In the last year, we inspected more than 250 Oracle deals, which represents $1.1B in client spending. We also saw our first Java audit notification sent to an Accenture Procurement client. In terms of Java purchasing, the average deal size we reviewed was between $900K and $3M – some hefty prices for a solution that was, until recently, free.
The Sales Playbook
At Oracle, sales reps are strongly encouraged to perform above their quotas, and are rewarded financially the higher they go. The most lucrative Oracle deals, especially those that involve SaaS products, are driven by term length and total deal size. Also, the reps are incentivized to migrate legacy on-premise customers to the cloud, and steer ERP business away from competitors such as SAP.
Oracle revenues come from two sources: an aggressive sales process and a robust audit program. We’ve summarized the approach in the following graphic:
Oracle sales reps are experts at mining your organization for information about your needs, deployments, and processes. They are adept at using this knowledge to undermine buyer leverage, dictate demand, reveal gaps in compliance, and drive purchase decisions. Customers who are unfamiliar with this concerted sales effort are routinely exploited by Oracle.
Regarding compliance, there are six things that trigger audit activity, which Oracle uses to boost revenue, push strategic products, and force Unlimited Licensing Agreements (ULAs) on customers:
Stagnant or reduced spending
The inability to self-certify
Large organic growth events
Mergers, acquisitions, divestitures, and change in leadership events
Hardware environment refresh
Any of these situations signals a financial opportunity for the Oracle audit team, but the biggest area of risk regarding Oracle audits relates to Java SE and virtualization, summarized in the following two slides:
Danger of noncompliance, the standard language found in Oracle contracts, also presents numerous additional risks. Oracle uses unique and ambiguous licensing rules, which are difficult to understand and do not reside in one central location. The supplier’s contracts are designed to leave customers exposed to pricing increases and locked into long-term deals. In addition, Oracle reserves the right to change its licensing policies without notification, which greatly increases the likelihood that customers fall out of compliance. Oracle will not provide better than its boilerplate contract terms without negotiation; customers who do not realize this sign deals at their own peril.
We have summarized the most frequent areas of struggle for Oracle customers in the following graphic:
Since the use of cloud has exploded in the last couple of years, we want to point out some specific contract risk that has to do with certification in the public cloud. The next chart lists the most frequently asked questions our clients have, along with our answers and our analysts’ point of view:
To help mitigate some of the considerable risk here, we recommend that clients negotiate the removal of "average counting” language from their Certification clause and get the vendor to (1) use the actual number of installed and running processors and (2) reduce the 12-month period language down to 6-months.
Another area of the contract to negotiate surrounds renewal rights. Here’s a summary of our observations, risk areas, and ways to mitigate them:
There are four important questions that customers are encouraged to ask regarding contractual renewal rights:
Is a cap included in the contract? If not, negotiate one. Having no cap in the contract does not mean there with be no increase.
What’s the percentage? The renewal cap number must be clearly stated, and if it’s based on the consumer price index (CPI), then the index source should be clarified.
What about contingencies? Sometime there is a minimum renewal term, and/or penalties related to product usage reduction.
How is the renewal rate calculated and applied, and is there a grace period after the initial term?
Spend Modeling and Best Practices
We urge clients to build their own conservative, accurate demand forecasts to keep Oracle from controlling their spend. If left on their own, the Oracle rep will pack the deal to make it as big as possible, make the term as long as possible, and assume that everything you’re buying is deployed on day one. To prevent this from happening, we offer this checklist:
To successfully negotiate with Oracle, we remind clients to guard their deal information diligently, align their stakeholders, understand their demand, and scrutinize the contractual language to identify where there is room for improvement of terms.
For assistance with your Oracle engagements, we offer the following services:
For a case study related to Java SE, “soft-partitioning” and virtualization, view an example of a recent Oracle proposal, and find out more about neutralizing Oracle’s strategies and tactics, download the 30-minute webinar on which this blog is based, or contact one of our Oracle subject-matter experts.
- Tanya Lutsyuk is a SC&M Advisory Manager, Rob Murphy is a SC&M Advisory Manager, and Joseph Malarney is a SC&M Advisory Assoc. Manager at Accenture.