Oracle’s Quarter: We Need New Benefits!

Oracle, certainly no shrinking violet in marketing/sales practices and clearly a software leader, reported a quarter with light earnings and qualified guidance.  The news hasn’t broken through the euphoria of a no-taper-yet stance from the Fed, but it should be a warning that we really do have issues with IT spending.

What makes Oracle’s story particularly important is that the company is a software player primarily, and software is the on-ramp between productivity benefits and IT spending.  Nearly anything that’s going to provide fodder for new projects in IT is going to involve software, according to my surveys.  I noted in the spring that the balance of total spending to project spending in IT, which has historically been biased toward projects, has shifted since 2009 to “budget” or sustaining spending.  You can’t advance IT without new projects, so all of this is a signal.

Enterprises believe by an almost 3:1 margin that IT can provide them incremental benefits in enhancing worker productivity, sales, and overall company performance.  When we ask them to quantify how much more they believe could be obtained from optimized IT, they suggest an average 21% improvement.  That’s really critical because if you raised benefits by 21% you could raise spending by that same amount and still meet corporate ROI targets.

What’s more interesting (to me, at least) is that my model says that the actual gains that could be obtained from something like point-of-activity empowerment that fuses cloud computing and mobility to give workers better information at their point of work would be even higher.  The net investment needed for point-of-activity empowerment is actually lower than the average cost associated with securing a current and more traditional IT benefit set.  Thus, the model says that PofA empowerment could actually justify an IT spending increase of nearly 26% over the next five years.  So why don’t we have that?  I think Oracle is a poster child for the market’s issues.

First and foremost, the operations management of major enterprise buyers are simply not educated in the notion of point-of-activity empowerment.  They are stuck in a fragmented model of IT that recognizes “mobility” as a project, “the cloud” as a project, and nothing that combines the two.  Companies that are highly sales-driven (which means most companies, but Oracle in particular) tend to respond to buyer requirements rather than to propose new and broader ones.  Every salesperson knows that if you try to expand the scope of something you involve other people who have to approve it, increase project delays, and delay sales.

The second problem is that Oracle isn’t a mobile company in the first place.  Oracle has no specific mobility assets to play with; they don’t do carrier LTE or WiFi networking.  While I believe that there is no real need to be a mobile/wireless provider to address a corporate point-of-activity empowerment opportunity, Oracle likely thinks that bringing the cloud and mobility into any story would be tantamount to stamping “Cisco” on the cover sheet.  Overall, companies have tried to focus on what sells for them, and that means that a revolution in benefits may require stuff they never thought they’d need…and don’t currently have.

The third problem is inertia.  We have been stuck in project neutral since 2002 according to real data from government spending and GDP sources.  I’ve noted a number of times that our model of the rate of growth in IT spending versus growth in GDP since WWII shows not a steady ramp but a sine wave.  Each peak in the wave corresponds to a period when project spending as a percent of total IT spending grew significantly, and where new benefits justified as much as 40% better spending growth.  We had the last peak in the late ‘90s and we’ve been stuck near a historically low point in the IT/GDP ratio since.  What all this means is that we’ve trained a whole generation of sales and sales management people on the notion that IT is nothing but a cost center and that the only path to success is to help the customer spend less on the stuff you sell.  And, of course, hope that you get a bigger piece of the smaller pie than your competitors.

When we don’t have new projects, IT spending is at the mercy of the so-called “refresh” cycle, which is the regular modernization of equipment that happens because performance and reliability improvements eventually justify tossing the old in favor of the new.  The problem is that since 2005 users have reported keeping IT technology longer, so this refresh is not driving as much spending as before.  Users also tend to cut IT refresh spending early in any pencil-sharpening savings-finding mission.  Why buy a new version of something to do the same job that you’re getting done using something that’s already paid for?

Oracle, as I’ve said, isn’t the only company facing this sort of issue.  All of the network equipment space and all of the IT space that relies on enterprise purchasing has the same problem.  Even in the consumer space, we’re seeing smartphones and tablets plateau because the next big thing just isn’t big enough.  Operators don’t put “early upgrade” plans in place if users are willing to jump to new models without them.  We’re running out of low apples here.

The answer to this is to grow up and realize that we need some more “R” to drive the desired “I”.  But that’s been the answer for a decade now and we’ve successfully ignored it.  I don’t know whether the industry can learn its lesson now without a lot of serious pain, which is bad news.  We may find out.

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