Putting muscle behind the outsourcing model of application management, Oracle Corp. said it is starting an international campaign to persuade customers to hand over maintenance of their Oracle software.
“We have decided to go in and actively go after our installed base and tell them that this is a better way to do it (run Oracle applications),” said Jeff Henley, Oracle’s chief financial officer, speaking to financial analysts in New York on March 21. “We will put the sales guys on it and invest heavily in capacity.”
Businesses can save significantly on IT costs and improve product-service response time by as much as 50 per cent by letting Oracle manage and maintain its own software, company officials said, citing costs savings of between 31 per cent and 84 per cent from existing customers.
Stienstra Holding BV, a Heerlen, Netherlands-based real-estate business that uses several Oracle 8.17 databases, was approached last year by Oracle with an offer of database management outsourcing. Stienstra declined then and has no intention of giving in this time around, said Marco Schreijen, electronic commerce manager at Stienstra.
“Outsourcing means losing a lot of flexibility that we currently have with our own database administrator,” said Schreijen. “We would lose database administrator rights if we let Oracle take over. We can’t afford to have to wait for Oracle if something needs to be done.”
Security is another issue for Stienstra. The company manages 13,000 homes for rent, sells homes and offers insurance and mortgage services.
“We don’t want our confidential information to get out. We check our own staff, but you never know who you are dealing with at Oracle, no matter how strict your contract is on security,” Schreijen said.
Oracle offers two ways of outsourcing: one whereby the software is hosted on Oracle systems in an Oracle data centre, another where Oracle manages software installed on the customer’s systems at the customer’s location, said Timothy Chou, president of E-Business Suite Outsourcing at Oracle.
Customers who opt to have Oracle host and manage the applications pay 5 per cent per month of the list license price in addition to base licence, product support, update and other standard costs. Those who choose to have applications managed by Oracle, but run at their own site on their own systems, pay 3 per cent per month of the list licence price in addition to the other costs, Chou said. As a promotion for users signing up for the on-premises service, Oracle is offering unlimited software upgrades for the next five years.
Oracle isn’t doing anything new, according to Eamonn Kennedy, research analyst at IDC.
“Oracle’s announcement fits in with announcements from other software vendors trying to reach further in the relationship with customers and trying to get a bigger piece of the revenue pie,” he said.
Redwood Shores, Calif.-based Oracle will provide incentives for its sales force and invest about US$50 million in new data centres to push its outsourcing services around the world, Henley said.
“This is really the way most customers are going to want to have their software delivered over time. The bulk of our customers are going to operate this way in the not-too-distant future,” Henley said. “We offer much faster implementation, much lower cost and much better service.”
Outsourcing is becoming more popular, but Oracle does not have the right cards to play the game, said Charles Homs, senior analyst with Forrester Research BV in Amsterdam. Forrester expects the U.S. outsourcing market to grow to US$171 billion in 2006 from US$71 billion in 2001.
“The thought that outsourcing will grow is correct, but Oracle will be less successful than its competitors. Oracle is a company that has many smart software engineers, but few people who understand customers’ business processes. SAP (AG) does have that,” Homs said.
“The last few years we have been looking at IT and its possibilities, but today we look at a company and what IT can do for the productivity at that company. That makes it important for a software vendor to understand and support business processes,” said Homs. ” The success of Siebel (Systems Inc.) proves that technology has become subordinate to business processes.”
Oracle intends to approach all of its customers, but will especially target those that are in the process of upgrading to version 11i of Oracle applications, also known as the E-Business Suite.
“We have this epiphany opportunity here to talk to our customers,” said John Nugent, senior vice-president at Oracle. “If over the next twelve months we can move 25 per cent of our customers over, that is a tremendous business opportunity for us.”
Outsourcing today is a “relatively moderate” business for Oracle, according to Henley, “but we think it can be a multibillion dollar business over the next few years.”
Oracle at its analyst meeting did not mention a special ASP (application service provider) offer launched by Larry Ellison, the company’s chief executive officer, at the Oracle AppsWorld conference in Amsterdam in January.
Ellison said Oracle would take over a company’s entire IT operation and migrate that to Oracle software in exchange for a five-year contract and that company’s entire IT budget to be paid each year. Ellison said Oracle would charge 5 per cent less each year.
“We are not ready to talk about that yet,” said Oracle spokeswoman Carol Sato, declining any further comment.
Oracle currently has about 200 customers on its ASP, or hosting, service, of a total of 12,500 applications customers.