Wednesday, January 31, 2007
Oracle does the right thing with open source acquisition
Back in October 2005, Oracle acquired Innobase, the developer of InnoDB, an open source database engine. At the time, I wondered whether Oracle's intention might be to interfere with Innobase's relationship with MySQL, an open-source database product that uses InnoDB as its engine for users that need that want high concurrency, row-level locking, and transactions in MySQL.
At the time I wrote
The open source community is not quite sure how to interpret Oracle's move. Is it a further endorsement of the open source movement? Oracle has been a huge supporter of Linux, an open source operating system. But Oracle doesn't sell operating systems. Oracle sells databases, among other things. And InnoDB is at the heart of the open source database movement.
The more cynical view is that Oracle is buying InnoDB in order to divert its five (yes, just five) developers away from supporting open source development and the MySQL relationship. The InnoDB/MySQL agreement is up for renewal next year, and Oracle's press release says they expect to see it continue. But who knows?
Well, it's now been over a year, and the outcome so far is encouraging. Zack Urlocker from MySQL writes to me that Oracle has been very good about continuing to develop Innobase and that Oracle renewed Innobase's agreement with MySQL with no changes.
Oracle continues to fix bugs and release updates [to InnoDB], which is good. It has been pretty much as before which is in some ways surprising because many expected Oracle to go off in some other direction. But we were very happy to renew the agreement with them under the same terms as before, ensuring that InnoDB is supported as a top notch engine for many years to come. (And that's one of the reasons we made Oracle "partner of the year" at our conference last April.)
So while I think some folks were initially spooked by Oracle's moves into open source, at least on the MySQL front, things have been "business as usual" for us.
But we also recognize that it's good to have other storage engines out there, so there's a growing ecosystem that includes several partners and open source projects, described at www.mysql.com/engines. And we've also launched an alpha of our own "Falcon" storage engine which is targeted to transactional web sites and embedded applications.
Oracle is really being a good citizen in its relationship with MySQL, at least so far. Oracle, like Microsoft, is an easy target, and I've given Oracle my share of criticism from time to time. So, I want to be sure to give Oracle credit when it does the right thing.
Update, Jan. 31: Computer Business Review
has more on MySQL and its plan to go public.Related postsThe disruptive power of open sourceOracle bid for Innobase a threat to MySQL?
Tuesday, January 30, 2007
The disruptive power of open source
Zack Urlocker, from MySQL, an open source database developer, called my attention to his blog
, where he has been discussing the open source business model as disruptive to traditional software license vendors.
His first post is a good basic explanation of the definition of a disruptive technology
What makes something disruptive is making it more convenient, simpler, more flexible and sometimes, making it cheaper. Often, for a business to be disruptive it requires a different business model. Sometimes the business model itself is the source of the innovation. The idea of getting DVDs in the mail may not seem radical today; but if you're Blockbuster and you've built your entire revenue on thousands of retail stores, its hard to wrap your head around using a web site to send DVDs out by mail.
In his second post, he goes on to discuss disruption in the software industry,
specifically. I agree with everything Zack as written, but I found his comments regarding MySQL, specifically, to be noteworthy:
[MySQL] gets deployed on a lot of niche applications, like web sites, ecommerce, data warehousing, reporting, custom applications and telecommunications infrastructure. And those niches are growing faster than the rest of the database industry.
Typically, MySQL does not replace the existing legacy databases in organizations. In fact, many of our customers are also users of Oracle, SQL Server and DB2. But they use them in different areas. As Charles Phillips from Oracle said a while back: Oracle and MySQL are both in the transportation business. But Oracle is a 747 and MySQL is a Toyota.
He goes on to discuss some specific innovations taking place now at MySQL:
At MySQL, we have long focused on using disruption as a way to make our customers' lives easier. The first stage focused on making developers' lives easier with a no-nonsense database that was easy to use, reliable and fast. The second stage was the introduction of MySQL Enterprise and the Monitoring & Advisory service that makes the DBA's life easier. And now the third stage is to make the IT Buyer's life easier. We are doing that by announcing today something we call MySQL Enterprise Unlimited.
For $40K (the price of a single CPU of Oracle) you can get an enterprise wide use of MySQL Enterprise, with production 24x7 support and unlimited use of the MySQL Network Monitoring & Advisory Service for a year. For customers that are used to spending $1 million or more on closed source licenses, this is a heckuva good deal.
It will be interesting to see how the major software vendors, such as Oracle, view MySQL's further incursions into the enterprise space. One of the characteristics that Zack doesn't mention is that incumbent providers typically don't take the threat of disruptive providers seriously. At first, their technology is viewed as primitive, or even as a toy (think of the Radio Shack TRS-80 PC that first started popping up here and there in corporate settings). The disruptive technology, at first, is only of interest at the low end of the market, the segment that the incumbent vendor has the most difficult time servicing and is the least profitable. But over time, as the disruptive technology improves, it begins to move up-market, eating into the segments where the incumbent vendor really makes money. This has certainly been the case with Linux, which at first was viewed as a hobbyist operating system and now runs enterprise applications. The same thing, hopefully, may be happening with MySQL.
Zack makes good points. (His blog is also a good example of what other software vendors--open source or traditional--should be doing with blogs to better communicate with their customers and the general technology community. Tone down the PR-speak, and just talk to people.)Related postsOracle plans free version of databaseOracle bid for Innobase a threat to MySQL?Why organizations choose open source softwareKey advantage of open source is NOT cost savingsOpen source: turning software sales and marketing upside down
Thursday, January 25, 2007
New faces at Lawson
It's always good for a company when top executives are coming rather than going. So, I made note this morning that Lawson has picked up three new senior members for its management ranks. Scott Swoish, formerly of PeopleSoft/JDE, is coming in as senior VP of sales operations; Fady Sfeir, formerly of Oracle, will become VP of indirect channels in EMEA, and Barry Wilderman is being named VP of business strategy.
Barry's announcement is most interesting. I met Barry a couple of years ago at an industry conference. At that time, he was a senior analyst at Meta Group, and he had authored one of the best reports I've ever seen on the ERP marketplace. That report, based on a survey of actual ERP implementation experiences, compared the total cost of ownership of SAP, Oracle, J.D. Edwards, PeopleSoft, QAD, and Lawson. As I recall, QAD and Lawson came out the clear favorites in terms of TCO.
According to Lawson's press release, Wilderman "will lead initiatives that link Lawson's overall business strategies and value stories with the organization's sales objectives." His previous work at Meta is certainly consistent with the story that Lawson will want to tell.Related postsLawson's performance better than it appears: CEO
Wednesday, January 24, 2007
Unlocking value within legacy software vendors
With so much news about vendor consolidation, one might imagine that in a few years the entire market for enterprise software will be owned by SAP, Oracle, Microsoft, Infor, and a handful of other players.
But that won't be the case. The software market is far more fragmented than most people realize. There are thousands of vendors of business applications. Most are small and privately-held, and they are not household names. But they serve real needs, and millions of customers rely upon them.
If you were to plot all business software vendors individually in order of declining revenue, you would see a few tall bars representing the big vendors, such as SAP and Oracle, and then a long, long series of bars tailing off to the right, representing the thousands of software vendors that serve niche industries and business functions. For example, the Open Directory entry for agriculture and forestry software
lists nearly 50 vendors, and the page for veterinary business software
shows 20 vendors. And that only includes vendors that took the time to get listed.Functionally adequate but technically dated
So, who are these developers? Some of them are new companies, using the latest software platforms to provide leading-edge applications or serving new markets. But many of them have been in business long enough to have fallen behind the technology curve. They still have customers, even satisfied customers--business users can be notorious for sticking with obsolete technology, such as client-server or even mainframe platforms, as long as it works. But the vendor's business may be stagnating, as new prospects are reluctant to go backwards in terms of technology.
I'd been thinking for some time about the future of vendors that have good solutions and an established customer base but not the resources to bring their products up-to-date in terms of technology. What is the future for such packages?A new investment approach
Last week I met an associate who has started a private equity fund to specifically address this need. The idea is to acquire such vendors--not to consolidate them or squeeze out costs--but to upgrade their technology and increase their value to existing and new customers. Such an approach may be attractive to private owners who don't have the resources to reach the next level or who are simply looking for an exit strategy that continues to do the right thing for their customers and employees.
If you know of someone who might be interested in more information on this investor, let me know and I'll pass on his contact information.
It's an interesting investment approach and one that recognizes that there is value in legacy systems beyond merely milking the client base for recurring revenues. It will be interesting to see whether other investors begin to recognize these opportunities.
Tuesday, January 16, 2007
Philly pulls plug on failed Oracle project
For Oracle, Philadelphia is not the city of brotherly love these days. The fifth largest municipality in the U.S. has just killed a project to implement Oracle applications in the city's water department. Furthermore, Oracle has agreed to forgive or pay back a whopping $6.9 million in fees.
The Oracle project was put on hold in October 2005, after the city had spent $18 million with nothing to show for its time and effort. In its place, the city has launched a new project to implement Basis2, a utility billing system from Prophecy International Pty., an Oracle business partner in Australia. The new system will run on an Oracle database and will interface with Oracle E-Business Suite products that the city runs for financial applications. Oracle itself will play no role in the new project.What went wrong?
There are several hints in a Computerworld story
on the situation, concerning the root causes of failure in Philadelphia.
First, it appears that the city did not appreciate the magnitude and difficulty of managing a project of this size, at first putting it entirely under the direction of the users. In light of the fact that their IT experience was limited to a legacy application using punched cards
(!), one assumes they were ill-equipped to manage an Oracle implementation.
In contrast, the new project is being jointly managed by the users and the city's IT group. The city's new CIO, Terry Phillis says, "I know it's second-guessing, but the city suffered somewhat by not maturing the organization to care for a project like this." Under the joint-responsibility arrangement for the Basis2 project, he said "We're getting along terrifically. We're singing 'Kumbaya' -- not well, but we're singing it."
Second, the original project included quite a bit of custom software development. Custom development greatly increases the risk in an implementation, especially a large project such as this one, magnifying any deficiencies in project management. In contrast, implementation of Basis2 will require no customization. One wonders why the city didn't try harder in the beginning to find a system that better fit its requirements.
If these are the root problems, then Oracle shouldn't be blamed entirely for the failure, although a give-back of nearly $7 million suggests that Oracle made its own mistakes on the engagement. One suspects that the city had some strong terms and conditions in place for Oracle's performance. If so, at least the city did one thing right.Related postsProject management: the missing discipline
Monday, January 15, 2007
Lawson's performance better than it appears: CEO
Harry Debes, CEO of Lawson Software, emailed me yesterday to help me better understand Lawson's recent financial performance. He didn't say so, but I suspect he was reacting to a single sentence at the end of my post over the weekend that mentioned Lawson
. In that post I wrote,
The heavy discounting by SAP and Oracle make it hard to beat them on price, and slowing growth in IT spending for software means fewer deals to go around. Lawson's loss in the most recent quarter is another point of evidence.
So, Debes wrote to me yesterday, concerned that I might not have "the complete story on Lawson Software." He then continued (bolding is mine):
Lawson acquired Intentia in April 2006. Both companies were of comparable size, but each served different markets. Lawson was focused on the Americas and services-based organizations while Inentia was focused on Europe and manufacturing & distribution organizations. Because of the different industry focus, we decided to keep our existing industry focus and discrete products - naming the former Lawson suite S3 and naming the former Intentia suite M3. There were plans to cross-sell the applications into each others' geography and customers and that is working fairly well.
On a non-Gaap basis, where we exclude certain one time, non-cash accounting treatments, the newly combined company was profitable in Q1 (June - Aug 06) and again for the second quarter (Sept - Nov 06). Pre-tax, non-Gaap operating income - the appropriate measurement of management's performance and one that is used by all of the Wall Street analysts, was 3% in Q1 and 6% in Q2.
Our transition year accounting can be difficult to understand. We did miss our license guidance in Q1 and Q2 primarily because during our first year of integration, we must defer approximately 50% of our license revenue. That deferred revenue goes to our balance sheet and will come back into income in our second year, as we deliver the projects. This means that next year, we will automatically receive a $8m - $10m license revenue bonus every quarter on our P&L. Because of the acquisition, we did not have an opening deferred license revenue balance, but if this was a normal year, with all other activity at the same level of performance, our license fees and our earnings would be $32m-$40m higher this year - resulting in revenues of approximately $780m and operating income of approximately $60m. Because of the transition and timing issues associated with our acquisition, we must wait until our next fiscal year (June - May 2008) to reap these financial statement benefits.
On the whole, the business is sound. Every quarter we engage in competition against SAP and Oracle and every quarter we come away with 35-45 new accounts. We are growing our sales force and as we do, those number of wins will continue to increase.
Lawson offers a legitimate alternative to customers who don't find a suitable solution or level of partnership with the two larger ERP vendors. We are more focused on our target markets and are also more focused on developing an intimate relationship with our customers.
I have bolded the key point above, which is the issue of recognizing revenue in a contract or subscription business. You receive software license contract (or maintenance contract dollars) all at once, but you deliver services for the contract through the year. At the beginning of the contract period, such businesses accrue revenue on the balance sheet and then credit sales month by month throughout the life of the contract, so that the GAAP principle of matching revenue with expense is maintained.
Of course, Lawson has been accounting for its sales in this way long before the Intentia deal. But Debes appears to be claiming that, at the time of the deal, Lawson mis-estimated how much revenue would need to be deferred for the newly acquired Intentia contracts. So, I asked if this were the case.
To answer your question directly - no we did not think the deferral rate would be as high as it has turned out. We estimated a 40% deferral rate for the former Intentia's products for the first quarter and then improving numbers over the course of the year. For many reasons, our deferral rate has been and average of 50%. Also, the accounting treatment for the acquisition wiped out any previous deferred balance on Intentia's books, so we were starting the year with nothing. By then end of this year, we will have built a balance of $40-50m in deferred revenue and next year we will be able to take that into revenue at the rate of $8-10m per quarter.
My point is that while we are building this backlog, we have artificially low revenue (license revenue) and earnings in our current fiscal year. That should all be behind us next year.
I decided not to attempt to delve into the reasons that Lawson's deferral rate was different from what Lawson originally estimated. Suffice to say that, according to Debes, there should be an improvement in Lawson's GAAP financial performance in the next fiscal year if for no other reason than the realization of deferred revenue.
Debes' other main point is that, apart from immediate financial performance, Lawson's business is strong. He claims 35-45 wins over SAP and Oracle every quarter, which he attributes to Lawson's deeper focus on its target markets, such as retail and health care, along with Lawson's "more intimate relationship" with its customers. Over the long term, those are the things that should result ultimately in superior financial performance. It will be interesting to return this time next year to see whether it turns out to be the case, because investors have certainly not rewarded Lawson relative to SAP and Oracle in the past year (see relative share prices for the three companies below).
Lawson still has challenges in integrating its Intentia business and operating as a global company. In its conference call, Debes also pointed out that it is behind in meeting its goal to ramp up its sales force. Add to this the challenge of moving its existing customer base to its new Landmark architecture. For the sake of choice in the marketplace, and to keep things interesting, I hope Lawson is successful.Related postsBusiness brightens for LawsonLawson acquiring IntentiaBlogging from the Lawson user conference
Sunday, January 14, 2007
SAP license sales grow, but short of target
Being top dog in enterprise applications brings a lot of close scrutiny from investors.
SAP found this out on Thursday when it announced a 7% increase in software license sales--ahead of the overall growth rate for ERP in general, but beneath analyst expectations of a 9% rise. SAP's stock price promptly dropped 7.5% on the news, although it recovered 3% in the U.S. the next day.
I wouldn't put too much blame on SAP for the shortfall, however. SAP now expects sales growth around 11% for 2006--still a healthy increase. But growth in the U.S., its largest market, was flat. The market is taking SAP's underperformance as a sign that IT spending growth in North America is slowing, which, if true, will be a problem for most other vendors as well.
Furthermore, SAP still has Oracle to contend with. Oracle, with its many new acquisitions, is able to compete with SAP in many more deals, and it's not afraid to compete on price. So much for fears that Oracle's acquisitions would be anti-competitive. As I noted
in a comment on a previous post, if anything I see price competition even more fierce than it was prior to Oracle's bid for PeopleSoft.
What does this all mean for the enterprise software market? Just that it's going to continue to be hard for other horizontal application vendors to make money. The heavy discounting by SAP and Oracle make it hard to beat them on price, and slowing growth in IT spending for software means fewer deals to go around. Lawson's loss
in the most recent quarter is another point of evidence.Business Week
has the most complete analysis of the story behind SAP's recent announcement.Update, Jan. 15: Sharad Sharma
has further analysis of SAP's and Oracle's financial results. He argues that the large enterprise market is getting saturated and agrees with me that a license price-war is breaking out. He sees both of these trends as evidence of ERP entering into a "falling edge dynamic" (the opposite of "leading edge"). If he's right, it's not good news for traditional license vendors in general.Related postsPayback begins from SAP's Netweaver strategyOracle knocks quarterly results out of the park
Friday, January 12, 2007
Mini-Y2K: Change in daylight savings time rules
Expansion in the dates for daylight saving time, dictated by the U.S. Energy Policy Act of 2005, is shaping up to be a mini-Y2K for IT organizations and software vendors.
The Act changes the start and end dates of daylight saving time starting this year. Clocks will now spring ahead on the second Sunday of March instead of the first Sunday of April, as was done in the past. As most users know, Microsoft Windows automatically adjusts for the clock change (Microsoft has a complete list
of its programs affected). In addition, many business applications that depend on an accurate rendering of local time will need to be assessed. Such applications include calender and scheduling applications, programs that calculate elapsed time (e.g. tariff calculations and service billing), and transaction logging functionality that records transactions in local time. In large shops, rolling out such changes may be no small effort, and many IT managers are not even aware of the change to daylight savings time rules.
Nevertheless, many IT executives may also be skeptical about daylight savings time changes, after what was perceived to be an over-hyped need for Y2K changes. Software developers have long been aware that daylight savings time is a common source of software bugs
, and a mass change to the rules will undoubtedly cause many more such problems.
Many may be taking a wait-and-see attitude, willing to react after the fact to any problems that crop up in the production environment. For mission-critical systems, such as scheduling systems in certain industries (think transportation), such an attitude may be irresponsible. IT managers should at least take the time to evaluate the impact of any problems with the clock shifting.Wikipedia
has an entry on the Energy Policy Act of 2005
has more on IT impact of the change in daylight savings time.
Thursday, January 04, 2007
Gartner retires mid-market ERP magic quadrant
A Spectator reader alerted me to a recent decision by Gartner to discontinue its "magic quadrant" for mid-market ERP. Gartner's magic quadrants are a way to graphically display competing IT products in terms of the vendor's completeness of vision versus its ability to execute. Gartner has over 150 of them.
In attending vendor presentations, I am always amused by the fact that the vendor always seems to be able to find one magic quadrant that puts his product in the most favorable position.
Now it seems that Gartner is retiring its magic quadrant for ERP Midmarket Manufacturing. My source, who works for one of these vendors, says that as a result of consolidation there are not enough vendors left in midmarket ERP to populate the quadrant.Related postsSoftware vendor consolidation and buyer concerns
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