Oracle versus SAP

TECH TALK

Oracle's transformation from a database company to a business applications vendor has just begun. Rivalry with SAP will mean several firms, including Indian ones, will be M&A targets.

About three years ago, Oracle Corp.'s Redwood Shores, California offices became seized of growing angst among its customers. They were very happy with the company's top-class database that had over two decades been built into the world's finest set of automated data repository managers.

But they wanted to go beyond such capabilities. They wanted tools that would help in working on that data. They wanted intelligence out of that information that could be applied to increase sales, reduce costs and suggest changes for productivity.

In other words, Oracle's flagship database software was a commodity; applications were the value enhancers.

Now such applications "� ranging from business intelligence to data mining, from consumer analytics to churn management "� or capabilities have been available since the mid-1990s with large companies such as SAP, PeopleSoft, SAS Institute and Siebel Systems; tier-II rivals like BEA Software, JD Edwards, SSA Global and i2; as also the likes of the smaller Business Objects, Cognos, PeopleClick or ChannelAdvisor.

These companies, and several more including Oracle, offer wares to meet the different and often overlapping business software needs of large to small companies.

Larry Ellison will not like this comparison but the 2002 awakening of Oracle to business applications was akin to Microsoft's Bill Gates embrace of the internet as late as 1996.

When the history of business software is written, Ellison's move will be seen as epochal and risky. It is diving headlong into applications with the intent of building "� or buying "� what it thinks will be the best products in the business.

(Oracle concluded the acquisition of the PeopleSoft-JD Edwards combine and Retek at top-dollar prices last year.) Oracle, the industry leader, brings with it a lot of clout "� it has about 260,000 database customers, 23,000 application customers and about 280,000 partners across 19 industries "� and will drive the applications charge forcefully.

Once it had set its sights on applications, Oracle moved fast. Says Mark Gibbs, who heads Oracle's application business in Asia Pacific today: "We consulted with McKinsey. We set up global industry boards within the company to listen to what customers were telling us, what their 'pain points' were."

Then, late in 2004, Oracle reorganised itself from teams organised based on continents and countries to an industry-based structure. Gibbs says Oracle is now better focused on customers.

SAP, meanwhile, has not been sitting tight. It attempted to hit back at Oracle where it hurt with a foray into databases a few years back, but that has not been successful despite transferring the technology and ownership to mySQL, a Swedish firm that offered low-end databases free and at very low licence fees.

The Walldorf, Germany-based company, widely seen as the first focused enterprise resource planning software maker, has been feverishly working at new products.

CEO Henning Kagermann has predicted that half of SAP's revenues in five years will come from these products.

More recently, it has a two-pronged strategy at growth and at hurting Oracle. One, it has scripted what it calls a "Safe passage" initiative to lure PeopleSoft, JD Edwards and Retek customers into the SAP fold.

It has even bought TomorrowNow, an independent vendor providing support services to PeopleSoft customers, to ease their transition to the SAP platform.

JP Morgan said in a recent report: "The market shift to SAP from other vendors will likely continue through 2005 and beyond. The gap between SAP and Oracle continues to widen, perhaps even at an increasing pace, as now SAP has 43 per cent share of the top US vendors and is tracking to reach 50 per cent by year end."

Local SAP executives say the churn trend against Oracle is yet to catch on in Asia, where the German company has a 20 per cent share compared with Oracle's 11 per cent.

Two, SAP has made promising alliances with industry biggies to tie-in its business applications with their offerings. IBM, Microsoft, Intel, Cisco Systems, EMC, Computer Associates, Macromedia, Adobe

Systems and Symantec are all working on versions of their products that are SAP-optimised.

Oracle, some insiders admit, will take a beating in the short-term as it takes time to integrate PeopleSoft-JD Edwards and Retek into its fold.

Customers using the acquired companies' products are apparently worried about Oracle's plans for the newly-bought entities, despite Oracle's promises to provide support for PeopleSoft-JD Edwards software till 2013.

Given Oracle's aggressive pedigree, it is more likely to propel customers towards 'Project Fusion,' a plan to produce an application suite to which Oracle, PeopleSoft, and JD Edwards users may all migrate.

The new suite is expected to be out in 2007 and 2008, with a pricing strategy aimed to compel global chief information officers to stick with Oracle for their business applications software needs or, perhaps, even change over from rivals.

SAP, the quieter among the warring duo, is focusing its energies on localisation and customisation for different countries and individual customers in various industries.

If last year's acquisition of PeopleSoft-JD Edwards and Retek by Oracle for nearly $11 billion was too high decibel for your liking, you should brace yourself for the coming years.

The feeding frenzy in the business software industry is nowhere near over. Already there are rumours floating in the global investment banking community of Oracle cosying up to Siebel, a San Mateo, California vendor of customer relationship software.

Siebel has had more than its share of troubles with three CEOs passing through its swivel doors in the last year and its business looking shakier than ever before.

Further, its balance sheet makes for an ideal target: zero debt, $2.2 billion in cash and a $5 billion market cap. Siebel doesn't hold much value for SAP given that the German company has its own strong customer relationship practice.

But, for Oracle, Thomas Siebel's company could be a very valuable target given that it would add customer relationship management, another key horizontal functionality after human resource management acquired through PeopleSoft.

One restraint on Ellison, though, will be Oracle's ability to digest another large-sized acquisition on the heels of the PeopleSoft-JD Edwards buy.

That operational risk will also stop him from looking to gobble up other sizeable targets such as BEA or I2.

The action, instead, may shift to the smaller players as was seen in the hot chase for Retek, a relatively small applications software maker focused on the retail sector, by both Oracle and SAP.

Oracle, as the newcomer, will be looking for individual companies to buy strong applications in key verticals such as telecoms and banking and financial services.

Some names in these industries that may be up for grabs: Logica-CMG, Nice, LH Specifications and, perhaps even, India's iflex solutions.

Alternatively, Oracle may actively look at carving up targets into parts it is interested in and acquire those businesses. Infosys' Finacle or Polaris' Intellect suites are two prime examples, as two billing and customer relationship modules of telecom software from equipment vendors.

Either way, the noise has just begun.

Josey Puliyenthuruthel can be reached at josey@vsnl.net