Oracle and Accenture? A non-starter and here’s why

SUMMARY:

Rumors of Oracle eyeing up Accenture were quickly dismissed by ourselves. But a strong denial by Oracle at the weekend provides us with the opportunity to explain why Oracle is right to both deny and provide an explanation.

Larry Ellison, Oracle

Towards the end of last week my email lit up with rumors that Oracle was in the early stages of making a bid for Accenture. My immediate response was ‘in your dreams’ and moved swiftly on.

Over the weekend, Oracle took the unusual step of categorically denying the rumor, with analyst relation teams running potential damage control with investment houses in strongly worded emails I saw. That caught my attention. Why should you care?

First up, the rumor came from The Register. While we have a good amount of respect for the title, this is one they should have let rot, despite getting a refusal to comment from Oracle and claiming a couple of sources. There are several BIG reasons.

Unfortunately, El Reg’s story caught the attention of the Wall Street chattering classes and it wasn’t long before financial anal-ysts were being quoted on Seeking Alpha. At this point, I’m groaning but then I’m equally aware that anything Oracle sees as impacting its share price generates internal debate at the company. Keeping The Street onside is something that Oracle’s leadership has carefully managed over the years and especially after the company embarked on its long haul acquisition path and, more recently, as it has signalled its transition to cloud based technologies.

This latest rumor, unlike others we have flagged up in the past (and which turned out to be spurious) was all wrong from the get go and the analysts who saw a rationale here need go spend quality time better understanding the Oracle business model rather than looking for Street cred by virtue of popping their heads above the media parapet. Here is why.

Enterprise software companies have consulting departments as a necessary evil, in their eyes. Those departments are generally run at low or no gross profit margin but are there as part of the vendor’s efforts to ensure they have a good understanding how their products need to be implemented for success or, are there for specific customers relationship purposes. In short, consulting from the software vendor’s perspective is not a strategic imperative but provide a supporting role for the main business of selling high margin products where the gross profit is in the 80-90% range.

Consultants like Accenture operate a totally different model where there are two distinct elements. The first is to act as trusted advisors to the company’s leadership on strategic issues that are (often but not always) supported by technology. A good number of folk think this means they are independent but that’s a fuzzy topic in its own right.

A few are truly independent but most of the tier one consultants, of which Accenture sits at the top of the pile, have multiple agendas that allow them to traverse global organizations, slotting in whichever flavor of software is favored in a particular location. That might be Oracle, it might be Salesforce, SAP, Microsoft and a host of others. The point is they act in a way that is similar to a candy store where you can go in and pick which flavor of goodies you want and Accenture will then wheel out the right subject matter experts to implement that solution.

As such, consultants are not normally selling software solutions, but are selling the bodies and expertise needed to make the chosen solution work, the second part of this model. When you look at how that translates into revenue and profit, it quickly becomes apparent that while the implementation contract may well be 5, 6 or even 10x the software cost, the margins are much smaller per dollar spent by customers.

To give you a flavor of what this means, in its latest filing, Accenture recorded operating income of 13.7%. For its part, Oracle reported operating income of 32%. As you can readily see, there is no comparison between the two companies, despite the fact Accenture has been acquiring and developing its own software for solutions outside the ‘mainstream’ of solutions that Oracle sells.

If a deal was on the table then Oracle would have some very difficult explaining to do about how margins would work given that it is under enough pressure over ambitious cloud based growth numbers. In short, it doesn’t make sense to distract Oracle management with profit table juggling when the company is already focused on other things.

In Accenture’s case, it also has a significant outsourcing arm which accounts for 47% of total revenue. Accenture, like every other outsourcer is undergoing a transformation that will see its traditional ‘body shop’ labor cost arbitrage work decline as it makes strides in automation. These transformations are not a done deal by any stretch although most observers believe Accenture is making an exceptionally good job of moving from ‘here to there.’

There is a significant risk in the outsourcing transition. Some might argue it is no worse than the transition Oracle is undergoing from on-premises to cloud business. I’d argue that Oracle’s fate is something over which it has a good degree of control. The same cannot be said for Accenture with the same degree of certainty. More to the point, where’s the upside for Oracle?

The issue most critics focused upon though was the fact Accenture holds multiple strategic relationships outside of that with Oracle. That is also an important issue and one that is nigh on impossible to see as traversable without significant divestment. Why would any company buy another with a $75 billion market cap in the near certain knowledge it would likely have to hive off a huge chunk of that business? How do you work out a market premium that doesn’t leave you in the hole for billions of dollars?

From a market perspective, it is far better that Oracle (and any other software vendor) steers clear of services, and while the consulting industry may well develop some software expertise to backfill ‘white spaces’ for vertical markets, that’s not the same as developing honking great software suites of the kind Oracle makes.

All in therefore, there is no upside for Oracle and a shed load of risk.

However, I was surprised at the extent to which Oracle’s analyst relations came back at media looking for a story. In one email I saw, one of the AR team at Oracle chose to remind the recipient of Oracle’s history in this context. Referring to Softwar, an intimate portrayal of Larry Ellison and Oracle, the email author said:

In the book there’s discussion how in the mid-90s Oracle President Ray Lane was trying to turn Oracle into a services company. Larry stopped that cold, and re-focused the company on platforming software on the Internet. Ray Lane left Oracle shortly afterward and that was the last of Oracle’s effort to have a big services business.

While I’d like to hope this kills the speculation, the cynic in me knows there are conspiracy theorists out there who will suggest this is some head fake, a Jedi mind trick or just some plain old reverse psychology move on our part. To those folks, there’s nothing we could do to dissuade you from your theories other than let time pass and let you figure this out on your own.

Quite. Having a services business didn’t make sense way back when and it makes no sense today.

My take

For its part, El Reg is convinced that Oracle is blowing smoke, declaring that while there is an emphatic denial from Oracle, that the basis of their original story remains true. I don’t see it and certainly not from the way the rebuttal was spun by El Reg, which conflated wholly different circumstances to any that might be vaguely possible today.

These kinds of rumor are the stuff of a media that thinks it knows more than it does and is prepared to go along with anything that makes a good headline without necessarily understanding the fundamentals. We’ve been a tad guilty ourselves on occasion but I hope that we’ve been sufficiently diligent to not get over excited. The problem is that markets keen to find any leverage can quickly get into a spin that plays havoc with stock prices. And heh – who doesn’t want to be an armchair quarterback for a day?

It doesn’t help that activist shareholders are constantly on the lookout for opportunities to tweak managements that display any kind of weakness. And boy, if this were for real, then it really would be a weak move.

I said at the top that when I first heard the rumor I dismissed it and moved on. The fact Oracle issued an outright rebuttal is unusual and the ferocity of response suggests it got up someone at Oracle’s nose big time. Understandably.

Buyers might be less concerned but on occasion it is worth their while taking note. Why? Customers hold different relationships with their consultants to those they hold with the vendors. Any substantial change in those arrangements would have significant impact on buyers and the technology landscapes they operate. So while it might be fun to think that the real ‘one throat to choke’ scenario plays out in this situation, that’s not how things work in the real world. If anything, I would be deeply concerned at the over arching lockin this portends.

In the incredibly unlikely event of an albino alligator of this kind turning up at Accenture’s doorstep then I will eat humble pie. In the meantime, this episode has provided a useful glimpse inside Oracle. Now – can we all move on?

Image credit - via free sources

Disclosure - Oracle, SAP and Salesforce are premier partners at time of writing.