ERP Support: How Far Will Oracle Go to Protect Golden Egg?

TomorrowNow (a now defunct third-party support player that SAP owned for a while) and Rimini Street have been the high-profile faces of third-party maintenance offerings for years, and their pitch is simple: ERP support for half off Oracle's prices on its PeopleSoft, JD Edwards and Siebel software. Customers pay software vendors annual maintenance and support fees on their software--which is calculated as a percentage of software licenses, in Oracle's case 22 percent. The fees cover technical support, major application releases, bug fixes and patches, and product update rights such as critical regulatory, legal and tax updates.

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Judging by the ferocity of legal battles to date, Larry Ellison & Co. don't take too kindly to those who invade their hallowed maintenance turf. The crux of the lawsuits against TomorrowNow (formally against SAP) and now Rimini Street, which Oracle filed in January 2010, is this allegation: Massive theft and misuse of Oracle intellectual property, software and related support materials by said defendants through an illegal business model.

The cases have been contentious, intriguing and expensive. They also demonstrate the lengths to which Oracle will expend its vast resources to protect its intellectual property (IP) and multibillion-dollar maintenance and support revenue streams.

But what if one of Oracle's valuable partners--say, a reseller or system integrator or consultant--were to offer support services similar to those provided by Rimini Street? In fact, court documents show that Oracle has confirmed that there are such third-party support providers in its partner ecosystem. (Oracle's lawyers have made it clear that Oracle does not sanction this type of business activity.)

Therefore, the question is this: Should Oracle have a legal beef with those partners as well, since they offer a service based upon a business model that Oracle considers illegal?

And, just as important, is this question: If Oracle keeps pursuing litigation in the third-party support arena, might that discourage other potential service providers from jumping in and creating more competition, which also means less choice for its customers and more reasons to stick with Oracle?

"This is a gray area," says Ray Wang, partner for enterprise strategy at Altimeter Group. On one hand, Oracle has every right to protect its IP. Though, he points out, if Oracle and other vendors were serious about this area, they would work with third-party maintenance providers "to establish clear guidelines as to what would be the right way to deliver third-party maintenance in a way that would not infringe on [the software vendors'] IP."

But if Oracle's overarching intent is simply to protect is maintenance fees by intimidating the current and potential competition, then the result will be devastating for customers, Wang contends, because "this hinders users from a potential cost savings opportunity."

Maintenance and Support: Who Cares? You Should

Maintenance and Support: Who Cares? You Should

Third-party support for enterprise software is entirely legal. It is, for the most part, very similar to buying a new BMW from an authorized BMW dealership, but taking it to an independent auto repair shop for servicing. Oracle, however, has an obvious problem with the way in which TomorrowNow and Rimini Street have gone about offering their services and their individual "business models."

While the legal wrangling can be intriguing, the world of maintenance and support is unglamorous as it gets inside today's businesses. Which is not to say it's trivial.

Rather, those fees, typically spread out among enterprises' financial ledgers and departments amid a sprawl of myriad vendor contracts, can go unnoticed unless examined and calculated in their entirety. On several occasions, that salient fact was pointed out to me by Vinnie Mirchandani, a former Gartner analyst and founder of vendor consultancy Deal Architect, which helps companies negotiate software engagements.

For the software vendors, however, the fees are a lucrative cash cow that keep on giving all year long. In Oracle's most recent quarter, for instance, Oracle enjoyed 92 percent software maintenance margins that delivered $3 billion in profits to its bottom line. That $3 billion offset a $800 million quarterly loss in the rest of Oracle's operations.

Estimates of the overall market for third-party maintenance and support vary widely: from hundreds of millions annually to $20 billion (that's from a 2009 Cowen and Co. research report). Analysts and industry watchers all say that it's a market that's growing. Rimini Street's 2009 revenues, for example, increased 270 percent year over year and the company has expanded its operations outside the United States.

Is There a Problem Here?

Like most other high-tech conglomerates, Oracle maintains close ties to a range of firms in its partner channel. Oracle's is mammoth: A 21,000-company-strong partner system that is stocked with system integrators, resellers, independent software vendors and consultants who help companies install and use the vast array of Oracle software products.

But Oracle does not extend licensing or partnership agreements that allow its partners to sell support and maintenance for its PeopleSoft, JD Edwards or Siebel products.

One partner in particular, however, offers an intriguing case study: CedarCrestone, an Alpharetta, Ga.-based consulting, technology and managed services firm, claims to be the "largest independent provider of managed services for PeopleSoft" products. It is an Oracle Platinum Partner, no less. The Oracle association is, in fact, a key part of CedarCrestone's selling point and painted all over its website.

"As a Platinum Partner of Oracle, CedarCrestone has extensive expertise in Oracle technology and Oracle applications with specific expertise in PeopleSoft Enterprise, Oracle E-Business Suite, and Fusion Middleware," according to CedarCrestone. Its website is virtual billboard of Oracle partner awards.

Though it's not made obvious on CedarCrestone's website, one of the company's offerings is maintenance and support for PeopleSoft applications. CedarCrestone recently christened a maintenance and support deal with the Tucson Unified School District (TUSD) in Arizona. The meeting minutes for TUSD's Dec. 8, 2009, "Governing Board Regular Meeting" note this:

Award of Request for Proposal (RFP) No. 10-63-12--PeopleSoft Maintenance and Support, awarded to CedarCrestone in a multi-term contract beginning December 18, 2009 with renewal options through June 30, 2012, in the estimated amount of $75,000.00

The deal was the result of an RFP process started in the fall. An excerpt from the 71-page CedarCrestone RFP to the TUSD, signed by CedarCrestone Business Development Manager/Public Sector Chris Myers and obtained by CIO.com, states:

Our Managed Services group offers clients alternative deployment solutions for PeopleSoft applications, including Hosting, Application Management, Upgrade Lab, Tax and Regulatory Support, and Remote Development.... With [CedarCrestone] Extended Tax and Regulatory Support, clients are kept in regulatory compliance without using a licensed PeopleSoft application update as a starting point.

Given the previous Oracle litigation with TomorrowNow and Rimini Street, this would appear to be an awkward business-partner situation--at best. At worst, a borderline litigious one. (CIO.com's calls and e-mails to Oracle and the Tucson Unified School District CTO office, requesting interviews for this article, were not returned. Kristin Kullmann, CedarCrestone's VP of marketing and strategic alliances, declined to comment.)

So why hasn't Oracle litigated or attempted to stop its trusted and valued partner, CedarCrestone, from offering a service that Oracle specifically doesn't sanction among its partners and is one that Oracle contends is based upon a business model that can be illegal?

A "Business Model" in Question

A "Business Model" in Question

In fact, Oracle and CedarCrestone danced a bit of a "legal tango" in 2008, while SAP watched on with great interest. In October, Oracle served a subpoena to CedarCrestone, according to court documents connected to the Oracle v. SAP case. (SAP finally shut down TomorrowNow's operations at roughly the same time.)

A joint discovery document filed in November 2008, by SAP, states: "Apparently, certain former TomorrowNow customers have elected to get support from CedarCrestone rather than return to Oracle," states the document. "Oracle's subpoena includes, among other things, a request for production of documents reflecting CedarCrestone's business model." (At the time, Oracle also subpoenaed Spinnaker Management Group, which offers third-party support for Oracle-owned JD Edwards software.)

Court documents show that CedarCrestone itself confirmed that its employees download "patches" and "fixes" for Oracle software on behalf of Oracle's customers.

SAP, amid the ongoing legal battle with Oracle over TomorrowNow, which started in March 2007, was obviously more than just a little interested in Oracle's subpoena of CedarCrestone: Exactly who were these vendors in Oracle's partner ecosystem that offer unlicensed and unsanctioned third-party support and maintenance? SAP lawyers asked, court documents show.

In turn, SAP served CedarCrestone with its own subpoena, requesting discovery documents describing CedarCrestone's business model, any partner agreements between itself and Oracle, and how CedarCrestone provides third-party support for Oracle enterprise software. SAP lawyers argued that Oracle's relationship with CedarCrestone was "directly relevant" to calculating damages Oracle sought in the TomorrowNow suit, according to an IDG News Service article.

In short, SAP wanted to show there was third-party competition, even from Oracle's own partners. (SAP also declined to comment for this article.)

Shortly after SAP subpoenaed CedarCrestone, court documents show, Oracle withdrew its subpoena. CedarCrestone objected to SAP's subpoena. Legal wrangling ensued. And finally, in February 2009, a federal judge ruled that SAP was "entitled to some non-burdensome information regarding [Oracle's] partnership program." The result, ordered by U.S. Magistrate Judge Elizabeth Laporte, was this:

Specifically, Plaintiffs [Oracle] shall provide a list of the "small percentage of its partners" with which Oracle contracts to provide support services for PeopleSoft, J.D. Edwards or Siebel applications.... Plaintiffs shall produce its partnership agreement(s) with CedarCrestone for the relevant time frame from 2002 through 2008. Plaintiffs shall also produce to Defendants [SAP] the two master agreements regarding support, including fee schedules, referenced at the hearing. At the hearing, Plaintiffs agreed that Defendants may issue a subpoena to CedarCrestone regarding its activities supporting the use of Plaintiffs' software outside of the services it provides pursuant to its Partnership Agreement with Oracle.

The More, The Merrier

The More, The Merrier

If CedarCrestone was scared off by its head-first plunge into the Oracle v. SAP legal foray, it apparently hasn't influenced CedarCrestone's business in any way.

Several customer-testimony documents on CedarCrestone's website shows that the Tucson Unified School District (TUSD) is not CedarCrestone's only maintenance and support customer: Companies such as BWAY, George Weston Bakeries and Williams Lea all utilize CedarCrestone's maintenance and support services. BWAY, for example, "has a whole team, from CedarCrestone, responsible for the support and maintenance of their PeopleSoft investments," according to the customer documents on CedarCrestone's website.

In CedarCrestone's RFP to the TUSD, there's a wealth of information showing that its Managed Services Group has plenty of business.

There are a handful of players in the third-party maintenance and support arena, besides Rimini Street and CedarCrestone. The most notable are: netCustomer, which sells support services for Oracle's PeopleSoft, JD Edwards and Siebel products; and Spinnaker Management, which offers JD Edwards consulting and support solutions.

Of course, there are those system integrators and consultancies that provide some support services for their customers--simple fixes and debugging (what's called "break/fix") where there's no heavy lifting involved. What differentiates a company like that from, say, Rimini Street is that Rimini Street (and CedarCrestone, for that matter) can handle those important regulatory, legal and tax software updates for unsupported ERP systems.

Enterprise Software Customers Take Notice--Finally

Timing is everything. And just as the Great Recession has rocked the economies of the world, it's no coincidence that software buyers have become more aware of the arduous fees of their support contracts. Industry analysts, such as Altimeter Group's Wang and Forrester Research principal analyst Paul Hamerman, say there's been a noticeable increase in interest for third-party support services. Wang's survey data from his clients and software user group meetings shows a 22-point increase (113.7 percent) among clients looking at this option as part of their apps during the past six months.

Oracle is not alone in its lucrative maintenance and support service: SAP, Lawson, Infor, Epicor--right on down the list of enterprise software vendors. Those vendors can earn roughly 50 percent of total sales for maintenance and support fees, according to the Cowen and Co. research report. Those fees, notes the report, are "a highly reliable, high margin, recurring revenue stream that provides earnings stability and enables margin expansion even if license sales falter."

While Oracle has been able to squash most customer resentment regarding its 22 percent maintenance fees for years, SAP has not. SAP was embroiled in a year-long maintenance and support saga that ultimately resulted in a PR nightmare with high-profile customers such as Siemens, creation of a new "tiered" maintenance offering and the dismissal of CEO Leo Apotheker.

Yet Oracle's maintenance fees keep on rolling in, despite a couple of recent and very public mistakes: more problems with Oracle's new My Oracle Support portal and a head-scratching PR-brouhaha over why Oracle shut down a free and extremely popular support services blogger--all as Oracle execs try to assuage edgy Sun Microsystems customers about their future together.

Now, Oracle's legal sights are squarely set on Rimini Street and another protracted courtroom war. Which takes us back to where this started: Oracle v. SAP, which commenced with Oracle's filing on March 22, 2007, and appears to have an end in sight. After multiple delays and extensions, and scores of hearings, depositions and motions to compel, the trial has been scheduled for Nov. 1, 2010.

Oracle has been dogged about protecting its maintenance and support revenue streams. That much is unambiguous. But if more award-certified partners in its channel start following CedarCrestone's lead, will Oracle start throwing its legal might at them, too?

One potential action was suggested by Judge Laporte. During the CedarCrestone proceedings between Oracle and SAP, the court transcript shows that she offered this nugget to Oracle's lawyer, as to what the vendor should do to CedarCrestone if Oracle discovered support practices it didn't care for.

Judge Laporte quipped: "You may yank those awards back."