Global CIO: Have Oracle & SAP Hit Tipping Point With 22% Fees? - InformationWeek

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7/23/2009
12:04 AM
Bob Evans
Bob Evans
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Global CIO: Have Oracle & SAP Hit Tipping Point With 22% Fees?

Alternative providers of support and maintenance services are winning over CIO hearts and wallets, but is this a real threat to SAP and Oracle or just a fad?

So just what do we have here: a pimple on the keister of an elephant, or the first echoes of what could become a very big bang? The stakes are enormous: for CIOs, billions of dollars from IT budgets that have already been squeezed tighter than two coats of cheap paint; and for software vendors typified by Oracle, the fate of a pricing and business model that many customers say no longer reflects the realities of today's market.

Setting the stage for this rumble, in this corner we've got global powerhouse Oracle Corp., which just reported $12 billion in annual revenue from support fees and maintenance fees that it generates by collecting from customers annual fees totaling 22% of their software purchase price. And in this other corner we have Rimini Street, a four-year-old company that says it offers equivalent or better support and maintenance services on Oracle products but charges only 11% per year. That model, by some estimates, could give Rimini revenue this year of between $250 million and $300 million.

That means Oracle's in-the-books revenue from support and maintenance fees is somewhere between 40 and 50 times bigger than what Rimini hopes to have if its aggressive second-half pipeline comes through as planned. With a revenue disparity that large, why am I even talking about this? Why should you care? Well, let me offer a few reasons:

1) In our recent Global CIO Next Practices study, we asked CIOs from around the world what they'd be spending the greatest amount of time on, and the top answer was figuring out ways to spend less of their precious IT dollars on internal operations so that they can devote more to customer-embracing projects. So, for some of the big-company CIOs that have turned to Rimini for some or all of their Oracle (and now SAP as well) support and maintenance services, this new approach has been a helpful means toward that end.

In fact, responding to a question about what we sometimes refer to as the "80/20 ratio" that has 80% of a CIO's budget going to internal costs such as maintenance, Ravin referred to that 80% figure as "entitlement costs": "the software companies have been getting so much for so long that they feel they're entitled to it."

2) Rimini is indeed a relatively small company but it is growing very rapidly: it tripled its revenue this year over last. And while that's easier to do when beginning with relatively small numbers, the company says it is confident that it can continue its rapid acceleration because the market opportunity in front of it is so large.

3) While Rimini Street is hardly a household name – in fact, it's name can fairly be called obscure or strange or both – it is assembling a list of customers that are known around the world, with the Fortune 500 now making up its largest customer segment, according to CEO Seth Ravin. Rimini also says it is doing business with nine of the Fortune 100 – again, nine out of 100 is not exactly a match for Oracle, whose penetration of that elite group is probably around 90%, but nevertheless it's probably about nine more than most CIOs might have guessed.

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