How real are SAP and Oracle's cloud numbers?

Profile picture for user pwainewright By Phil Wainewright January 11, 2016
Summary:
With Wall St hungry for continued growth, the temptation must be huge to artificially boost SAP and Oracle's cloud numbers by any legal means

Cloud dollar sign under magnifying glass on blue sky © spacezerocom – Fotolia.com
Cloud revenues are increasingly important to the big names in enterprise software as their customers continue to migrate aspects of their operations to cloud platforms. It's where these vendors' future growth will come from, if they can indeed continue to thrive.

They have a difficult balancing act to perform. On the one hand, they want to protect their continuing revenues from the installed base of customers, many of whom have no intention of moving their computing to the cloud just yet. But while this revenue stream of maintenance charges and occasional upgrades is their bread-and-butter income, they know their future growth will come from selling cloud solutions to these customers and to others.

There's an additional complication in that the pay-as-you-go subscription model of cloud, while more profitable in the long term, produces much less upfront revenue in year one than a traditional on-premises license sale. So unless your cloud revenues are rising much faster than your on-premises fall, your topline numbers will crater. In the circumstances, there must be a strong temptation to artificially boost those cloud numbers by any legal means.

Last month, we heard Oracle talking up strong growth in its cloud sales amidst otherwise disappointing numbers. Now it's the turn of SAP, which was so pleased with its Q4 numbers it has released them early. SAP revenues across the board are up by more than many analysts expected, though on slightly lower margins than most had forecast. But as always, the devil is in the detail, which will follow later this month.

Are these numbers too good to be true? Before I take them for granted, here are four questions to which I'd like to see the answers, based on what I've been hearing and reading over the past year or so.

1. How much cloud goes out as shelfware?

Some vendors are so keen to maximize cloud revenues that their sales staff are incentivized with bonuses as high as seven times their salary if they blow past their sales targets. With such incentives, it's perhaps no surprise that some salespeople have been cutting some decidedly odd deals. Licensing consultant Paul DeGroot of Pica Communications told The Register last year that Microsoft has been giving discounts on other products if customers sign up for Office365:

I know first hand of a case where a small customer got an extra 15 per cent off of everything else if they agreed to purchase some Office 365.

In another case I was told ... one customer agreed to add $2m for Office 365, which they had no intention of using, in exchange for a $6m overall discount.

The catch, of course, is that Office 365 is a subscription product, which makes such deals rather like the low-cost broadband deal that only lasts six months before the locked-in higher rate kicks in for the rest of the contract.

Customers often have a roadmap to go cloud anyway, so signing up for cloud in return for a cash discount today on existing on-premise commitments can be attractive. But from the vendor's point view, its hold on the customer is far less certain until such time as the product is implemented and people start using it.

There's not enough evidence to say whether this kind of deal is widespread, and let's be clear, pureplay cloud vendors are also guilty of exactly the same behavior. Customers often sign multi-year contracts and even if the subscription doesn't begin until the first deployment, rolling out to the entire intended user base can take months and sometimes years. There's also the question of what you do if later on you get hit with a SaaS price hike.

As for throwing in deep discounts to win more sales, The Register has heard that Salesforce is offering up to 25 percent off Marketing Cloud in return for early renewals of its core Sales Cloud product. And sales bonuses for SaaS products have traditionally been disproportionately high, since it's the lifetime customer value that really matters, rather than the first-year contract value.

At SAP, compensation for salespeople works out roughly the same whether they sell a cloud deal or on-premise, which as we've pointed out in the past, may even skew behavior in favor of on-premise deals, since it's the more familiar territory. What we do know, though, is that one incentive both SAP and Oracle are practising is to offer customers the chance to exchange shelfware for cloudware, which again doesn't offer much of a guarantee that the product is actually going to be implemented and used.

2. Did they send in the auditors?

There are stories circulating that some vendors are using compliance audits to pressure customers into signing up for cloud deals. Richard Spithoven, a partner of licensing consultancy b.lay, told The Register that an Oracle customer facing a multi-million hike in license fees after a software audit had the increase slashed when they signed up for some cloud services.

SAP is also reportedly cracking down on license compliance. Even if it's not being done to help boost cloud sales, every little extra revenue that can be squeezed from existing maintenance deals can help tide over the revenue gap that opens up as other customers go cloud.

3. Are they sweetening maintenance deals?

Maintaining existing revenues gets hard, though, when third-party maintenance (TPM) vendors are undercutting your prices. Ironically, the move to cloud can accelerate take-up of TPM offerings. Once customers have put cloud on their roadmap, they may well decide to freeze any further updates to installed software. At that point, one of the main objections against going third-party melts away.

Stories have surfaced that SAP is offering discounts of up to 40 percent on maintenance renewals in order to keep customers in its fold. Again, this is more about protecting the existing customer base and the associated revenue stream than it is about cloud adoption. But it underlines the many directions from which margins fall under pressure as incumbents make the transition to cloud.

4. How much of the growth is non-core?

In SAP's case, one thing that's been evident from previous earnings announcements is that the fastest growing components of the SaaS cloud portfolio are the products that it has acquired. SuccessFactors now has some very big customers going global on its HCM platform and claims impressive growth. Concur is contributing well too, and SAP has been making a big push to increase the number of businesses on the Ariba network.

Trouble is, none of this proves that SAP is making any headway in moving customers from its historic core ERP products to the cloud — especially when you consider that they are still all some way from migrating fully themselves to SAP's flagship HANA platform. While a growing number of customers are said to be adopting HANA, only a proportion are doing so on a cloud platform.

It's much the same story for Oracle, where again much of the cloud growth is coming from acquired products. The vendor doesn't yet appear able to demonstrate any substantive success in moving customers to the cloud on its historic core ERP products.

My take

The journey to cloud is under way but the speed at which these vendors are getting there may be somewhat overstated.

Image credit - Cloud dollar sign under magnifying glass on blue sky © spacezerocom – Fotolia.com.

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