oracle | Paul Wallbank - Communications Professional

Seeking salvation in the cloud

In a time of flat markets, companies struggle to find their next growth drivers. Software companies are hoping cloud computing will be their salvation

Oracle CEO Mark Hurd’s keynote at the company’s Open World conference in San Francisco yesterday illustrated a problem facing businesses around the world and its effects on enterprise software vendors like the one he heads.

“Standard and Poor’s top five hundred companies’ revenue growth is at one percent, their earnings growth is five percent.” “It means what? Expenses are going down.”

“This is the problem that the CEO has,” he says. “Why is it hard to grow revenue. All your investors want you to grow earnings and deliver growth. They have little patience for any long story about why it’s so hard.”

“They don’t care about any issues you may have. Grow earnings, grow cash flow, grow stock price. That’s it.”

Growing in a slow market

As a result of that the easiest way to grow earnings is to grow revenues but when global GDP and markets are flat, the only way to grow is to gain market share, Hurd says. “We have to know the customer better, we have to do a better job of marketing and we have to do a better job of aligning our goods and services to what our customers want. We have to improve our products and processes.”

That imperative for companies to cut their operating costs has had a brutal effect on enterprise IT budgets, “over the past five years, the growth in enterprise IT has been flat.” Hurd says, “the growth in spending has been basically zero.”

Customers drive the market

Like many things in the tech industry, the sector’s growth focus has shifted to consumers, “consumer spending on IT has almost quadrupled in the past decade. So while companies are sort of flat, consumers have been spending like crazy.” Hurd observes, “consumers are more sophisticated, more capable, more knowledgeable and expect better services than ever before.”

“Your customer experience is not being defined by your competitors but by technology fuelled consumers. For instance, AirBnB may be defining customer experience for the hospitality industry.”

“People are using a lot of social technologies in their personal lives,” “we expect ease of use, simplicity, clean interfaces are now things we expect in the enterprise side.”

Crimping innovation

In the enterprise IT sector, Hurd believes the flat market means many companies catering to the corporate market are skimping on Research and Development which in turn is crimping innovation, a factor compounded by cloud providers taking an increasingly larger share of the market.

This is underscored by cloud leader Amazon Web Services spending over ten billion dollars a year on R&D. Hurd’s boast that Oracle is spending half of that shows how the legacy players are struggling.

What stands out in Hurd’s keynote is how legacy providers see cloud computing as their salvation. However Amazon’s dominance in that space is a major obstacle for them.

For consumers, big and small, the shift to the cloud has been a good thing in shaking up the existing industry and making new technologies more accessible to smaller customers. For existing businesses like Oracle, there’s a challenge in adapting to a lower margin, commoditized and quickly changing market.

A bigger question though facing all large corporations, not just software companies, is this new normal of low economic growth. Succeeding in that environment is going require a completely different management and investor mind set to that of the last seventy years.

Profiting from the industrial internet

How will companies make profits from industries being shifted to lower cost structures?

Opening the first official day of Oracle Open World, CEO Mark Hurd spoke with James Fowler, the Chief Information Officer of General Electric about the company’s digital transformation.

Fowler described how the company intends to be driving $15 billion in revenues from its digital operation in the face of stagnant industrial spending.

Earlier in the presentation Hurd had described the problem of stagnant spending facing all major industrial companies, whether they are enterprise software providers like Oracle or engineering organisations like GE, where companies are ‘sweating the assets’ ruthlessly.

For GE, making a compelling argument for companies to reinvest in new capital equipment is essential while Oracle is facing an industry wide decline in revenues and a structural shift to cloud technologies which Hurd described in stark tones.

Last year, he claims, the major tech companies saw a gross decline of $16.4 billion in revenues while cloud services only picked up by billion meaning the market shrank by fifteen billion dollars.

That decline would deeply worry a salesperson like Hurd given the declining market means smaller commissions and fewer sales so it’s unsurprising the company is pivoting as hard as it can into the cloud.

GE on the other hand is making a huge bet on the future of its market by proactively shifting onto digital and cloud services.

The challenge though for all these companies is making money from these new business models those who figure it out will be the industrial giants of the next century. There’s no guarantee any of today’s will be among them.

Killing the business of complexity

A simpler business environment means lower margins. If you profit from complexity you have a problem

“The cardinal sin of the computing industry is the creation of complexity,” is quote attributed to Oracle founder Larry Ellison and often repeated at the company’s Open World forum which I’m attending at the moment in San Francisco.

For the computer industry that complexity has been a very profitable profitable business with everything from the local computer shop through to the big technology vendors and integrators.

One of the biggest beneficiaries of that complexity were the salespeople, big complex enterprise deals meant big commissions.

With the shift to cloud services and apps, those fat margins and commissions have evaporated, leaving the lucrative old models of business stranded. IBM are probably the greatest victim of this while Microsoft are, once again, showing the company’s ability to evolve in the face of a fundamental market change.

For the salespeople the days of fat commissions are over, with thinner margins it’s not possible to pay big lump sums for winning contracts.

The simplification of the computer industry is changing the fortunes of many IT businesses, but that change isn’t limited to the tech sector or their salespeople as those fundamental changes are rippling into other sectors.

A constant claim by Internet of Things evangelists is that the IoT will squeeze inefficiencies out of businesses and this is exactly what we’re seeing with cloud and mobile based services like Uber and AirBnB.

If you’re in a business that profits from market inefficiencies then it might be time to figure out how to survive in a low margin environment. The challenge facing companies like Oracle is one whole industries are now having to face.

IT industry feuds are buried as business models collapse

The collapsing personal computing and server markets are forcing once powerful competitors to bury animosities and feuds as industry giants face a troubled future.

Samsung’s exit from selling desktop computers illustrates how quickly the PC industry is collapsing which underscores Michael Dell’s urgency in his attempts to take Dell Computer private along with the spectacle of once hostile competitors like Oracle and Microsoft embracing each other.

Earlier this week Microsoft Australia hosted a briefing at their North Ryde office to show what the company is doing with their Azure cloud computing service, which is part of the company’s quest to find revenues in the post-PC world.

Microsoft are quickly adapting to the new marketplace. This week in Madrid, the company hosted their European TechEd conference where they showed off their Cloud First design principles of software built around online services rather than servers and desktop PCs.

One important part of Microsoft’s cloud strategy is establishing pairs of data centres to provide continuity to the various zones, including China, across the globe. Each individual centre is at least 400 miles apart from its twin to avoid interruptions from natural disasters.

Interestingly, this is the opposite of Google’s data centre strategy and quite different from how Amazon offers its data services where customers can choose the zones and level of redundancy they want.

There’s no real reason to think any of these three different philosophies are flawed, it’s a difference in implementation and each approach brings its own advantages and downsides which customers are going to have choose between.

While Microsoft is showing off its new direction, HP CEO Meg Whitman was in Beijing proclaiming that “HP is here to stay” and laying out the company’s path to survival in the post-PC world.

Like Microsoft, HP is putting bets on cloud computing and China, Whitman emphasized the work she’s been doing engaging with Chinese companies while promising “a new style of IT” and that “HP is in China for China.”

A key difference to Microsoft and Dell is that HP is doubling down on its desktop and server businesses with a focus on selling into the Chinese market. This is a high risk move given China’s investment into high speed networks and the global nature of the cloud computing movement.

One of the boasts of Whitman and her management team is that HP have added a thousand Chinese channel partners over the last twelve months, this is an effort to replicate Microsoft’s market strength in mature markets which has given the software giant breathing space against strong, cashed up competitors like Google and Apple.

Whether this works for HP in China remains to be seen, in the meantime Microsoft are trying to move their huge channel partner community onto the cloud with various offerings that give integrators who’ve traditionally made money selling servers and desktops some opportunity to sell online services.

A selling point for Microsoft is yesterday’s announcement they will offer Oracle databases on their Azure platform. The ending of animosities between Microsoft and Oracle is an illustration of just how the collapse in the PC and server markets is forcing market giants to forget old feuds and build new alliances.

With the server and personal computing markets being turned upside down, we’re going to see more unthinkable alliances and pivoting corporations as once untouchable industry giants realise the threats facing them.

Too many presidents spoil the enterprise computing broth

Oracle has an interesting management problem as revenues stagnate.

Last week Oracle, the world’s third largest software vendor, had an eight percent drop in its stock price after the company missed earning estimates.

Part of the research for are article I’m writing on the company involved digging into the organisational structure of the company and interestingly it has a pair of ‘co-presidents’ – Mark Hurd and Safra Katz.

Safra is the Chief Financial Officer who has a pretty powerful CV and seems well qualified for the job of controlling the finances of a $150 billion dollar company.

Mark on the other hand is my favourite IT executive, his tenure at HP is a case study in the entitlement culture of modern managerialism and no small reason for that company’s present day problems.

The analyst briefing (free subscription might be required) following Oracle’s disappointing reports betrays a little bit of tension between the two. First Safra;

We’re not at all pleased with our revenue growth this quarter. So it didn’t help that our quarter ended on the same day as the sequester deadline. What we really saw is the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4.

Since we’ve been adding literally thousands of new sales reps around the world, the problem was largely sales execution, especially with the new reps, as they ran out of runway in Q3.

It seems there’s a touch of ‘dog ate my homework’ in mentioning the US political sequester, but the message is clear – “what we really saw is the lack of urgency we sometimes see in the sales force.”

These are IT sales people we are talking about, ‘a lack of urgency’ is an insult to a group of people who have been known to work 120 hour weeks and sell their grandmothers if it means getting a fat commission.

Mark is in the poo. We quickly learn why when it’s his turn to speak,

We’ve added over 4,000 people to the Oracle sales force in the last 18 months. We’ve significantly expanded our customer coverage. We’ve seen material growth in our pipeline. But Q3 [conversion rates] were below what we expected, while our actual win rate went up.

An investor would hope there’s material growth in the sales pipeline when you’ve added 4,000 salespeople to your workforce.

In Oracle’s case though revenues have fallen .8% for the year and are only up 2% over the time Mark’s added all those go-getting Willy Lomans to the company’s payroll.

The interesting thing with Oracle’s figures is the company has spent nearly $400 million on restructuring costs over the last year, has hired over 4,000 new sales people and yet total operating costs, and margins, have barely moved in that time.

Which indicates somebody in Oracle is bearing the costs of Mark’s hiring spree.

During Hurd’s tenure at HP, he was notorious for penny pinching and cutting worker’s benefits. While staff were finding they were stuck in economy for international business meetings, Mark himself was staying at some of Europe’s best hotels and showing off his bank account to attractive employees.

Hopefully history isn’t repeating itself.

Probably the most perplexing thing with Oracle today are Mark’s and Safra’s roles of c0-Presidents. What on Earth are those roles?

Most telling with the co-Presidents is that they aren’t really in charge – if Larry Ellison, the CEO and founder, wakes up one morning and decides either Safra or Mark have to go then they’ll be out of the company well before lunchtime.

Along with carparking spots, inflated executive job titles are good indicator an organisation’s management is focusing on it’s perks, benefits and privileges rather than delivering for customers and shareholders.

Perhaps Oracle’s analysts and common stock holders should be focusing more on management’s behaviour more than the details of the company’s sales performance.