- SAP and Oracle have tremendous profits margins on their support. However, how do their support margins compare to international drug cartels? Find out in this article.
Introduction to SAP and Oracle Profits Margins
SAP and Oracle have virtually an identical support model, with an identical profit margin on their support. You will learn about the comparative margin of SAP and Oracle versus Pablo Escobar.
About the Medellin Cartel
While watching documentaries on Pablo Escobar, the scale of his operations boggles the mind. Pablo Escobar and his associates were a corporate conglomerate. Pablo was making close to 1/2 a billion per day. The operations of the Medellin drug cartel were an extensive network of drug factories and air transportation bringing cocaine from Columbia to the US (primarily). They were the world leader in the manufacture and distribution of cocaine and the category leader. If the Medellin drug cartel had been a listed company, they would have been an extremely attractive stock, and they were a great growth story. They had high profitability and very low debt. Really, what was not to like?
One can imagine hiring marketing and PR people to recast the Medellin drug cartel as in the “pharmaceutical business.” There are certainly many people in the marketing and PR community that would have loved to have had the Medellin account.
Pablo Escobar and the Medellin Cartel’s Profit Margins on Cocaine
Pablo Escobar also had a profit margin on his cocaine that was very reminiscent of two other companies as the following quotation can attest.
“The profits were astronomical at every step. In 1978 each kilo probably cost Escobar $2,000 but sold to Lehder and Jung for $22,000, clearing Escobar $20,000 per kilo. In the next stage they transported an average of 400 kilos to south Florida (incurring some additional expenses in hush money for local airport authorities) where mid-level dealers paid a wholesale price of $60,000 per kilo; thus in 1978 each 400-kilo load earned Escobar $8 million and Lehder, Ochoa, and Jung $5 million each in profits. Of course, the mid-level dealers did just fine: after cutting the drug with baking soda each shipment retailed on the street for $210 million, almost ten times what they paid for it.” – Mental Floss
That is a 90% profit margin.
Would Pablo Escobar Have Admired Hasso Plattner and Larry Ellison?
This is actually lower than the profit margin that SAP and Oracle receive on their support, which is reported by these companies in their financial statements at 93%. Both SAP and Oracle used to have far better (and less profitable) support in the past. But SAP and Oracle attain this profit margin by employing far less experienced support staff, and by staffing almost entirely in undeveloped countries. SAP and Oracle’s support is considered extremely poor. This reduction of support has had deleterious effects on SAP and Oracle customers who often feel stranded on an island. We have comments from Oracle customers that question whether Oracle continues to even provide support in return for support money.
Now comes the multiple choice part of the article.
- It was essential that both companies let go of large numbers of domestic support personnel for competitive reasons.
- It was essential that both companies let go of large numbers of domestic support workers for profitability reasons.
Gouging Your Customers
Notice that both SAP and Oracle had plenty of money coming in to keep up the support quality, but they preferred the margin from locked-in customers. They also have been steadily increasing the support percentage, and just a few years ago bumped it from 15% to 22%+ (for SAP 22% just the starting point. Many of their products or product areas are not covered by the standard support fee). SAP and Oracle support used to be comprehensive, but increasingly the basic support is treated more as a “bottom tier” by these vendors. That is both SAP and Oracle see the 22% as the “built-in” cost that all customers need to pay. Then actual support starts above that level.
The Secret to SAP and Oracle’s Revenues
Both SAP and Oracle receive over 50% of their revenues from support and this percentage, combined with the profit margin on their support is really the secret to the revenues of these companies, and they float both of these companies. We quote the following.
“These revenues account for more than all of Oracle’s operating profits. (Maintenance revenues do not have sales and marketing costs, they are for the most part, automatically renewed, they do not have R&D costs and they have minimal G&A costs). Without the golden stream of maintenance revenues, there’s no stable, highly profitable and usually predictable Oracle. (emphasis added)” – Seeking Alpha
Monopoly Power Leads to Exhorbinant Profit Margins
For those that would defend SAP or Oracle’ margins, there is a problem. Economists state that excessive profits are evidence of monopoly power. How did Pablo Escobar end up controlling 80% of the cocaine that was distributed and consumed in the US market? He murdered competitors. At one time Pablo Escobar had 500 sicarios or hit men working for him. SAP and Oracle use a different approach, they combine a partner ecosystem with constant acquisitions and leverage monopolistic control of a core component of enterprise software (the ERP system for SAP, the database for Oracle).
Economists are clear on this, there is no way SAP or Oracle could maintain such margins unless they possessed and exercised monopoly power against their customers. Both criminal organizations like the Medellin drug cartel and overgrown organizations like SAP and Oracle lead to monopoly profits.
Interestingly, there seems to be little questioning of whether such margins are fair to customers and what level of margin indicates a problem with greed. The question should be discussed is what type of entity charges their customers a plus 90% margin for an item? Well, we know that this is the roughly the same margin as drug cartels. The second question is do we hold the profit margins of drug cartels to be ethical? How about blood diamonds? How close does the profit margin have to be to 100% before some type of mental alarm is sounded? Because to hundreds of thousands of SAP and Oracle employees and followers, this support profitability seems pretty reasonable.
Pablo Escobar was generally considered to be a bad person, and not someone you would have over for dinner. However, it turns out that the margins on his cocaine were actually less than SAP and Oracle’s margins on support. Yet people like Bill McDermott and Mark Hurd are celebrated in the press.
I have had a number of people reach out to me and express surprise at the margins described in the article of SAP and Oracle support. Apparently, this was less common knowledge than I had anticipated. The point of the article was to compare the margin to an illegal operation as a means of understanding how SAP and Oracle are able to do it and get away with it.
We have heard quite a bit from SAP consultants or resources who did not like this article at all. The primary issue with SAP consultants have chosen to focus on is whether the comparison should have been drawn. As I was reading up on Pablo Escobar, I found out what the margin on his cocaine was. I thought,
“Wait that is the same margin as Oracle and SAP on support.”
The margin was so high and so rare, the thought was immediate. The proposal by SAP consultants is that I should not have thought that. However, that is automatically what my brain did. Apparently, I should not have thought this, even though the margins were both rare and close to the same. The argument has been that it was inappropriate to write this article, but if it was inappropriate to write it, was it inappropriate to think it? That is should the very associative thought be censored? So far, it seems like the answer is yes. That the pro-SAP resources have proposed that some thoughts are allowable, but other thoughts are not allowable.
One reason the SAP consultants may not have a problem with the margin changed on support is that they don’t pay it. However, if they paid for it, would they complain? I think they would. Most consultants I know like to get a good value for things in life that they buy, and do not appreciate being taken advantage of. I have had SAP consultants complain to me about excessive housing closing costs, which are far less onerous than SAP support.
As this point, I would like to hear from an SAP or Oracle customer that approves of the margin they are being charged. I would also like to hear from a customer that they were told during the sales process what margin they would be paying on support.
The Problem: A Lack of Discussion and Fact-Checking Around SAP and Oracle Support Costs and Value
Oracle, SAP and their consulting partners, as well as the IT media entities all, have something in common. They don’t want the total costs of support, the margin obtained from support by these vendors or the value of this support provided discussed.
The total costs of Oracle and SAP support are enormous, and they pull resources from IT departments with little commensurate value provided. This is why these entities don’t want these topics discussed.
Oracle and SAP benefit from the lack of quantification or the hidden nature of support costs. Upgrades, many of which cannot add value over their costs, are simply absorbed into the IT budget and considered “business as usual.”
Being Part of the Solution: What to Do About Oracle and SAP Support
The first step is to calculate the total costs of support — not just the 22% base level, but the extra costs with support additions as well as the cost of upgrades, etc. Then to quantify the value provided by ticket closure and determine which applications are actually planned to be upgraded. Paring support costs is not an all or nothing decision, even though SAP and Oracle sales reps make it sound like paring support costs is close to the end of the world.
If you need independent advice and fact-checking that is outside of the vendor and vendor consulting system, reach out to us with the form below or with the messenger to the bottom right of the page.
Financial Bias Disclosure
Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.
See Our Other SAP Support Content
The CIA’s response to involvement in the Golden Triangle.
“The CIA made its own internal inquiries of its staff and clients in Laos concerning the drug trade, but never denied the essential allegation. Rather, the CIA took the position that trading in opium was legal in Laos until 1971. The CIA explained that opium served the isolated Lao hill tribes as their sole cash crop and that opium was one of the few medicines available in the primitive living circumstances.” – Wikipedia
How the CIA protected airstrips in the arms for cocaine triangle in the Columbia and Nicaragua.
“In Costa Rica, when the war against Nicaragua’s Sandinista government was at its peak and cocaine was beginning to pour into the United States, the DEA attaché wanted to place cameras at clandestine airstrips from which he suspected drugs were being flown to the United States. The CIA resident gave him a list of airstrips on which he was not to place cameras. They were the strips into which the CIA was flying arms for the contras. Some were also strips from which the DEA agent suspected drugs were being flown to the United States.” – New York Times