The Giant Margins for SAP and Oracle Support

Executive Summary

  • SAP and Oracle have giant support margins that they hide from customers.
  • This support margin is the secret to understanding the revenue model of these two vendors.

Introduction

The SAP and Oracle revenue model is highly based upon support. SAP and Oracle have extremely similar support strategies and revenues models.

  • They both charge 22%+ per year for support and they both receive more than ½ of their revenues and the majority of their profits from support.
  • Both companies have roughly a 90% margin on their support.
  • Both companies have been removing value from their support and making the overall cost of support higher because more support services are pushed into premium packages.

Shhhhhh….Keep the Support Profit Margin a Secret

While SAP and Oracle report their support profit margin in their financials, they are very careful to not mention this support profit margin to customers. We performed a test and asked many of our readers who are both SAP and Oracle consultants or employees whether they would approve of the following text added to SAP and Oracle sales material.

“We Will Make a 90% Profit Margin on Your Support Contract.”

Curiously, no pro-SAP or pro-Oracle resources replied that they would endorse such an addition. More concerning is that many of these readers tout themselves as Oracle and SAP advisors, which implies they look out for their customers’ interests. Yet there seemed to be little appetite for informing customers regarding the support margin.

How Much of SAP’s and Oracle’s Profits are From Support?

Oracle’s numbers are pointed out by the following quote from Seeking Alpha.

“Oracle derives 52% of its revenues from maintenance. Those revenues have operating margins of 94%. The cloud accounts for 8% of revenues and has gross margins (gross not operating) of 48%.

By one calculation, Oracle’s support operating margins constitute more than 100% of the company’s operating profit.”

In fact, Oracle is so dependent upon its cloud revenues that Seeking Alpha declares 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)”

Selling Software for Support Margins?

There is really no other way to say it, Oracle sells software to its customers to get support contracts and to overcharge customers on that support contract. (as does SAP). The secret to understanding SAP and Oracle’s model is found in the highly stable support profit stream.
Both rely heavily on outsourced support to very inexpensive and normally less experienced resources to India and other low-cost countries (many domestic support personnel have been long since fired or reassigned). And for both companies support is less and less helpful in supporting customers, particularly if premium support is not purchased. We have gone around and around with SAP on support tickets with beyond technical skills, the supporting individuals seem to lack English comprehension skills, leading to all manner of miscommunications.

Getting the Perpetual Run Around?

One of the most troubling things about SAP support is how issues are covered up if they are embarrassing to SAP. As for Oracle’s support, if you need assistance on a Severity Two issue, you must ask to have your ticket escalated, or it will sit until the next ice age. Severity One? Escalate it. Moreover, if you don’t get back to support in short order, you will find your ticket closed. If you have a difficult problem watch support pass it around the globe by asking the same question and waiting for the answer, then letting it get picked up by the next shift. How about a problem with an engineered system? Well, the best move is to make some popcorn, sit on the phone with several support organizations and watch them play “pin the tail on the donkey.” What is often little discussed is how the configuration of SAP and Oracle support imposes unplanned costs on their customers. This topic is raised by 3rd party support provider Rimini Street.

“While support costs have continued to rise, the level of customer service you receive has steadily declined. When you contact vendor support about a problem, a junior-level tech might advise you to upgrade or implement a patch bundle that combines hundreds of other fixes. Before you know it, one small problem has morphed into a big project, with regression testing and downtime that costs a lot of money, time and resources. When you get back in touch with support, you’re unlikely to get access to experienced engineers unless you navigate a maze of escalations. Think about it: How long did you spend on the phone and how quickly was your issue resolved (if at all) the last time you called your software vendor’s support line?”

To be sure, Rimini Street is trying to sell 3rd party support, however, this quotation also conforms with our experiences on SAP and Oracle projects, as well as research in the area. Rimini Street highlights the many hours that SAP and Oracle customers engage in “call avoidance” and spend in researching issues before calling support and how this is a drain on IT departments.

“I used to spend hours researching case resolutions myself and was led around the world with vendor support depending on the time of day.” – City of Cuyahoga

Changing the Support Deal

We cover how Oracle and SAP have changed the “support deal” in the article How SAP and Oracle’s Stripped the Value from 22% Support. Essentially Oracle and SAP want support to be as close as possible to 100% profitable. In fact, most of SAP and Oracle’s profits come from support. Furthermore, according to Rimini Street only 1% of SAP support revenue is reinvested in enhancing existing software. ASUG, a user group, but also a marketing arm for SAP states that support should be used for acquisitions as we cover in ASUG’s Strange View of How SAP Support Fees Should be Used.

This is odd because if SAP uses the income from the support stream to make an acquisition, it means that customer is paying for SAP to buy applications that the customer most likely does not own. Therefore, how does this acquisition benefit the customer?

Throwing Away Money on Support

Customers have been throwing their money away on support, seeing it as an automated locked in cost. However, the 3rd party support firm Rimini Street has spent much time explaining to customers how they can cut their support in ½ by dropping Oracle and SAP support and using their third-party support. For a long time, customers of Oracle and SAP were more difficult to budge. However, as pointed out by Seeking Alpha, this is increasingly changing.

“Until now, the company did not face real challenges in its installed base. Applications had long lives and the databases that they ran on were considered part of the furniture. Renewals came automatically and since maintenance revenues are based on the total number of seats installed, the golden stream of revenues grew every year.”

But while there is some change, the margins in SAP and Oracle’s support indicates that there is still very little competition in the support space for these two vendors.

Conclusion

Even though SAP and Oracle’s software is very expensive, they currently only make a profit on support. They aim for 100% profit but fall short — so in the high 80% and low 90%. They do not use that revenue to reinvest in very much in the way of software development, and they have shrunken costs enormously in order to maintain the profitability levels in support that they do have.

Financial Disclosure

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.

Search Our Other SAP Content

SAP Licensing Research Contact

  • Interested in Our SAP Licensing Research?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch.

References

https://seekingalpha.com/article/3965635-oracle-might-eating-porridge

https://www.riministreet.com/Documents/Collateral/Rimini-Street-eBook-10-Telltale-Signs-Change-Database-Strategy.pdf

TCO Book

TCO3

Enterprise Software TCO: Calculating and Using Total Cost of Ownership for Decision Making

Getting to the Detail of TCO

One aspect of making a software purchasing decision is to compare the Total Cost of Ownership, or TCO, of the applications under consideration: what will the software cost you over its lifespan? But most companies don’t understand what dollar amounts to include in the TCO analysis or where to source these figures, or, if using TCO studies produced by consulting and IT analyst firms, how the TCO amounts were calculated and how to compare TCO across applications.

The Mechanics of TCO

Not only will this book help you appreciate the mechanics of TCO, but you will also gain insight as to the importance of TCO and understand how to strip away the biases and outside influences to make a real TCO comparison between applications.
By reading this book you will:
  • Understand why you need to look at TCO and not just ROI when making your purchasing decision.
  • Discover how an application, which at first glance may seem inexpensive when compared to its competition, could end up being more costly in the long run.
  • Gain an in-depth understanding of the cost, categories to include in an accurate and complete TCO analysis.
  • Learn why ERP systems are not a significant investment, based on their TCO.
  • Find out how to recognize and avoid superficial, incomplete or incorrect TCO analyses that could negatively impact your software purchase decision.
  • Appreciate the importance and cost-effectiveness of a TCO audit.
  • Learn how SCM Focus can provide you with unbiased and well-researched TCO analyses to assist you in your software selection.
Chapters
  • Chapter 1:  Introduction
  • Chapter 2:  The Basics of TCO
  • Chapter 3:  The State of Enterprise TCO
  • Chapter 4:  ERP: The Multi-Billion Dollar TCO Analysis Failure
  • Chapter 5:  The TCO Method Used by Software Decisions
  • Chapter 6:  Using TCO for Better Decision Making

How Accurate Was CIO on SAP Support Needing to Go Down

What This Article Covers

  • Explanations for Increases in SAP’s Support Prices
  • The False Explanations Begin
  • Our Analysis

Introduction

In the article Why SAP’s ERP Maintenance Prices Should Be Going Down — Not Up in CIO, some interesting points were brought up about what the cost of SAP’s support should be.

In this article, we will review the accuracy of this CIO article.

Explanations for Increases in SAP’s Support Prices

Nobody likes to pay more for something that they’ve been already getting, for roughly the same price, for a decade.

So when SAP announced this past July that all of its customers (new and old) would be moving from tiered pricing for SAP’s maintenance and support plans to a single and more expensive price come Jan. 1, 2009, there was some uproar in the “ecosystem,” as SAP likes to call its software universe.

Most of that initial outrage over the maintenance fee increase—which goes up from 17 percent (formerly known as Basic Support) to 22 percent, for the new and enhanced Enterprise Support—has been subsiding in the few months since the announcement. But it shouldn’t.

Two well-known industry experts, Forrester Research’s Ray Wang and former Gartner analyst Vinnie Mirchandani, are doing their part to fan the flames of SAP customer feelings of injustice. (Mirchandani is known as Vinnie “Maintenance,” and his distaste for high price and low value in enterprise software maintenance costs is legendary.)

First, Wang: In early October, Wang delivered a Forrester report on how companies are coping with SAP’s pricey maintenance hike and offered customers suggestions on how to deal with the unwanted costs. One of the important points Wang raises has to do with the lack of value that SAP customers felt they were receiving: “While the new [Enterprise Support] model does offer some new benefits like upgrade support and end-to-end operations support,” he writes, “many of the customers with whom Forrester has spoken already question the value of their existing Basic Support contracts at 17 percent.”

Everything so far stated up to this point is quite true.

In fact, of the 203 customers Forrester interviewed, a whopping 85 percent expressed minimal utilization of the existing Basic Support offerings.

This is supported by exposure to support accounts. Rimini Street also proposes that most SAP customers only open a small number of tickets.

In addition, SAP customers told Forrester that they just weren’t seeing the innovation in product offerings from SAP that should have resulted from the collective billions they’ve been paying in maintenance dollars over the years. “There are a plethora of examples where key functionality requested two to four years ago by multiple customers in the same or different industries were not delivered,” Wang notes.

This is entirely accurate, yet shocking to find in CIO magazine, which is owned by IDG and receives funding from SAP.

Mirchandani is also stirring up customer dissatisfaction. He points out in a recent blog post on SAP’s “empty calories” that SAP has yet to deliver important details with metrics on the new value SAP customers will receive from Enterprise Support. He also echoes Wang in that SAP “keeps dancing around” the key question of whether 17 percent maintenance was delivering enough value to customers in the first place.

This phrasing is strange. if Vinnie Mirchandani said something positive about SAP, CIO would not have stated that “Vinnie is promoting SAP.”

SAP, says Mirchandani, should have actually been able to lower maintenance costs—not increase them. “They have offshored some of the support. There is more automation—more customers get self-service support answers through knowledge bases. Their community is handling many routine support questions (and customers are funding that community, not SAP),” he writes. “In the spirit of rollbacks, SAP support costs should have been declining for the last several years.” (For more on SAP’s future, see “Five Things About SAP’s Strategy That You Need to Know.”)

This is all true. It is reinforced by the fact that SAP has a 90%+ margin on support.

The False Explanations Begin

Two things should be noted that this point. One: SAP has claimed that the price increase is justified due to the complexity of its customers’ IT environments and that its customers want more comprehensive support offerings, according to Wang. In announcing Enterprise Support, SAP stated that “the ongoing growth of SAP’s robust product offerings, the pervasiveness of business networks and mass adoption of service-oriented architecture (SOA) have challenged traditional support models.”

This is untrue. First, SAP is supposed to be simplifying IT environments, not making them more complex. Secondly, if this were true, why are SAP’s support margins so stratospheric?

SAP never embraced SOA and is basically died. This entire paragraph is false.

In other words, SAP had to change to meet the vast and complicated needs of its customers, and Enterprise Support is the manifestation of that.

Completely false. Needs did not suddenly become more complex.

And second, SAP’s chief competitor, Oracle, has been charging 22 percent for a long time now, though, as Wang notes, Oracle has been known for offering more “generous discounts” on initial software deals—”a practice SAP has not historically embraced,” he adds.

Now we are getting to the heart of the matter. SAP believes it is owned whatever Oracle charges.

So that’s where we stand: The economy is in the tank, companies are scrutinizing every in-house IT expense (including SAP), and SAP is raising prices on an IT cost that 85 percent of surveyed companies didn’t see much value in and used minimally. Those “empty calories” are going to be pretty tough to swallow come Jan. 1, 2009.

True

Conclusion

Vinnie Mirchandani comes across as the most accurate sources in this article. The arguments presented by SAP are fallacious and as CIO receives funding from SAP, they did nothing to challenge these arguments.

CIO receives a 5 out of 10 for accuracy in this article. This is one of the highest scores we have ever given an IDG publication.

References

https://www.cio.com/article/2373746/enterprise-software/why-sap-s-erp-maintenance-prices-should-be-going-down—-not-up.html

How do SAP and Oracle’s Support Profit Margins Compare to Pablo Escobar?

Executive Summary

  • 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.

The movie American Made, while the story was adjusted for entertainment purposes, holds up as historically accurate on its primary premise. This is the story of a Barry Seal, a pilot who was used by the Medellin drug cartel and the CIA to smuggle both guns (from the US to Nicaragua, which then ended up in Columbia and with the Medellin cartel!), and cocaine back to the US. The CIA became involved in a drug smuggling triangle for a “good cause”…..to prevent the spread of “communism,” and helped to prevent the population from choosing their political future in Nicaragua.

This is because the US is extremely dedicated to exporting democracy. Later Iran was brought into the mix, and this was eventually exposed as the Iran-Contra scandal, where it was shown that the CIA was operating without congressional oversight. This was all coordinated by the Reagan Administration. This is also not the CIA’s first association with drug smuggling. They were involved in the opium trade in both Southeast Asia’s Golden Triangle in the 1960s and 1970s and in Afghanistan’s opium trade after the US invasion of Afganistan in the “War on Terror.”

Why is the US military constantly being shown guarding Afghanistan poppy fields? Is someone the US military is friendly with relying upon it for some off the books income? 

Apparently, opium fields are a good place for members of the US military to make friends with the locals. Look at this wonderful cross-cultural exchanging happening in this photo. That Afhgani boy is about to get a Barry Bonds baseball card. Semper Fi. (Photo from Global Research)

If the US government had a Facebook relationship status with cocaine/opium/heroin smuggling and cocaine/opium/heroin smugglers it would be set to “It’s Complicated.”

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.

  1. It was essential that both companies let go of large numbers of domestic support personnel for competitive reasons.
  2. 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.

Conclusion

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.

Article Reactions

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.

Financial Disclosure

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.

Search Our Other SAP Content

SAP Contact Form

  • Interested in Our SAP Research?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch.

References

https://mentalfloss.com/article/29396/profiles-scourges-pablo-escobar

https://www.slate.com/blogs/browbeat/2017/09/29/what_s_fact_and_what_s_fiction_in_american_made.html

https://seekingalpha.com/article/3965635-oracle-might-eating-porridge

https://www.theguardian.com/news/2018/jan/09/how-the-heroin-trade-explains-the-us-uk-failure-in-afghanistan

Drug War? American Troops Are Protecting Afghan Opium. U.S. Occupation Leads to All-Time High Heroin Production

https://www.cnn.com/2017/09/08/health/heroin-deaths-samhsa-report/index.html

https://en.wikipedia.org/wiki/Allegations_of_CIA_drug_trafficking

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

How SAP Exposed its Own Support Monopoly in the Oracle TomorrowNow Lawsuit

Executive Summary

  • In the TomorrowNow lawsuit, SAP accused Oracle of many things that equally apply to SAP.
  • The most important accusation being that Oracle uses coercive tactics to prevent customers from saving money on support!

Introduction

In the Oracle vs SAP on the TomorrowNow case, Oracle made a broad number of accusations against SAP. In order to defend itself, SAP made a number of statements that that while designed to protect SAP ended up exposing SAP virtually identical support model. In this article, we will cover these hypocritical statements.

The case has quotations in it that are surreal. Here is one.

“Plaintiffs bristle at the notion that customers may wish to lower their support fees and forego the right to future software upgrades. A senior Oracle executive wrote: ‘Let the bastards dream of reducing their maintenance fees. I just finished telling Toyota that we’re not going to reduce their bill. Not only that, but they need to buy more software from us!’

That attitude contributes to customers leaving Plaintiffs’ support.”

SAP? Oracle’s attitude? Where have we seen that exact attitude in another large vendor with a slightly different color scheme?

SAP’s Identical Model for Extracting Support

This is SAP calling out Oracle for not accepting competition for support. But SAP has the same support model as Oracle. All India outsourced support (lowest possible wages), desultory service, and 93%+ margins and constant lying to why customers must stay current on their support which is covered in the article Understanding SAP’s Declining Support. How does SAP produce the tone-deaf hypocrisy to call out Oracle for having the exact same perspective/policy on getting customers to keep paying their support (and scooping up their 93%+ margins) when SAP does the same thing?

SAP has the same type of emails that you see listed in this trial brief which are introduced as evidence against Oracle. SAP appears to be making Rimini Street’s argument in this brief! Thank you very much for sharing it.

Financial Disclosure

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.

Search Our Other SAP Content

SAP Contact Form

  • Interested in Our SAP Research?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch.

References

www.tnlawsuit.com/uploads/727%20-%20Defendants%20Trial%20Brief.pdf

The Amazing Support Percentage of Revenues for SAP & Oracle

Executive Summary

  • Support as a Percentage of Revenues for Oracle and SAP
  • What it Means for the Future

Introduction

SAP and Oracle are very aggressive in promoting how well they are doing. However, something that receives little attention is how high the support percentage of their revenues are, and how much they rely upon their revenues for their profitability. Both SAP and Oracle have support margins in the 90% range. As for the composition of the revenue, more than 1/2 of each company’s revenues are from support. Let us look back a few years to see what the support percentage used to be.

“According to Veverka (2009), Oracle’s income from maintenance fees is more than 51% of its total revenue, and SAP’s is 50% (SAP Investor Relations 2013). With all of the aforementioned issues, implementation, and associated service costs, not many can afford to go for an ERP implementation.”

This percentage has only increased since this time. In fact, the support part of the business is growing faster than the rest of SAP or Oracle’s business.

In fact as of our calculation for the first quarter of 2018, SAP’s percentage of revenues that are made up of support is significantly higher.

The fact that the only real growth in either revenue or profitability is support for both companies should be an area of concern for those analyzing these two companies.

The Future of SAP & Oracle?

This quote brings up interesting questions for the future of SAP and Oracle.

This following quotation is from Ahmed Azmi, a person who used to work in Oracle support.

“80% of the M&S revenue comes from the top 10-20% of SAP and Oracle customers. Premier customers who spend $10 million+ on services per year. Think Fortune 500.

For this customer, a support contract is just an expensive insurance policy. Just in case something happens, the vendor must step in. They have ZERO interest in innovation value. In fact, they would never let anyone come near their stable version. That’s why most customers don’t run the latest product releases.

Any CIO worth his salt knows that new products are risky at best so they never upgrade until a few years have gone by and the most serious issues have surfaced and resolved. No one wants to be a lab rat for their software vendors.”

Ahmed goes on to explain how those that follow Oracle are being misled because of the support margins.

“Take Oracle. Sales growth over the last three years has averaged a paltry 2%. The most recent quarter showed sales growth of 3%, so it wasn’t much of an improvement. However, profit margin is 42.1%, and operating margin is 36%.

To be fair, these high margins despite stalled growth are driven by SEVERE cost cutting. Hiring fresh grads and offshoring development and support to India and Romania.

The key observation here is lack of growth catalyst. 2% growth over the past three years means the cloud numbers were fiction. This also explains the investor lawsuit for cloud fraud, and the recent departure of the head of Oracle cloud.”

Both SAP and Oracle aggressively cut costs. Both companies rely on a similar 22%+ percentage of the original license, and both follow a third world employment model for most of their support.

Getting Profits Up With Customers Who Can’t Leave

Looked at it that way, SAP’s and Oracle’s increased margins look like a short-term strategy to get profits up (and squeeze the most squeezable part of their revenue stream). That is support…. customers who can’t leave. Wall Street does not see this and is buying the growth story pitched by McDermott and co and Hurd and co. Those analysts think those profits are coming from the non-support part of these company’s revenues. Both companies have proposed that cloud sales is what is driving this margin. However, both companies have about the same percentage of revenues that make up their cloud, around 16 percent.

What Wall Street does not see is the cost-cutting has rendered SAP and Oracle support close to inoperable. This reduces maintainability of the solutions that were so expensive to implement. On the Q4 2018 (fiscal) call Safra Catz bragged about Oracle’s 47% margin, she did not let on to the analysts that most of that margin is in support! But the math on this is simple. Most of Oracle’s margin is from support. She and the rest of the execs on the Oracle side gave the analysts the impression the margin was generalized.

Are SAP and Oracle’s Support Margins Monopolistic?

The study of margins is performed by economists to test for monopoly power. The margins that SAP and Oracle charge for support are generally referred to as “monopoly profits.”

This is a good example of the type of research into monopoly profits.

However, some pro-SAP resources have proposed that even though SAP’s margins are so high, that SAP does not have a monopoly on SAP support because of the existence of third party support.

I am quite familiar with the effort that companies like Rimini Street make to get support contracts. First, Oracle’s margins are so high, that Rimini Street promises a 50% cost reduction right off the bat.

Rimini Street has popularized these types of graphic, that explain the annual support fees are only one part of the costs associated with keeping Oracle and SAP operational. Both SAP and Oracle constantly push upgrades that consume more resources and have little impact on improving the software. Rimini Street has explained upgrades actually cost, and the cost is very high. Many upgrade projects become very expensive affairs with a lot of billed hours for consulting firms.

There are problems that make SAP and Oracle’s support sticky. First, an SAP and Oracle’s customer getting off of support means they don’t get upgrades. If this tie were broken many, more companies would far more readily switch away from SAP and Oracle’s support.

Moreover, once we get beyond Rimini Street who is there? Well, there is Spinnaker Support, but Spinnaker is very small in SAP support. SAP customers don’t have many options. Oracle has more options, but it is still very little competition. Secondly, if you are going to provide 3rd party support (and be public about it), you better have a lot of money set aside for attorneys. Oracle has been repeatedly suing Rimini Street in an attempt to put them out of business.

Conclusion

SAP and Oracle’s support revenues and profits are called monopolistic profits by economists. They are so high because it is extremely limited. This allows SAP and Oracle to offer extremely little value in return for the support dollars. SAP and Oracle’s support revenues and profits are the primary drivers within these companies. This means that their strategies will increasingly reflect their motivations to protect these revenues and margins. Secondly, both companies are using these revenues and profits to project health in the rest of their businesses to Wall Street. At some point, these companies will not be able to maintain this illusion.

Financial Disclosure

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.

Search Our Other SAP Content

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  • Interested in Our SAP Licensing Research?

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References

ERP in Clouds or Still Below, Journal of Systems and Information Technology – Mar 4 2014.

*https://www.slideshare.net/CIOEvent/rimini-street

ASUG’s Strange View of How SAP Support Fees Should Be Spent

 Executive Summary

  • ASUG wrote a strange explanation for SAP support money should be used.
  • We review ASUG’s accuracy.

Introduction

It is interesting to find what ASUG believes SAP support fees should be used for.

In this article, we will cover this topic as it is stated by ASUG in an article.

Support Should Not be Used for Development?

In its article, ASUG proposes something quite interesting about using support money.

“Those 22 percent maintenance fees that come with SAP licensing contracts are expected to pay for support and maintenance of currently licensed products, but SAP and other vendors also use that money to upgrade and innovate. In this case, it appears that mergers and acquisitions are also lumped into the innovation pile. That’s an interesting note for customers who are curious as to where those maintenance dollars end up.

  • Firstly, Twenty-two percent is actually the lowest level that an SAP customer can pay in support. Most customers pay more than this because a number of areas of support are taken out of the base support level. SAP even has much more expensive support levels above this, like MaxAttention that are normally used for problematic products, and are truly exorbitant. 
  • Secondly, the statement ASUG makes regarding how the support funds are to be used is simply incorrect. Support money is, in fact, to be used to continue to develop the application. But the way that ASUG states it, makes it appear as if SAP is being magnanimous by using some of the support money in this way.
  • Thirdly, why are maintenance dollars being used to make acquisitions? Newsflash, an acquired application will be “sold” to an existing customer of SAP. The customer will not get it for free. So in that case, why are support revenues used for acquisitions? ASUG (although in actually SAP) makes the case so nonchalantly. However, think through the implications. Customer’s support fees on products they currently own should be used for acquisitions, which customers will then have to buy if they want to use? Is this pre-emptive support funding?”

SAP’s Declining Support

As covered in the article, What to do About SAP’s Declining Support, in part because SAP employs many support personnel in countries where SAP pays between $25 and $35 per day per resource, SAP receives a 85% margin on its support. (And SAP’s support has been steadily growing as a percentage of its overall revenues.) SAP’s support has greatly degraded over the past 15 years, in part because the people offering support barely speak and write the language of the customers that use SAP (most of SAP’s customers are in the US and Europe).

So yes, it would be expected that SAP would use the support money to not only provide far better support than it does (and not gold plated support cost and third world nation capabilities) but also to fund its development organizations. Bill McDermott’s personal compensation, which is over $50 million per year, and the compensation of other top SAP executives is a major part of the problem. Bill McDermott’s yearly compensation alone would pay for 6,392 support personnel where SAP employs the bulk of its support employees. But does Bill McDermott do as much work as 6,392 people? If so, Bill McDermott must be a very productive fellow.

Conclusion

ASUS has a strange and SAP-centric perspective on what SAP support fees should be used for, which actually contradicts what SAP has been telling customers for many years.

This article appears to be communicating to customers that they are lucky if SAP takes any of the support money that it receives to continue to develop its applications. This is yet again evidence of how much ASUG is in SAP’s pocket.

SAP Articles Published Through the SAP Surrogate ASUG, Under the Pretense of Being Independent Analysis

SAP publishes such articles, using ASUG as a faux independent entity in order to lower the expectations of customers, hopefully without customers realizing it.

Financial Disclosure

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.

Search Our Other SAP Content

SAP Licensing Research Contact

  • Interested in Our SAP Licensing Research?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch.

References

https://www.asug.com/news/sap-ceo-bill-mcdermott-s-4hana-integration-is-top-r-d-priority