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Oracle’s Dilemma: Applications Unlimite Versus Oracle Fusion Applications

by Wii B, aw Bt, Pu d. H, Chi mt,Fbuy 11, 2013

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In recent quarters, Oracle’s application revenue growth has underperormed boththe overall soware market and SAP, resulting rom slowing growth in existing

apps and too little revenue rom its Oracle Fusion Applications. Recent acquisitions

o SaaS companies (e.g., aleo and RightNow echnologies) are not large enough to

take up the slack.

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I Oracle Fusion Applications are the uture or Oracle, most Oracle users

haven’t gotten the memo. O the Oracle clients we surveyed, 65% had no plans

to implement Oracle Fusion Applications, and another 24% did not know i they

would. Clients reported lack o clarity about Oracle’s app strategy and Fusion’s

immaturity as the biggest barriers.

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Oracle will need to increase client interest in Fusion or de-emphasize it as another

app in Applications Unlimited. Te current middle path o talking about Fusion

while providing no disincentives against clients staying on existing apps will lead to

mediocre growth. Our bet is that Oracle will push Oracle Fusion Applications.



© 2013, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Inormation is based on best available

resources. Opinions refect judgment at the time and are subject to change. Forrester ®, Technographics®, Forrester Wave, RoleView, TechRadar,

and Total Economic Impact are trademarks o Forrester Research, Inc. All other trademarks are the property o their respective companies. To

purchase reprints o this document, please email [email protected]. For additional inormation, go to www.orrester.com.

For CIo ProFessIonals

Why Read This RepoRT

Oracle aces a strategic dilemma, and how it responds to this dilemma will present the CIOs at its clients

with some tough choices. Oracle Fusion Applications — Oracle’s new generation o enterprise applications,

as well as the ocus o much Oracle innovation and development — have had low levels o adoption by

existing Oracle customers, in part, because Oracle’s Applications Unlimited policy has provided them

with little incentive to migrate. Oracle’s organic revenue growth has slowed over the past year or so as its

existing products age, and it has needed acquisitions o leading soware-as-a-service (SaaS) vendors like

RightNow echnologies and aleo to bolster its app revenues. Oracle has not wavered in its commitmentto continue to support existing applications customers indenitely; however, the company is clearly now

more aggressive in promoting Oracle Fusion Applications and cloud deployment models (including

private cloud and SaaS) to its customers. Tis report examines the Applications Unlimited versus Oracle

Fusion Applications quandary Oracle aces, ramed by the results o a Forrester survey o Oracle customers

and Oracle’s recent nancial results.

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© 2013, Forrester Research, Inc. Reproduction Prohibited February 11, 2013

soMeThing’s happening WiTh oRaCle apps, WhaT iT is ain’T exaCTly CleaR

Forrester is writing a series o reports that will take a temperature check o the enterprise application

market during this period o rising interest in soware-as-a-service through the lens o the leading

business applications vendors. We are starting with Oracle, because o its size and scale in this

market. Oracle has approximately 65,000 applications clients and oers a wide range o application

suites, including the Oracle E-Business Suite, Oracle PeopleSo, Oracle JD Edwards EnterpriseOne,

and Oracle JD Edwards World. It also has specic application product suites like Oracle Agile

in product lie-cycle management, Oracle AG in eCommerce, Oracle Hyperion in business

intelligence, Oracle Primavera in project portolio management, and Oracle Siebel in customer

relationship management (CRM), plus recently acquired RightNow in CRM and aleo in human

capital management (HCM). Oracle also has a number o vertical applications in banking (ormerly,

i-ex solutions), retail management (ormerly, Retek), and utilities (ormerly, SPL WorldGroup).

Oracle’s total application revenues (excluding soware services) was $7.8 billion in calendar year

2011, and we estimated it was $8.4 billion in calendar year 2012, making it second in size in theapplications market to SAP. Oracle’s app revenue also represents more than one-third o Oracle’s

total soware revenues and helps drive sales o Oracle’s middleware and hardware products.

We are also starting with Oracle because strange things have been happening over the past year

and a hal with Oracle’s applications revenues. Specically, Oracle reported sharp declines in its

application license revenues in Q4 2011 and Q1 2012, ollowed by a big but temporary bounce

back in Q2 2012. Oracle’s two recent earnings release (Oracle’s scal Q1 2013, ending on August

31, 2012, and its Q2 2013 ending on November 30, 2012) no longer reported application revenues

separately, so we don’t know or sure whether Oracle apps license revenue rose or ell in that quarter.

However, according to its 10(Q) lings, Oracle’s soware license revenues ell by 3% in calendar Q3,

beore rising by 10.8% in calendar Q4. Because Oracle’s app license revenues had grown less than itsdatabase and middleware license revenues through Q2, it is likely that this pattern continued in the

rest o 2012. Oracle’s total application revenue (including maintenance and subscriptions as well as

license revenues) has been in positive growth territory the entire time, but growth has been erratic

and only twice gotten above 10% over the past ve quarters (see Figure 1).

Some may argue that a vendor’s revenue perormance is o little interest or importance to that

vendor’s clients, as long as they have condence that the vendor will keep supporting and enhancing

the vendor’s products. But our view is that vendor revenue growth does matter to CIOs who use

that vendor, because weak revenue perormance should raise questions about the strength o

those vendor commitments. I the vendor’s revenues rom the products that a rm uses are at ordeclining, there is a risk that the vendor will start treating those products as a cash cow, milking

maintenance revenues and cutting back in its investment in enhancing and supporting them. Tat

risk rises when the vendor has developed or acquired new products or which it can generate new

revenues by pushing clients to migrate rom old apps to the new ones.






For these reasons, we start our analysis with a question: Why have Oracle’s application revenues

been so erratic and so oen weak? Part o the answer is the broader soware environment, where

growth in revenues or many soware vendors has slowed, especially growth measured in US dollars.

But a large part o the answer is unique to Oracle. Was there a disruption in Oracle’s sales teams andactivities in this period? Or is it the result o a more undamental issue in its application product

portolio? Based on a survey o Oracle users, we think it’s the latter. Specically, our survey strongly

suggests that there’s a conict between Oracle’s Applications Unlimited policy — which allows users

o the many applications in Oracle’s product portolio to continue to use them indenitely — and its

next-generation Fusion Application products.

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Oracle’s change in how it reports its revenues — rom reporting application revenues and database

and middleware revenues separately, with license and maintenance revenues or both through

Q2 2012, to reporting that combines application and middleware license, maintenance, and

subscriptions revenues since then — does complicate analysis o what is happening with Oracle’s

application business. But siing through its earnings statements and SEC lings and making some

educated guesses, here are the trends that we see:1

■ Total Oracle application revenues have slowed, with maintenance soening the slowdown.

When Oracle still reported application revenues separately, license revenue growth slowed rom

around 18% in the rst hal o 2011 to 7.5% in Q3 2011, then ell by 11% in Q4 2011 and by

5.5% in Q1 2012 beore rising by 11% in Q2 2012. Since then, we estimate that its application

license revenues ell by 5% in Q3, then rose by 11% in Q4 2012. Combined license and

maintenance had a similar seesaw pattern. Because maintenance revenues are less volatile, thegrowth or total app revenues was not as high as or license revenues in the rst three quarters

o 2011; the slowdown was not as dramatic in Q4 2011, Q1 2012, and Q3 2012; and the bounce-

backs in Q2 and Q4 2012 were milder.

■ Without Oracle’s recent acquisitions, its apps revenues would have even weaker growth.

Among the many acquisitions that Oracle has made in the past year and a hal, two were

acquisitions o SaaS apps vendors with publicly reported revenues or the periods prior to the

acquisition: RightNow, a provider o customer service automation soware, in October 2011

and aleo, a vendor o recruitment and talent management apps, in February 2012. o get a

sense o how Oracle’s organic revenues perormed without those acquisitions, we added these

vendors’ revenues to those o Oracle’s in the base quarters o Q4 2010 to Q4 2011 rom which

year-over-year growth is measured.2 Te resulting picture o how Oracle’s application revenues

would have perormed i it had owned those vendors throughout the period is a useul proxy or

growth in Oracle’s core application portolio and shows that the decline in Oracle’s application

revenues in Q4 2011 to Q4 2012 was even weaker than growth in recorded revenues: 1.9% in Q1

2012 (versus reported growth o around 4%), 5.6% in Q2 2012 (instead o 11.2%), an estimated






-3.9%% in Q3 (instead o an unadjusted 3.9%), and 6.4% in Q4 2012 (instead o an unadjusted

11.2%) (see Figure 2).

What has caused Oracle’s application revenue growth to become so variable and oen weak?Certainly, external orces are a actor, especially the stronger dollar, a recession in Europe, and

slowing growth in other markets.

■ A shi rom a weak dollar in 2011 to a strong dollar in 2012 has hurt Oracle’s app revenues.

For a US-based vendor like Oracle, the shi rom a relatively weak dollar in the rst three

quarters o 2011 to a much stronger dollar in 2012 means that currency-adjusted growth rates

in 2011 were 4 to 7 percentage points lower in Q2 2012 and Q3 2012 than reported growth;

the strong dollar since then has meant that Oracle’s constant-currency growth rates were

higher than reported growth by about 1 percentage point in both Q4 2011 and Q1 2012, by 4

percentage points in Q2 2012, and by 5 percentage points in Q3 2012. Not until Q4 2012 did

reported and constant currency growth rates become the same. So, adjusting or currency

changes, Oracle’s app revenue growth in Q4 2011 and Q1 2012 was in the 1% to 3% range,

compared with growth rates on a similar basis o 15% in Q2 2012 and, most likely, in the 8% to

9% range in the second hal o 2012.

■ Weaker economic growth in Europe and elsewhere has also hurt Oracle’s app revenues. In

Q1 2012, or example, Oracle’s application license revenues or Europe were down by almost

20%, while its application licenses revenues or the Americas were up by about as much. A

similar gap occurred in Q2 2012, when Oracle’s app license revenues in Europe rose just 3%

while app license revenues in the Americas rose by 36%. And in Q3 2012, Oracle’s total soware

license and subscriptions revenues in Europe ell by 8% while its global revenues rose by 5%.Only in Q4 2012 did Europe cease to be a drag on Oracle’s revenues, with its 10% growth in

European license and subscriptions revenues matching its 10% global soware revenue growth.

Still, only part o Oracle’s application slump can be attributed to external actors. SAP, Oracle’s

biggest competitor in the application market, has been subject to the same actors, yet it has

generally perormed better over the past two years than Oracle in applications.3 Admittedly, SAP

does not split its revenues between database and middleware versus applications as Oracle used

to do, so it is hard to show an exact comparison between SAP’s app business and Oracle’s app

business. Still, because 70% or more o SAP’s revenues come rom applications rather than SAP’s

app server (NetWeaver), database (Sybase), and business intelligence (BusinessObjects) products, a

air comparison with Oracle’s apps business can be made using SAP’s total soware product growth

rates (adjusted or its acquisition o SaaS talent management apps vendor SuccessFactors).4 And on

that basis, except in Q2 2012, growth in Oracle’s app business has lagged behind growth in SAP’s

revenues when both sets o revenues are in a common currency.5 We show this comparison using

both euros in deerence to SAP and in US dollars in deerence to Oracle (see Figure 3).






Figure 1 Oracle's License Revenues, Especially For Apps, Have Been On A Roller Coaster

Source: Forrester Research, Inc.82763

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Oracle applicationsrevenue*

Oracle softwarelicense revenue

Source: Oracle earning releasesNote: Because Oracle in its latest earnings releases stopped reporting revenues for its applications, Forresterhas estimated these numbers for Q3 2012 and Q4 2012 based on its total software license and subscriptionrevenues.

*Forrester estimates for application and application license revenues after Q2 2012

Percentage change from prior year in US dollars

Q12011

Q22011

Q32011

Q42011

Q42012*

Q32012*

Q12012

Q22012

Oracle applicationlicense revenue

Figure 2 Oracle’s App Revenue Growth Looks Worse When Acquisitions Are Counted In Base Period


Oracle appsrevenue

Oracle’s apps revenuewith RightNow’s and Taleo’s

historic revenues included inthe base period

Source: Oracle, RightNow, and Taleo earnings releases*Forrester estimates for application revenues after Q2 2012

Percentage change from prior year in US dollars

Q12011

Q22011

Q32011

Q42011

Q42012*

Q32012*

Q12012

Q22012

-5%

0%

5%

10%

15%

20%






Figure 3 Oracle’s App Revenue Growth Has Mostly Lagged Behind SAP’s


SAP plusSuccessFactors

Oracle plusRightNow and Taleo

Percentage change from prior year in global application revenues ineuros adjusted for acquisitions

Q12011

Q22011

Q32011

Q42011

Q42012

Q32012

Q12012

Q22012

Comparing euro growth in Oracle application revenues versus SAP revenues3-1

SAP plusSuccessFactors

Oracle plusRightNow and Taleo

Source: Oracle, RightNow, Taleo, SAP, and SuccessFactors earnings releases

Percentage change from prior year in global application revenues inUS dollars adjusted for acquisitions

Q12011

Q22011

Q32011

Q42011

Q42012

Q32012

Q12012

Q22012

Comparing US dollar growth in Oracle application revenues versus SAP revenues3-2

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%






appliCaTions UnliMiTed sloWs CUsToMeR MoVe To FUsion appliCaTions

Internal actors that drive nancial results include sales incentives, motivation, and management;

marketing resources; and the t o product portolio against customer needs. Based on our analysis

o Oracle’s apps product portolio, we believe that signicant tensions exist between older and

newer products.

Our theory: oo many Oracle applications clients are standing pat with older product lines and

ignoring migrations to Oracle’s newer product lines — Fusion Applications and Oracle’s SaaS

oerings. Te result? While Oracle’s portolio o applications continues to spin o a steady stream o

maintenance revenues, customers’ comort level with their current apps is hurting new license sales.

Te growth in Oracle Fusion Applications is coming mostly rom sales to existing Oracle clients o

one or several Oracle Fusion Applications modules rather than ull-blown Oracle Fusion

Applications replacement sales to either incumbent or new Oracle customers; as such, it is too small

to add much to total application revenues. Moreover, as noted above, most o the reported growth inOracle’s application revenues has come rom its acquisitions o SaaS vendors like RightNow and aleo.

o test our theory, we surveyed 139 Forrester clients who run all or part o their businesses on Oracle

applications.6 More than hal used Oracle PeopleSo; two-hs or more used Oracle Hyperion,

Oracle E-Business Suite, or Oracle Siebel; about one-quarter used Oracle JD Edwards; and 3% to 12%

used other apps like Agile, AG, Primavera, and RightNow (see Figure 4).

We were particularly interested in how these Oracle customers viewed their next app investment —

were they planning to stay with their on-premises apps and trade up to one o the latest releases; were

they interested in Oracle Fusion Applications, which are available as on-premises, hosted, and SaaS

deployment options; or were they going with a mix o one or more o those choices. Teir responsesrepresent mixed directions or Oracle’s uture app revenue picture (see Figure 5). Survey respondents

encouraged to provide multiple responses said they will do one or more o the ollowing:

■ Upgrade what they have. Te majority o respondents (64%) intend to upgrade to the next

version o the Oracle apps they are currently using, translating to continued growth in Oracle

maintenance revenue and perhaps an uptick in sales o newer Oracle Exadata servers and

middleware.7 Te ipside is once that app migration is done along with any accompanying

hardware or middleware reresh, rms have likely exhausted their resources — money, time,

and people — or any major app investments or the next ve years or so.8

■ Opt or other Oracle apps. Compared with upgrading to the next release o their current

Oracle app, the appetite among respondents or consuming other Oracle apps was comparatively

low — 11% o respondents plan to move to an Oracle SaaS oering, and 8% intend to migrate to

a packaged solution rom Oracle dierent rom what they’re currently using. Tat put Oracle a

long way rom realizing a return on investment on the seven years o development eort — the

rm’s largest ever R&D project — that it has put into developing Oracle Fusion Applications. 9






■ Stay put. One-quarter o respondents said they would maintain the Oracle app versions they

have and limit urther investment in them. In this case, either customers have recently upgraded

their apps, or they’re sticking with an older app release. For the latter group o customers,

continuing to pay Oracle maintenance may prove less and less appealing; 12% o our survey

respondents said their rm planned to move to third-party support options.10

■ Move away. According to our survey respondents, Oracle is set to lose some o its business, as

17% o respondents plan to migrate to a SaaS oering rom another vendor and 12% intend

to move to a dierent packaged solution rom a third-party vendor. Tere are three areas

o particular customer discontent. According to our survey (which encouraged multiple

responses), 43% o respondents believe that “high licensing costs” completely describes what

they dislike most about their current Oracle apps, ollowed by “high maintenance costs” (38% o

respondents), and “difcult to upgrade” (32% o respondents).

■ Not yet decided. Eight percent o respondents are still considering their options and reviewing

their road map planning. Oracle clearly hopes that its recent SaaS acquisitions in CRM

(RightNow) and in human capital management (aleo) will help shore up customer deections, as

will its purchases o smaller players in the emerging social soware app arena, such as SelectMinds.






Figure 4 Oracle Clients We Surveyed Mostly Use PeopleSo, Hyperion, E-Business Suite, And Siebel


Source: June 2012 Global Oracle Applications Online Survey

Oracle PeopleSoft

Oracle Hyperion

Oracle E-Business Suite

Oracle Siebel

Oracle JD Edwards

Oracle vertical packaged applications(e.g., Oracle Utilities, Oracle Financial Services)

Oracle ATG

Oracle Primavera

Oracle RightNow

My rm does not use any packagedapplications from Oracle

Oracle Agile

Oracle Retail (formerly, Retek)

53%

45%

41%

39%

23%

12%

7%

6%

4%

4%

3%

3%

“Which of Oracle’s packaged applications does your organization use?”

Base: 114 respondents who use Oracle applications






Figure 5 Oracle Clients Mostly Plan o Maintain Or Upgrade o Te Next Version O Current Apps



We will upgrade to the next version[of our current application]

64%

We will maintain the versions we have andlimit further investment in them

25%

We will migrate to a SaaS oeringfrom another vendor

17%

We will move to third-party maintenanceproviders for the versions we have

12%

We will migrate to a dierent packagedsolution from another vendor

12%

We will migrate to a SaaSoering from Oracle 11%

We will outsource hosting of one ormore of our Oracle applications

11%

We will migrate to a dierentpackaged solution from Oracle

8%

Other 8%


“Which of the following statements best describes your organization’s

future intentions for its most important Oracle application?”

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Back in mid-2006, Oracle’s Applications Unlimited policy looked like a very smart move designed

to reassure thousands o worried acquired apps customers o Oracle’s commitment to invest in and

support those apps.11 And, Applications Unlimited worked — there weren’t the predicted mass

migrations away rom JD Edwards, PeopleSo, and Siebel to Oracle’s remaining apps competitors.

Troughout this period, Oracle has maintained very high maintenance contract renewal rates,

protecting a large and highly protable revenue stream. Now, however, Oracle wants customers to

move rom the amiliar to something new — Fusion Applications, which became generally available

in November 2011.

Te Applications Unlimited policy plays to what Oracle customers like best about their current

Oracle apps — stability and scalability. According to our survey encouraging multiple responses,

62% o respondents liked that their current Oracle apps were “scalable and reliable,” while 67% said

they liked that their apps were “stable” (see Figure 6).






Ever since 2006, Applications Unlimited has represented a commitment by Oracle to: 1) continue

enhancing enterprise resource planning (ERP) and CRM apps and not to enorce upgrades; 2)

inorm and involve customers in product road maps; 3) deploy dedicated development teams; and

4) tie acquired apps into Oracle Lietime Support.12

Delivering on all our areas involves Oracle expending a good deal o resources and eort.13 Some

o this work has undoubtedly helped in the development o Oracle Fusion Applications. But now

that Oracle Fusion Applications are generally available, is Oracle deriving enough benet rom all

its continued investment in both supporting and enhancing a wide range o other app suites? Even

more important, has it put enough eort behind selling the benets o a move to Oracle Fusion

Applications?

Our survey suggests that the answer to both questions is no — at least, with its installed client base.

Among the rms that we surveyed, less than 10%, and in many cases less than 5%, had plans to

migrate to at least one o the Oracle Fusion Applications. Sixty-ve percent said they had no such

plans, and 24% said they didn’t know (see Figure 7).

Figure 6 Oracle Clients Like Stability, Scalability, And Reliability O Its Apps




Stable 67% 19% 14%

Scalable and reliable 62% 24% 14%

Easy to customize throughconguration of the solution

40% 31% 29%

Easy to customize using code 28% 32% 39%

Easy to integrate with otherapplications

27% 35% 38%

Cost eective solution 18% 32% 50%

Easy to upgrade so we canobtain new features 10% 29% 61%

Percentage of responses agreeingcompletely or mostly withthe statement

Percentage of responses neutral onthe statement

Percentage of responsesdisagreeing completelyor mostly with the statement

“What do you like best about your rm’s most important Oracle application?”






Figure 7 Almost wo-Tirds O Oracle Clients We Surveyed Have No Plans o Implement Fusion



“Does your organization have plans to implement Oracle’s Fusion Apps? If so, which modules?”


Customer relationship management

Human capital management

Project portfolio management

5%

Supply chain management

0%

Financial

65%No, my organization does not have plansto implement Oracle Fusion Applications

Governance, risk, compliance

24%

Procurement 3%

Do not know

5%

1%

4%

8%

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Tese results raise serious questions about the uture o Oracle Fusion Applications, which Oraclerst started talking about in late 2005 as Project Fusion.14 Te idea was to take the best elements

o each o its major apps amilies, enhance them, and then use them together into a single apps

suite.15 For instance, Oracle talked about using Financials rom E-Business Suite and CRM rom

Siebel, inusing both with the user riendliness o the PeopleSo user interace. It also looked to

incorporate ideas rom other industry-specic apps it had either developed or acquired.

Oracle described its Oracle Fusion Applications as code-complete in July 2009 and worked with a

number o early adopter customers, partners, and systems integrators (SIs) on testing the apps.16

Oracle Fusion Applications today aim to cover a wide range o unctionality grouped under seven

major listings: 1) nancials, 2) human capital management, 3) supply chain management, 4) project

portolio management, 5) procurement, 6) customer relationship management, and 7) governance,

risk, and compliance. Each o the app listings contains ve to eight major modules together with

integrated business intelligence and social collaboration.17

Oracle Fusion Applications are available in a number o dierent deployment avors — Oracle

Cloud, hosted by Oracle or its partners, or on-premises — with the idea that a single code base






or Oracle Fusion Applications can enable customers to move back and orth between deployment

options or mix and match those choices.18 With its recent SaaS apps purchases, RightNow and aleo,

Oracle has warmed to cloud computing. In addition, Oracle Fusion Applications are now being sold

primarily as SaaS, whereas this was not a key part o the delivery strategy until recently.19 It’s alsotalking about the potential extensibility o Oracle Fusion Applications by customers, partners, and

SIs due to its platorm-as-a-service development component; it announced some integration-as-as-

service capabilities at Oracle OpenWorld in October 2012.

Despite Oracle’s extensive marketing eorts, our survey results and our daily inquiries with Oracle

customers suggest that Oracle’s strategy and road map or Oracle Fusion Applications isn’t getting

through. Encouraged to provide multiple responses to why their rm doesn’t plan to use Oracle

Fusion Applications, 60% o survey respondents said that Oracle’s app strategy was unclear, 54%

said Oracle Fusion Applications weren’t mature enough, 36% cited high licensing costs, and 30%

said Oracle lacks good customer reerences or Oracle Fusion Applications. When asked i Oracle

had presented their rms with a credible plan to transition to Oracle Fusion Applications, 60% o

our respondents said no, 4% said yes, 17% said they didn’t know, and 19% said they don’t plan to

transition to Oracle Fusion Applications (see Figure 8).

Oracle has been cautious about introducing Oracle Fusion Applications to avoid the mistakes that

plagued E-Business Suite’s buggy rollout a decade ago. o encourage migration at the customer’s

own pace, it has advanced a number o dierent scenarios or Fusion adoption.20 In these scenarios,

customers would:

■ Stay put, but prepare or Fusion. Te ocus here is about getting ready or Oracle Fusion

Applications: In other words, moving to the same underlying inrastructure — FusionMiddleware — as Oracle Fusion Applications. As we’ve previously mentioned, Oracle has

worked to ensure that the more recent releases o the existing ERP and CRM apps now run on

Oracle Fusion middleware.21

■ Adopt some Oracle Fusion Applications modules to complement existing apps. Te key here

is co-existence, with companies remaining on their current apps rom Oracle but opting to add

in some Fusion unctionality in strategic areas with lower transactional workloads. Tis is ar

and away the most popular approach to Fusion among the 400 customers who have licensed

or signed up or the apps, about 100 o which have live implementations.22 For instance, within

HCM, organizations are bringing in Fusion Perormance Management, Fusion Workorce

Compensation, and Fusion alent Management. In avor o this approach, Oracle notes that

anywhere between 45% and 67% o its apps users, depending on the specic app, are investing

in new modules.23

■ Replace a key apps element or pillar with a Fusion alternative. In this scenario, a rm looking

to upgrade its unctionality, say its Financials or its HCM, chooses Oracle Fusion Applications






over the latest release o its existing apps.24 Tis may be a customer currently operating a single

on-premises instance o say, E-Business Suite, which is keen to decouple HCM rom that instance

and move to SaaS HCM. Alternatively, another organization may look to consolidate multiple

instances o E-Business Suite Financials apps through a migration to Fusion Financials.25

With its 65,000-strong apps customer base, the 400 Oracle Fusion Applications customer base is

something o a drop in the ocean o Oracle apps. However, as more organizations look to have more

choice in apps deployment, particularly in relation to SaaS apps, Oracle Fusion Applications may

start to look more appealing. For the customers we talk to, the attractive eatures o Oracle Fusion

Applications include the more riendly user interace, the embedded business intelligence, increased

apps extensibility by both I and business users, and the user experience across devices. Tese

unctionalities are all nice-to-haves, but one issue with slow Oracle Fusion Applications adoption is

that none o those capabilities is a compelling driver or an app migration business case.26

Oracle is also building out more unctionality within Oracle Fusion Applications, broadening

international support, and talking about debuting industry-specic capabilities or Oracle

Fusion Applications sooner rather than later.27 Te vendor has also established a direct and

telesales Oracle Fusion Applications sales orce to go aer new prospects as well as cross-sell and

upsell opportunities among existing Oracle apps customers and project teams to provide rapid

implementation o Oracle Fusion Applications.28

Figure 8 Lack O Clarity About Oracle Strategy And Lack O Maturity Hamper Fusion Adoption



“Why doesn’t your rm plan to use Oracle Fusion Applications?”

Base: 51 respondents who use Oracle applications(multiple responses accepted)

Oracle’s applications strategy is unclear 60%

Not mature enough 54%

High licensing costs 36%

Oracle lacks good customer referencesfor the product

30%

High maintenance costs 28%

Other 26%

Satised with present Oracle products 24%

Inadequate function 20%

Dicult to integrate with other applications 12%






hw orc C a su Rv it act dmm

Many customers are re-evaluating or thinking about revisiting their current apps investments. In

part, this is a result o the rise o SaaS applications, which oen hold out the promise o more

predictable I costs; and, in part, some organizations have reached a point where their existing

and oen heavily customized on-premises apps are no longer sustainable. From our research, we

nd that a vendor pulling support rom existing apps oen acts as a catalyst or rms to reassess

their next step with their apps. Tat’s one reason why we think Oracle will tread careully when

considering Applications Unlimited and how aggressively it positions Oracle Fusion Applications

as the uture destination or its customers. Our survey shows that Oracle does not have a high

enough level o customer trust or satisaction to support an aggressive transition to Oracle Fusion

Applications. Te Oracle clients we surveyed cited “difcult to upgrade” as the second most

important actor that they disliked about Oracle apps, with 65% o respondents agreeing completely

or mostly with that statement; 66% o respondents cited the perennial complaint about high

maintenance costs (see Figure 9).

o allay customer concerns around Oracle Fusion Applications, like those expressed by our survey

respondents, we think Oracle will take the ollowing steps:

■ More clearly articulate the benefts o Oracle Fusion Applications. Oracle will try to

demonstrate why rms need to embrace Oracle Fusion Applications; it will sell the speed and

unctionality o Fusion Apps as essential to businesses rather than a nice-to-have. However,

Oracle will need to present more compelling migration paths to Oracle Fusion Applications

or its customers, particularly those on older versions o its existing apps. Tere is a danger o

Oracle ending up with something o a digital divide, with a group o early adopters pushing

ahead with ull-blown Oracle Fusion Applications deployments once the ull unctionality isavailable across all the modules, another set o customers preparing or the move to Fusion,

while a third group doesn’t budge rom the older Oracle apps releases. For Oracle, the laggard

group is the one most under competitive threat and the ones most likely to move i Oracle were

to set a rm cuto point to Applications Unlimited.

■ Push ahead with Fusion Financials. As Oracle has only recently acknowledged, the uture o

business applications is in the cloud. It’s still a developing market, but one where Oracle, due to its

late entry, is playing catch-up to pure-play SaaS vendors like salesorce.com in CRM and Workday

in HCM. What’s lacking in today’s market is a set o strong enterprise SaaS nancials, an area

which Oracle could dominate i it moves ast enough as midmarket players like NetSuite continue

to scale up their oerings and SAP looks to gain traction with its recently announced Financials

OnDemand product, an outgrowth o its midmarket SaaS Business ByDesign apps suite.

■ Clariy long-term road maps or Applications Unlimited products. o protect billions o

dollars o high-margin maintenance revenues, Oracle continues to support and enhance its

older applications products. Indeed, many customers are likely to keep these applications






running or a decade or more despite usability, exibility, and upgrade challenges. Oracle

needs to be clearer about long-term product road maps to help customers understand the

ramications o staying on older products versus migrating to Oracle’s newer oerings or

considering other alternatives.

We think Oracle has three primary options to resolve its Applications Unlimited versus Oracle

Fusion Applications dilemma, each o which will have dierent implications or the revenue growth

o its apps business. It can:

1. Push Oracle Fusion Applications more aggressively. In this scenario, it will reward Oracle

Fusion Applications migrants with attractive module bundling price points and play a more

active role in acilitating migrations, particularly when customers are moving rom older app

versions. Oracle is currently encouraging legacy apps clients to use certain Oracle Fusion

Applications modules that complement their existing core legacy apps. Moving to a more

aggressive posture involves providing incentives or customers (and Oracle sales) to adopt

core Fusion transactional modules (e.g., nance, payroll, procurement), replacing the similar

modules in EBS, PeopleSo, and JD Edwards. It may also involve creating some disincentives

to clients staying on existing apps, such as longer and more modest enhancement releases. Tis

strategy is hampered by the act that the older products support more industry nuances and

localizations than the respective Fusion modules. It would tend to hurt Oracle’s revenues in the

near term but improve them in the long term.

2. Retain Applications Unlimited and reduce the role o Oracle Fusion Applications. In

this less likely scenario, Oracle pulls back on any major growth ambitions or Oracle Fusion

Applications.29 Rather than expect Oracle Fusion Applications to replace legacy core transactionapps, Oracle would oer only the newer modules that complement the older products. As newer

releases o existing apps and Oracle Fusion Applications gain more o a common look and eel,

Oracle Fusion Applications will seamlessly blend into Oracle’s overall app portolio. Tis will

protect Oracle’s revenue growth in the near term but hurt its revenues in the longer term unless

it pursues a more aggressive acquisition strategy.

3. Maintain current balance between Applications Unlimited and Oracle Fusion Applications.

Tis approach, representing Oracle’s current position, allows Oracle to keep its (and its

customers’) options open by not orcing a choice between Applications Unlimited and Oracle

Fusion Applications. Tis scenario also allows or a longer period o time to see i Oracle Fusion

Applications will catch re among Oracle’s customer base on their own over several years. But as

Fusion adoption evolves, Oracle’s commitment to enhancing the older products may ade, along

with customers’ desire to continue to invest in upgrades and support. Te result is likely to be

weaker growth or Oracle’s apps than the other options both in the near and longer term.






Figure 9 Oracle Clients Dislike Upgrading As Much As Tey Dislike Maintenance Costs




Percentage of responsesagreeing completely or mostlywith the statement

Percentage of responses neutral onthe statement

Percentage of responsesdisagreeing completelyor mostly with the statement

“What do you dislike most about your rm’s most important Oracle application?”

High maintenance costs 66% 26% 8%

Dicult to upgrade 65% 19% 16%

High licensing costs 61% 29% 11%

Dicult to customize and change 44% 27% 29%

Dicult to integrate withother applications

39% 38% 23%

Decient business function 26% 32% 42%

Dicult to scale 19% 33% 48%

Unstable 7% 16% 77%

R e c o m m e n d a t i o n s

oRaCle ClienTs: WaTCh FoR MoRe pRessURe To MoVe To FUsion

appliCaTions

At this point, Oracle has sunk too much money and resources into Oracle Fusion Applications

to abandon the eort. We anticipate that Oracle is likely to step up eorts to encourage its

Applications Unlimited customers to move more rapidly to Oracle Fusion Applications and its cloud

inrastructure oerings. Oracle applications customers should do the ollowing to prepare:

■ Assess the sustainability o your applications portolio. ake inventory o all business

applications, including Oracle’s and those rom other vendors, to determine current

ownership costs and the technical debt resulting rom deerred upgrades. Determine levels

o investment needed to sustain the applications portolio and risks o obsolescence.






■ Develop a long-term applications strategy. Determine which applications should be

replaced, upgraded, or added. Customers running Oracle products (e.g., E-Business Suite,

JD Edwards, PeopleSo, and Siebel) should assess options to either upgrade within these

product lines, adopt Fusion Applications, or migrate to competing products.

■ Strike the best deal possible or Fusion migrations. I you decide to migrate rom older

Oracle products to Fusion, hold Oracle to its trade-in promise or like-or-like exchanges.

Beware o additional costs or middleware and cloud services in the Fusion stack, as well

as integration costs. Don’t assume that integration between various Oracle applications

products is plug-and-play.

■ Shi your applications updating model to the pace o the cloud. As you migrate existing

applications to newer products like Oracle Fusion Applications, shi your updating

model to the cadence o the cloud. Embrace the cloud’s managed services model to keepapplications up-to-date, whether you opt or a pure-cloud model or a hybrid (e.g., hosted or

private cloud) delivery model.

W H a t i t m e a n s

iT’s Make-oR-BReak TiMe FoR oRaCle’s appliCaTions BUsiness

Oracle’s main challenge in applications is retaining protable recurring revenues while increasing

revenue growth rom new licenses and subscriptions. For new customers, Oracle is in danger o

appearing more o a me-too apps player than an innovator, given the time it’s taken to deliver

complete versions o Fusion Applications and lay out its particular approach to cloud computing.Oracle Fusion Applications represents Oracle’s main strategy to grow its applications revenue and

counter a variety o ast-growing SaaS competitors. Fusion Applications alone, however, may not

provide the growth engine Oracle needs to protect its market position in applications. Look or

Oracle to accelerate its growth strategy with more SaaS acquisitions, similar to aleo and RightNow.

sUppleMenTal MaTeRial

Mt

Forrester’s June 2012 Global Oracle Application Online Survey was elded to 180 Forrester contactsthat are I decision-makers with knowledge o Oracle applications. For quality assurance, we

screened respondents to ensure they met minimum standards in terms o content knowledge and

job responsibilities.

Forrester elded the survey rom June to July 2012. Respondent incentives included a summary o

the survey results. Exact sample sizes are provided in this report on a question-by-question basis.






Tis survey used a sel-selected group o respondents and is thereore not random. Tis data is not

guaranteed to be representative o the population, and, unless otherwise noted, statistical data is

intended to be used or descriptive and not inerential purposes. While nonrandom, the survey is

still a valuable tool or understanding where users are today and where the industry is headed.

endnoTes

1 Te quarters we discuss here are the calendar quarters that most closely coincide with Oracle’s scal

quarters. Because Oracle’s scal quarters end in February, May, August, and November o each year, Q4

2011 in our discussion would be Oracle’s scal Q2, which ended on November 2011; Q1 2012 would

include Oracle’s scal Q3 2012 ending in February 2012; and Q2 2012 would include Oracle’s scal Q4 2012

ending in May 2012.

2 We want to note that this kind o analysis is not intended or investors in Oracle stock, who will not care

whether Oracle’s revenue growth comes rom new acquisitions or old products. Because Oracle does notprovide inormation on product revenue growth, we cannot calculate the revenue it gets rom its pre-

acquisition products. While our approach o adding the acquired vendors’ pre-acquisition revenues to

Oracle’s revenues in the base periods may overstate its organic growth i those vendors’ revenue growth was

aster than that o Oracle’s pre-existing products, the discrepancy is likely to be small given how much larger

the revenues rom pre-existing products are compared with the revenues rom the acquired vendors.

3 SAP is even more exposed to the weak economy o Europe than Oracle, as the Europe, the Middle East, and

Arica region will represent 47% o SAP’s total revenues in 2012, compared with 28% o Oracle’s soware

revenues.

4 SAP announced its intention to acquire e-purchasing company Ariba or approximately $4.3 billion on May

22, 2012. SAP’s acquisition o Ariba closed on October 1, 2012. See the August 3, 2012, “he SAP/Ariba

Merger Will Not Be Frictionless” report.

5 In this comparison, we converted Oracle’s US dollar revenues into euros using the average exchange rate or

the week in which Oracle’s scal quarter ended, while using SAP’s reported revenues in euros.

6 Sixty percent o the respondents to our survey were located in the US and 40% in Europe. Tey included

companies in manuacturing (28%); government, education, and healthcare (17%); transportation;

proessional, services and construction (11%); utilities and telecom (11%); media and entertainment (8%);

and retail and wholesale (8%).

7 Oracle tends to cite a statistic regarding apps upgrades o around 80% o all users being on the latest

version or on the two most recent releases o its apps.

However, that gure tends to mask the very dierentuser picture or dierent Oracle apps. For instance, while Oracle puts 93% o the E-Business Suite user

base on the latest two releases, it has only 43% o JD Edwards customers in the same situation. Oracle

notes that: “Percentage reects a weighted average o customers on the latest releases o Oracle EBS,

PeopleSo Enterprise, JDE, Siebel, Agile PLM or Process, Agile Engineering Data Management, Oracle

ransportation Manager, and Demantra. Source: “Charting Your Course with Oracle Applications,” Oracle,

January 2011 (www.oracle.com/us/products/applications/charting-your-course-315028.pd).










8 One comment we hear many times rom Oracle customers is how weary they are o Oracle’s upsell and

cross-sell approaches. Tis observation was borne out by our survey where 32 % o respondents encouraged

to provide multiple responses said that the ollowing statement completely described Oracle as a technology

vendor or their rm: “Oracle is constantly trying to sell us more o its products.”

9 In some cases, customers have told us that they have already lled gaps in the Oracle apps suites they

currently use with complementary Oracle on-premises apps and now eel too invested in those products

and their current app suites to consider an apps migration.

10 A modest third-party support market is emerging, but Oracle has led lawsuits against several o the key

players. See the July 20, 2012, “Rimini Street Challenges Big Sotware Maintenance Fees” report and see the

April 16, 2010, “Don’t Let Oracle’s Lawsuit Dissuade You From Considering 3SPs, But Recognize he Risks”

report.

11 Charles Phillips, at that time Oracle president, gave a presentation on Applications Unlimited at Collaborate

2006, an annual gathering o Oracle user groups in April in Nashville, ennessee. Te presentation isavailable at SlideShare’s website. Source: Christian Hoer, “Oracle Applications Unlimited,” SlideShare,

October 18, 2006 (http://www.slideshare.net/Fenomeno/oracle-applications-unlimited).

More inormation can be ound at the Oracle website as well. Source: “An Executive Guide to Oracle

Applications Unlimited,” Oracle, 2006 (http://www.oracle.com/us/products/applications/035821.pd).

An open letter to Siebel customers sent in July 2006 rom Oracle’s then senior vice president o CRM

applications Ed Abbo introducing Applications Unlimited can be viewed at the Oracle Applications Users

Group website (http://www.oaug.org/pls/portal/docs/page/oaug/usercommunities/siebelusercommunity/

documents/2006-07siebelopenletter.pd).

12 As part o Applications Unlimited, Oracle promised to provide three layers o paid support or its ERP and

CRM apps: Premier Support (includes updates, bug xes, security alerts, and certications with Oracle and

third-party products), which lasted or the rst ve years o an app release rom the date it was rst made

available; Extended Support, or a urther three years; and Sustaining Support, which eectively had no end

date.

Oracle noted that some releases might not have an Extended Support phase, in which case customers

would have the option to move to Sustaining Support once the ve-year period o Premier Support expired.

Source or Oracle Lietime Support Policy as o June 2012: “Oracle Inormation-Driven Support,” Oracle,

September 2012 (http://www.oracle.com/us/support/library/lietime-support-applications-069216.pd).

Oracle has also set new support timelines or some apps. For instance, Oracle recently announced changes

in Oracle Lietime Support policies or Oracle E-Business Suite releases 11i and 12.1. Source: Steven Chan,“EBS 11i and 12.1 Support imeline Changes,” Oracle E-Business Suite Technology blog, October 9, 2012

(https://blogs.oracle.com/stevenChan/entry/ebs_11i_and_12_1)

13 It’s worth noting that over time Oracle has expanded Applications Unlimited so it applies not only to its

app suites — E-Business Suite, JD Edwards, PeopleSo, and Siebel; it also applies across its other products

lines such as Agile project lie-cycle management and Primavera enterprise project portolio management










soware, both the result o acquisitions, and its industry-specic apps, many o which were the result o

smaller “tuck in” purchases such as G-Log and Retek.

14 Source: “Oracle Fusion Human Capital Management Rethinking the Business o HR,” Oracle, April 2011

(http://www.oracle.com/us/products/applications/usion-hcm-rethink-hr-wp-365545.pd).

15 Other apps vendors were also looking to this kind o model. For instance, Microso had Project Green,

an initiative to combine the best eatures o its our acquired Dynamics ERP amilies — Dynamics AX,

GP, NAV, and SL — and o its Dynamics CRM apps into a next-generation single suite. Microso later

abandoned that strategy and repositioned Project Green as a replacement o non-Microso inrastructure

within Dynamics apps with support or Microso middleware and databases.

16 Oracle Fusion Applications early adopters, which Oracle has publicly highlighted, include Alcoa, Boeing,

Elizabeth Arden, Green Mountain Coee Roasters, McDonald’s, McKesson, Pacic Northwest National Lab,

Principal Finance Group, Qualcomm, Siemens, and UBS. New additions to that list at OpenWorld 2012

included Ardent Leisure, Peach Aviation, Red Robin, oshiba Medical Systems, and Zillow.

Oracle Fusion Applications partners include Acxiom, ADP, D&B Hoovers, Fujitsu, HireRight, InsideView,

Nuance, SAVO Group, Silverpop, and Vertex.

Oracle Fusion Applications SIs include Accenture, Cognizant, Deloitte, Inosys, PricewaterhouseCoopers,

and Wipro.

17 Oracle breaks down each module to more granular level still, which enables it to claim more than 100

Oracle Fusion Applications.

18 Oracle puts the current deployment prole or Oracle Fusion Applications at 65% soware-as-a-service

(Oracle Cloud), 26% on-premises, and 9% on-demand. Te geographical split across 17 countries is North

America 67%, Europe 23%, and Asia Pacic 10%. Source: Oracle OpenWorld 2012 presentations.19 It’s interesting to listen to Oracle CEO Larry Ellison in ull cloud computing dismissal in an address to

nancial analysts on September 25, 2008 (http://www.youtube.com/watch?v=0FacYAI6DYO). Ellison

denitely has a point about the cloudiness or vagueness o the cloud computing term, but he goes on to

say how Oracle doesn’t need to do anything dierently to be a cloud computing player other than change

the wording o some o its advertising. For a more amous and amusing cloud computing putdown,

also listen to Ellison’s September 21, 2009, appearance at Te Churchill Club (http:/www.youtube.com/

watch?v=KmXJSeMaoY).

20 Source: “Charting Your Course with Oracle Applications,” Oracle, January 2011 (http://www.oracle.com/us/

products/applications/charting-your-course-315028.pd).

21 It’s worth noting at this point that Oracle Fusion Applications don’t share the same code base as Oracle’s

existing apps, whether homegrown or acquired. At present, upgrade scripts to Oracle Fusion Applications

are limited to the latest releases o E-Business Suite, JD Edwards, PeopleSo, and Siebel, making it less

burdensome or customers on those versions to potentially move to Oracle Fusion Applications.

22 Te number o Fusion customers is taken rom presentations Oracle executives gave at OpenWorld 2012.






23 For existing apps customers keen on adding in Oracle Fusion Applications or swapping out their current

apps or Fusion alternatives. Oracle is providing soware licenses credits as like-to-like unctionality

provided those customers are paying support ees. Customers need to pay extra or any net new Oracle

Fusion Applications, in other words, modules that are not replacements or existing apps or which usersare already paying maintenance. Oracle Fusion Applications are available via perpetual licensing or by

subscription. Oracle Fusion Applications are priced by a variety o dierent metrics. Source: “Oracle Fusion

Applications Global Price List,” Oracle, March 15, 2012 (http://www.oracle.com/us/corporate/pricing/

usion-applications-price-list-418746.pd) and “Oracle Fusion Applications Cloud Service and Cloud

Service Options Licensing Inormation,” Oracle, May 2012 (http://www.oracle.com/technetwork/usion-

apps/oracleusionapplicensingcloudrel4-1612436.pd).

24 At Oracle OpenWorld 2012 in October, Oracle executives positioned the split o Oracle Fusion Applications

customers as 39% adopting HCM, 38% adopting CRM, and 23% adopting ERP modules.

25 One major systems integrator with an Oracle Fusion Applications practice shared with us that it has seven

to eight active Oracle Fusion Applications client deployments and is in discussions with 30 or so more

clients who are interested in adopting Oracle Fusion Applications. ypically, rms are looking to deploy

Oracle Fusion Applications in specic divisions or business lines, with an eye on a uture Oracle Fusion

Applications global deployment. Organizations are tending to move to Oracle Fusion Applications rom

the most recent version o Oracle’s other apps. I they plan to migrate rom earlier versions, rms are more

looking at an apps re-implementation rather than a migration.

26 Forrester has published a report that includes drivers and user case studies around making major new apps

investments. See the July 31, 2012, “Measure he Business Impact O Improved App Strategy ” report.

27 At Oracle’s OpenWorld user conerence in October 2012 in San Francisco, Oracle executives said the rm

will bring Fusion HCM on par with Oracle PeopleSo in terms o international support over time. Forinstance, the plan is to expand the current number o supported payrolls rom ve countries to 15 by the

end o 2013. On the industry support ront, Oracle intends to verticalize Fusion Applications over the

next ew years and is also talking some specics about particular areas. For instance, within Oracle Fusion

HCM, a uture goal is to cater to verticals including higher education by oering aculty management and

manuacturing by providing scheduling and health and saety management. Oracle has yet to provide

manuacturing apps as part o Oracle Fusion Applications.

28 One o the potential obstacles to on-premises Oracle Fusion Applications is the additional Oracle

inrastructure soware that customers might also have to purchase in relation to business intelligence,

portal, and identity and access management apps.

29 A more extreme variant o this scenario would be to abandon Fusion Applications altogether, which Oraclemay have considered at several points in the product suite’s rather long gestation period.





Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward-thinking advice to

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