Dissecting the Oracle Continuous Innovation Model: Great Deal for You or Oracle?
Every Oracle customer should pay close attention to the way that our friends in Redwood Shores have reorganized their support model to address a variety of forces that will reshape the enterprise software landscape in the next decade.
There is a model that has been around for a few years, but has received little (if any) public attention. Oracle calls this model “continuous innovation.” This relatively new model is focused on keeping Oracle in the best possible position over the next 10 years as the transition to the cloud and to SaaS applications accelerates. It is designed only for Oracle applications like Oracle’s PeopleSoft, Siebel, eBusiness Suite (EBS), and JD Edwards EnterpriseOne and World.
Like everything Oracle does as a sales, marketing, and value capture company, this model is shrewd, strategic, and designed to maintain Oracle’s incredibly powerful market position. But based on my research, there has been no public analysis of this model. That leaves customers in the dark. Therefore, this is the first in a series of articles that will explain the continuous innovation model as well as address some crucial questions about it so both current and potential Oracle customers can fully understand what this model means for their businesses.
The most important question that has not been fully answered is: What does this offer do for Oracle customers? Given how little attention this model has received, it’s a question that’s imperative to answer. And as part of the Escape Hatch from Oracle Research Mission at Early Adopter Research, we are going to answer these questions in great detail in a series of articles. This article is the first in the series and focuses on these questions:
- What are the challenges facing Oracle in 2020?
- What is Oracle’s continuous innovation model?
- What is new and different about the model?
- What are the benefits to Oracle from the model?
- What are the risks to Oracle from the model?
- What are the benefits and burdens for Oracle customers?
The key point with all these questions is to explore the model in depth and not just accept Oracle’s implicit assertion that it’s an improvement for all customers. Businesses cannot truly assess whether a shift like this is right for them unless they understand it. We hope to provide that understanding here.
What are the challenges facing Oracle in 2020?
As we have long argued in the Escape Hatch from Oracle Research Mission, the best way to see Oracle is as two companies. Oracle is a product company, one of the greatest software companies ever. The world today could not run without Oracle products, both databases and applications. This company continues to create even better products.
Oracle is also a second company: a sales, marketing, and value extraction system. This company, like all enterprise software companies, brings products to market, executes a sales process, and creates new relationships with customers.
But Oracle is different from other companies in two respects. Oracle has a huge installed base that produces almost $20 billion a year in revenue. Oracle has an audit-based licensing model that it uses to gain leverage with customers. The aggressive tactics of the value extraction arm have made Oracle quite unpopular with many of its customers.
As time passes, Oracle customers constantly reevaluate their use of Oracle technology. Oracle charges about 20% of the original license fees for support of its software. Customers want as much value as possible for paying those fees. But the landscape has changed and now Oracle is facing challenges on many fronts:
- Slow Oracle Cloud Adoption: Oracle is facing an uphill battle to become one of the main cloud platforms. Its cloud platform is growing slower than competitors and the installed base is much smaller. Additionally, when existing customers do decide to migrate to the cloud, Oracle often loses them to larger, more established cloud providers or tries to strong-arm clients into buying Oracle Cloud to boost its cloud numbers.
- SaaS Application Migration: Oracle’s support revenue primarily comes from traditional enterprise licenses for software that is installed and run by customers. Most new software, from Oracle and other firms, is software-as-a-service, with a subscription model. If a company decides to move from an on-premise application to a SaaS version, it is not simple, even with the same vendor. Naturally Oracle wants its customers to migrate to Oracle SaaS products.
- Third-Party Support: Customers really don’t like paying support fees to any vendor if little value is provided. Oracle also uses its license auditing process to aggressively find unauthorized use of its products and improve its bargaining position. This is known as Audit Bargain Close. Oracle has lost significant revenue to third-party support providers like Rimini Street, who offer value-added support at half the price Oracle charges.
- Upgrade Fatigue: Many Oracle customers run products that are several versions behind the latest version. Because migrating to a new version is onerous, customers are at risk of churning and adopting third-party support or migrating to competitors’ SaaS products (think Salesforce). Oracle often does not support out-of-date versions, making third-party support the only viable option. Oracle is literally driving some customers away. Or, given the effort involved, customers may decide to adopt a more modern solution from another vendor.
So, the ideal solution from Oracle’s perspective is as follows:
- Keep as many on-premise support customers as possible paying maintenance for as long as is feasible. The margin for support for on-premise software is 90% or higher, and therefore work in Oracle’s favor.
- If a customer decides to upgrade to a SaaS product, make sure it is an Oracle product.
But the ideal solution from the customer perspective is all about value. Specifically customers seek to:
- Get the most value from their applications.
- Pay the least amount of money for that value.
What is Oracle’s continuous innovation support model?
Now we can look at the nature of the Oracle continuous innovation support model and what it does both for Oracle and for customers.
Over the past few years, Oracle has declared a new support model for its applications. This model moves from upgrades to updates, with no major releases forthcoming.
For those who don’t live and breathe this stuff, it may not seem that there is much difference between an upgrade and an update.
An upgrade in the world of enterprise software usually means a major improvement, lots of changes, like a new model of a car. Most of the time, the software version number changes.
An update is a smaller collection of changes, sometimes fixes and sometimes smaller improvements. Updates might come out several times a year. An upgrade might be released every few years.
Oracle’s announcement that it is stopping upgrades is big news. Here’s what they said specifically:
- According to Oracle’s Lifetime Support policy guide for Applications, by December 2021 only the last major versions for most of its ERP software still will be offered premier support.
- Oracle offers premier support through 2030 for those last major releases. This means that there will be no major upgrades needed from then on to maintain premier support status.
- Instead of upgrades, customers will get continuous updates, released at varying frequency depending on the application. For example, E-Business Suite Release Update Packs offered roughly annually, while PeopleSoft image updates are offered at least quarterly.
- Oracle says the updates are optional. This is called “selective adoption” where customers can decide to only apply a portion of an update (ex: tax, legal and regulatory updates) vs. applying the entire update. However, if a customer engages Oracle support and is not on the latest update, Oracle may require the customer to apply the latest update first before being able to support them, as the necessary fix may be in a later update already provided. So the word “selective” is debatable.
- The other consideration is that there can be dependencies between the updates and underlying Oracle technologies according to Oracle. So Oracle cautions that the longer a customer goes without applying maintenance updates, the more dependencies and, in turn, the more difficult the process can be. To that end it is recommended customers periodically “get current” applying a gold master of the latest full image.
So, once you get to the latest version, if a company keeps paying the maintenance bill, theoretically, they will get premium support. All older versions go into what is called sustaining support.
What is new and different about the model?
Here is a breakdown of how the continuous innovation model differs from past models:
- The cycle of major upgrades is over. Going forward, at least through 2030, companies will not get new versions of but only updates to the current version, which is intended to last all 10 years.
- Fixes & features offered together as “selective adoption” In the historical major release/upgrade model of the past, customers may have to wait several years for Oracle to deliver large amounts of changes in the form of a new release, while delivering regular maintenance in the form of periodic and non-cumulative bundles that had to be consumed serially. Under the new model Oracle delivers maintenance and features in the same update, claiming customers can select to adopt them or not. But selective adoption is a strange sort of value claim. First, again the updates must be applied at least in part just for support and maintenance reasons. On the other hand if you’re only applying the updates for the maintenance and not using the features, this seems like a heavy cost to pay without utilizing new value, especially with third-party support as an option. The question customers should ask is how often and how much of the updates are you applying, and what value are you getting?
- Every application will be in sustaining support except the latest release. Oracle is trying to incentivize customers to upgrade to the latest version of the applications through the support provided. There is a big difference between sustaining support and premiere support and therefore Oracle customers could notice a significant drop-off in the support they receive from Oracle if they are not on the latest release when a problem arises. In sustaining support, customers no longer automatically receive new tax, legal and regulatory updates, fixes, program updates, interoperability certification, and their Severity-1 response time from Oracle is no longer guaranteed. There may be a charge for the tax, legal, and regulatory updates.
So, the advantage Oracle is offering is that customers will be free of upgrades for 10 years, but will have the option of applying updates. At support costs of 20% of license fees, customers will pay the initial cost of the software two more times over that 10 years. Selective adoption does offer choice, but quite obviously, customers won’t receive the full value of their investment if they don’t apply updates.
What are the benefits to Oracle from the model?
When we think of software, we often first describe the benefits it provides to users. However, in this case, it’s worth taking a step back and asking what benefits it offers Oracle. This gets to the underlying rationale of why Oracle is using this model.
Top goal: Protect support revenue. The primary benefit from this model is that Oracle protects its support revenue and avoids losing customers to other SaaS or cloud platforms. In some sense, Oracle is trying to make customers who are deeply locked in feel that they are getting a new deal and more value.
With this model, Oracle is ensuring it continues to receive maintenance costs (on which it makes a 90% profit) and extends the life of its on-premise customers for as long as possible. Oracle is under no obligation to provide a major upgrade release to customers at any time. This model also conditions customers to adjust to frequent updates that they have the responsibility to apply. This could eventually push customers to Oracle SaaS so those updates are applied automatically. Again, the benefits to Oracle in this model are significant.
Key challenge: Delivering value. Oracle has not executed this model before, so it is not clear what the updates will deliver. Oracle is essentially writing its own terms for what qualifies as continuous innovation, rather than allowing customers to determine whether they believe they’re getting a full return on their investment. We do know that receiving updates comes at an annual cost of 20% of the original application price. As stated, this means that every 5 years, customers pay the entire original cost of the software through ongoing maintenance fees. Ultimately, this is a very good deal for Oracle.
Our research in the market indicates that Oracle positions the continuous innovation model as a victory for customers. It feels good for customers in several ways:
- Customers breathe a sigh of relief at having done their last upgrade. Updates seem like less work than a full-on upgrade.
- The concept of selective adoption, having power over what updates to apply, is appealing. This gives customers the sense (if not the reality) that they are more in control of their positioning with Oracle.
- The idea of being in on the long-term plan for the software feels good. Even though customers don’t have any details about that long-term plan or what benefits updates will provide, Oracle’s model at least implies there is a clear direction for the future.
What are the risks to Oracle from the continuous innovation model?
But given those benefits, both illusory and real, it’s also worth pointing out that risks also come with the continuous innovation model for Oracle and its bottom line.
Foremost is that customers who are many versions behind may decide that it doesn’t make sense to move to the current version. Second, customers may feel that the innovations in the updates could never be worth the 20% annual maintenance fee.
Worse, customers who have heavily customized versions of Oracle may not be able to apply the updates as frequently as Oracle provides them. As a result, these customers may end up questioning why they are paying for upgrades that they’re not actually using.
In any case, Oracle faces considerable risk of customer churn. Their customers may opt for lower-cost third-party support or set their sights on migrating to a competitor’s SaaS product.
What are the benefits and burdens for Oracle customers?
Ultimately, whether the success of the continuous innovation model depends on how well it is received by Oracle customers. So it’s worth looking at the benefits and drawbacks for businesses.
There are two main benefits that Oracle customers get from the continuous innovation model.
- They get to avoid upgrades and have greater choice over the updates they do apply. This may offer additional flexibility.
- If Oracle’s updates actually supply the innovation the company promises, customers will receive a steady stream of new tools that they can use to improve their applications.
Still, customers must ask themselves whether these two benefits outweigh the burdens of the model. To adopt this model, an Oracle customer must in reality upgrade to the latest version of their Oracle software, from databases to CRM to ERP. Otherwise, as pointed out earlier, they may not get the full benefits of support and instead receive only sustaining support from Oracle.
Customers also have to monitor and assess every year whether the innovations are worth the 20% annual maintenance fee.
And even if they do upgrade, at best, the model still only provides the same type of support Oracle has offered in the past, which is still expensive compared to the value and the cost of third-party support. Oracle has not upgraded its support model — in truth, companies are just getting the same support (with its inherent high price tag and limited provisions) in a different way.
Ultimately, Oracle’s continuous innovation model is long on promises but short on details. The model is predicated on a heavy ongoing cost and an opportunity cost in which customers spend money and resources to keep up with updates at the expense of focusing on other ways to innovate. Customers should ask themselves whether they’re really getting their money’s worth paying for the same software twice (or even more) with updates that at best offer innovations Oracle has yet to explain.