I could see Oracle’s SaaS database and enterprise application products for CX, ERP, SCM, etc. becoming the preferred destination for organizations moving workloads to the cloud that don’t need or want the overhead of managing the underlying software and servers. Oracle is in a perfect position to follow the path of Adobe and Microsoft, which shifted office and content creation apps to a hybrid mix of locally-installed and cloud-based services.
It’s worth exploring the topic in more detail since I believe Oracle has more in common with application providers like SAP, Adobe and the non-Windows, non-infrastructure parts of Microsoft than AWS.
Everyone loves a good feud between tech titans (even if it's one-way), so it was easy to miss the signs of significant progress in Oracle's SaaS business present at OpenWorld and recent earnings releases, particularly the many customer success stories that we documented here at Diginomica. For example, in previewing the event, Den Howlett talked with Steve Miranda, executive vice president of Oracle Applications product development about the company’s strategy of adding automation and data-driven intelligence to its ERP, CRM and CX products. Miranda remarked on the speed with which even large enterprises are divesting themselves of on-premise systems in favor of Oracle's cloud applications (emphasis added)
What I didn’t expect was to see the number of companies that are being disrupted or are disrupting so that even in our case, we used to sell products but now we need to be much more a service company and that’s fundamentally different. The technical and business process debt across these companies ERPs is not helping them remain competitive in those processes while also reacting to customers in ways and at speeds they never had to before. That is the push in cloud ERP adoption that I didn’t expect.
As Miranda hinted, the competitive demands on Oracle itself have pushed it to become a service company which in turn adds urgency to its SaaS transformation and drives additions to its burgeoning service portfolio. While it's unclear how much of Oracle runs on SaaS, the company has rapidly transformed its software products into on-demand services. As Ellison crowed in his keynote,
The statement’s accuracy is debatable, but what’s not is increased customer adoption and product improvements, such as the way Oracle is adding automation, self-optimization and other forms of data-driven intelligence to its SaaS products. Indeed, as Howlett pointed out, machine intelligence was a theme Oracle emphasized at the event, as did Ellison as he beseeched customers to share their needs and ideas for ways to make Oracle’s products even better,
OpenWorld was full of customers sharing their success stories, which the Diginomica team chronicled in more than 20 articles. For example, Park Hotels and Resorts, which needed to implement a new finance system after being spun out of Hilton, shared its use of Oracle Cloud applications to both bootstrap the process and provide new capabilities. As Diginomica documented,
What Park required, Robb [Park’s senior vice president and chief accounting officer] explained, was a single platform for all of its financial data, covering general ledger, accounts payable, fixed assets, procurement and project financials, which also offered enterprise performance management tools for financial close and consolidation and planning and budgeting. It also wanted to use cloud computing to keep its IT footprint to a minimum.
Park worked with consultants from Grant Thornton and settled on a plan of attack that involved implementing Oracle ERP Cloud, Oracle Planning and Budgeting Cloud and Oracle Financial Consolidation, and using Oracle Integration Cloud Service as the ‘secret sauce’ that enables Park to pass data between these apps.
Birmingham City University told Diginomica a similar story of using Oracle Cloud to exploit new technologies like AI, NLP (natural language processing), chatbots and API services as part of its next-generation back-office platform. Like most large, established organizations, its goals were complicated by a legacy of miscellaneous systems that weren’t designed to talk to each other, much less remote clients over the Internet. Birmingham concluded that the right cloud suite could replace 15 siloed systems and its exhaustive evaluation decided that Oracle Cloud, with a portfolio spanning HCM, ERP, BI, payroll, financial planning and budgeting and PaaS extensibility, was the right provider.
Tahir Yousaf, Birmingham’s Associate Director of IT, told us that the university also wanted to minimize the overhead of customizing the SaaS applications for each department, instead asking each organization to describe their needs, not the details of how they would like to achieve them. As Yousaf said (emphasis added),
So, actually, we made a powerful decision not to do any ‘mapping’. Instead we went to each of our business units and we said ‘can you tell us about what you want your outcomes to be’. What was the business outcome you wanted to see? If you take a traditional set of requirements to a cloud vendor, they can do nothing with your requirements, because actually, their processes are already fully formed.
So we asked the cloud vendors, how does your cloud system do this? Then we let our users decide which one to choose based on their experience and the journey. Vanilla is better than you think in terms of its flexibility.
Aside from the breadth of its SaaS portfolio, a final selling point for Oracle was its PaaS, with its tight integration to SQL databases, support for a variety of languages and frameworks and ability to use backend platforms like Kubernetes, Hadoop and Kafka streaming. Oracle PaaS allows Birmingham to fill in the 5 percent of functionality and compliance requirements the vanilla SaaS services don’t provide.
The importance of Oracle’s SaaS products is evident in the comments and data it shares with financial analysts at each quarterly earnings report. As I referenced in my previous column, Oracle doesn’t break out cloud service revenue by product line and, like Microsoft, and typically only discusses growth rates, not absolute revenue figures. That said, after its Q4 2018 report, co-CEO Mark Hurd said that overall ERP and HCM SaaS revenue was $2.2 billion in FY 2018. While it didn’t update the revenue number after it’s most recent Q1 2019 report, Oracle did report impressive growth in SaaS, with co-CEO Safra Catz telling analysts that service revenue for ERP grew 30-plus percent, that for vertical cloud applications was up 40-plus percent, while cloud infrastructure and PaaS were tailing at 20-plus percent.
Chairman Ellison added color, calling Oracle’s cloud ERP product “a strategic key to our success in the SaaS applications layer of the cloud,” boasting that Oracle ranks first in cloud ERP market share with more than 20,000 Fusion and NetSuite customers. Ellison noted that its SaaS growth is fueled by customers replacing on-premise systems (emphasis added).
Customers are buying Fusion ERP to replace their existing SAP on-premise ERP systems, and customers are buying Fusion ERP to replace their existing Workday cloud ERP systems. ERP is the largest segment in the application business. Continuing our rapid growth in cloud — in the cloud ERP market puts Oracle well on its way to becoming the world's largest SaaS applications company. That's our strategy and current market position in the SaaS layer of the cloud.
As I previously discussed, Oracle’s strategy for cloud infrastructure is designed to facilitate the migration of existing enterprise applications to its managed systems. While Oracle offers an attractive feature set for this demographic, it’s capabilities aren’t notably superior to those of the big-three IaaS/PaaS providers, AWS, Azure and Google Cloud. Assuming Mark Hurd’s statement that “15 percent of the U.S. corporate-owned data centers shut down,” is true, and it sounds plausible, Oracle has many opportunities to gain IaaS business. Nevertheless, I think Oracle will continue to play second fiddle to Amazon and Microsoft in the IaaS market.
I believe that SaaS is the bigger cloud opportunity for Oracle as customers like Birmingham City University reason that if they are going to move to the cloud, why take half steps by continuing to operate their applications? Instead, they will see the wisdom of allowing Oracle to manage, secure and update the infrastructure and applications. Indeed, given Oracle’s unparalleled expertise in its own applications, it is highly likely to do a better job than the customers could do themselves.
In an era of cloud applications, enterprises add little to no value by operating what have become commodity applications like databases, email systems, and other back-office platforms. Although some organizations argue that they require custom installations to meet unique business needs, the rationale becomes untenable in an era of systems that can be extended using APIs and cloud PaaS frameworks. Oracle has a compelling story in both SaaS and PaaS and will likely evolve into a company that looks more like Salesforce than AWS.