Analysis: Oracle embraces outsourcing

Analysis: Oracle embraces outsourcing

After 2 1/2 years of boasting and bumbling, Oracle finally might be hitting its stride with its enterprise outsourcing business.

The database giant has made some wrenching internal changes in the past 18 months to make outsourcing a major source of future revenue. Customers who rely on an Oracle data centre, or a third party, to host and maintain their Oracle applications say those changes have led to more savings and better customer service.

In recent months, the changes at what Oracle now calls E-Business Suite Outsourcing include:

-- Revamping the technical support group for faster response time and more customer focus.

-- Linking tech support to Oracle software developers for faster changes and improvements.

-- Adding the Oracle 9i database and 9i Applications Server to its outsource offerings, along with the Oracle 11i E-Business Suite.

-- Launching a new effort, with incentives, to persuade customers upgrading to E-Business Suite 11i to convert to an outsourcing model instead of running the applications in-house.

Two other changes are not evident to customers but starkly underline Oracle's seriousness about outsourcing. In the past year, Oracle finally has overhauled its sales compensation package. Now sales staff get a bonus and full credit for a software licence sale whenever a customer chooses the outsource option.

They also got an order from Oracle chairman Larry Ellison, who decreed about four months ago that the outsource option be presented to every customer, in every deal.

"The fact that they're now compensating their sales reps on outsourcing sales is huge," says Amy Mizoras, program manager for application service provider research at IDC. "They're the only [software vendor] putting their money where their mouth is."

And a big mouth it has been.

Ellison predicted at the 1999 launch of Business OnLine (BOL) that Oracle would reap a huge benefit in a big market: He said there would be 10,000 users working with Oracle-hosted applications at the end of 12 months, and another 100,000 at the end of two years.

The reality

The reality is quite different. Oracle won't say how many users work with outsourced software. "We don't have that figure available," a spokeswoman says. After 2 1/2 years, Oracle claims 200 customers use the outsource option for E-Business Applications, such as finance and customer relationship management. About 200 more customers are using the database and applications server in a year-long pilot program, according to Paige O'Neill, senior director of outsourcing marketing for Oracle.

At the BOL launch, Ellison declared that Oracle would sell its applications to third-party outsourcers "over my dead body". Today, these same companies are valued partners, such as Appshop in Fremont, California, with nearly as many applications customers as Oracle.

As a result of all these changes, Oracle CFO Jeff Henley modestly told Wall Street analysts in March that within five years, Oracle's outsource revenue "could" reach $1 billion, and one of every four current Oracle customers "could" convert to outsourcing.

Judging by the experience of two of those customers, Henley's goals might well be achievable. Both customers say that one of the most important lessons they learned was that Oracle could learn from its own mistakes.

"I give a lot of credit to Oracle," says Kyle Lambert, vice president of information services for John I. Haas in Washington, D.C. "They started the [new] outsourcing model very cautiously. As they go along, they're adding policies and procedures to make it more robust."

Privately held Haas, with about 125 full-time staff, is the world's largest grower of hops and hops products in the world, Lambert says. "Any outsourcing [deal] is really a relationship," he says. "It's not like getting electricity from a utility company. You have to be in constant communication with your service provider to make sure you're getting what you want."

"We were not shy at all about making sure they knew what we needed," recalls Brenda Boyle, vice president of IT for Empirix in Waltham, Massachussets. The company was spun off from Teradyne in January 2001 to create software for testing Web applications and infrastructure. Boyle recommended outsourcing the Oracle applications suite because there was not enough time to hire scarce IT staff and create an infrastructure from scratch.

True believers

"It was the best thing we ever did," she says, with the conviction of a true believer, even though when she signed the purchase order with Oracle, "I was a nervous wreck".

Among the key changes Oracle made, Boyle says, were creating a dedicated account management team for Empirix, revamping the outsourcing group's technical support organisation and instilling a new customer service ethos.

"Now they'll send you proactive e-mails telling you, for example, about a system outage -- the root-cause analysis, how they'll keep it from happening in the future, and so on. They do a good job of keeping us informed," she says.

Both executives say the returns have been dramatic. Lambert says he expected a cost savings of 20 per cent. Instead the savings in running the applications was 45 per cent. The greater savings came from unanticipated productivity improvements, he says. "We were able to decrease our end-of-month financial closing time by 25 per cent, and reduced order-entry time by 50 per cent," Lambert says.

Much of the improvement was due to the fact that Oracle's data centre team tuned the hardware and software performance more efficiently than Lambert's IT group had.

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