emerging expansion plans – Ellison has softened that message.
In a statement in early January, Oracle said that its aim was for the PeopleSoft engineers to complete the development of PeopleSoft version 8.9 (in 2005) and then push towards the last upgrade, version 9.0 (in 2006). The last JDE EnterpriseOne release will be 8.12 (due in 2006), with JDEWorld and Enterprise XE on support and “enhancements” only. The fusion of key PeopleSoft functionality and the Oracle applications is due in 2007-8. While it is laying off 45% of PeopleSoft’s staff of 11,225, Oracle has offered jobs to 90% of its development and support engineers. But customers, intent on protecting their investments in PeopleSoft applications, will want to know how many sign up.
Whether PeopleSoft and JDE’s 11,000 customers will eventually migrate to Oracle depends on how that early experience goes.
But Oracle is counting on a large proportion eventually making the switch. If not, its revenue picture is certainly not going to turn in the right direction.
In the year to 31 May 2004, those revenues shrunk by 3% to $2.4 billion; in the year earlier the decline was 8%.
Oracle executives argue that there are several factors at work there – among them the general economic malaise that sent IT budgets down over 2002-2004 and the all-out price war between Oracle and PeopleSoft that resulted in customers being able to command 50% to 80% off list prices.
Others would suggest additional factors for both companies’ stagnant revenues.
The traditional applications software model is being challenged by applications service companies such as Salesforce.com which provide applications access over the web. While Oracle has made tentative steps in that direction (and Ellison himself was an investor in both Salesforce.com and one of its rivals NetSuite), any largescale move to ‘online’ applications would be highly disruptive to its core revenue stream.
One further factor is also cited: the success and credibility of SAP.
The SAP challenge
Following the acquisition, SAP finally has a challenger within sight. Its revenues of $9.3 billion in 2004 compared to the $5.2 billion generated in the same period by the Oracle/PeopleSoft/JDE combination. However, as Oracle and PeopleSoft have been preoccupied with the acquisition and customers have held back purchases due to an uncertain outcome, SAP’s fortunes have continued to rise and the gap widen.
Over 2004, growth was 7%. But the company’s current pace is even stronger – at 11%. Perhaps of greater concern to Orac assets assets.zip bin source summary_source tmp for crossheads
le is that in the US, where PeopleSoft has been historically strong, SAP revenues have caught fire.
At constant currency levels software sales in the US grew 30% in the company’s most recent quarter. That might suggest that prospective PeopleSoft customers (and perhaps even Oracle ones) have been drawn in its direction by the acquisition’s uncertainties.
In the coming weeks, as Oracle spells out plans for its organisational structure, products and marketing, PeopleSoft customers must now hope that there is a silver lining to the predicament they find themselves in. Oracle may have won the fight for their business – now it must show it deserves it.