- 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.
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.
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 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.
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Getting to the Detail of TCO
The Mechanics of TCO
- 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.
- 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