The Curious Case of Oracle Consulting

Ever since I started this blog over two years ago, I have been commenting on three laws that impact all product companies:

  1. There is an Inverse relationship between Moore’s Law and product margins.
  2. As technology markets mature, revenues and margins become services-centric.
  3. Product-centric companies contract in mature markets.

Oracle, for the past five years, has been one of my go to proof points for the second of these three laws. Oracle’s revenue mix has become very services-centric over the past five years.  Before the Sun acquisition, 70% of Oracle’s revenues were related to maintenance, consulting, and education services.

Oracle consulting, specifically, used to represent over 20% of Oracle’s total company revenues. In 2009, Forrester rated Oracle consulting as one of the top tier providers of consulting services related to Oracle technologies. The report listed the standard reasons product companies are uniquely positioned to provide services related to their products:

Oracle Consulting is in a unique position as the consulting arm of the technology provider, which means it is closely tied into product and support teams at the provider level.

Although strongest in the technical phases of implementation, Oracle has been ramping up its strategy consulting capabilities in an effort to round out its ability to provide end-to-end implementation services.

But this past week, I happened to look at the trend for Oracle Consulting revenues over the past three years. Check this out:

So, Oracle consulting revenues now represent less than 10% of total company revenues. This change is not simply a result of the Sun Microsystems revenues being added to total company revenues. The absolute revenue dollars for Oracle Consulting has been declining as well. From a peak of $1B a quarter in Q12008 to $660 million dollars in Q1 of this year.

What is going on here? While HP, IBM, and a host of other product companies aggressively pursue consulting opportunities, Oracle backs away from them? Or is this decline simply the result of less implementation and integration requirements as technology matures?

The trend is fascinating.  I guess I need to update my proof points.





3 Responses to “The Curious Case of Oracle Consulting”

  1. Paul Hofstadler Says:

    While I have no insight into Oracle’s business mix or portfolio, I can perhaps shed some light on what might be happening here.

    When the economy turned down, services that were based on industry standards became commoditized almost instantly by all of the out of work engineers that hung out a consulting shingle when they realized that finding a new full time job was going to be a long proposition. With all of the overhead involved in doing consulting inside of a product company, it became hard for companies like Oracle to compete with these freelancers that threw out lower than market rates to secure contracts with which to feed their families. It probably just became an economic necessity for Oracle to get out of some of those low margin, high price pressure, commoditized services businesses. The data set you’re examining here is the worst case (2008 – 2010) in terms of the impact of the downturn, by the way.

    In our portfolio, services that are based on our unique products and expertise weathered the downturn just fine (actually grew because customers could not hire) where services based on open industry standards and more generic technologies were affected badly. Perhaps Oracle’s rather wide-flung business experienced the same thing.

    I’d be willing to bet that if you looked at their portfolio product by product, the mix ratios in deeply Oracle-unique products actually went up in the past two years while the mix ratios in more industry generic products were pummeled. The overall mix ratio decline that you show above is therefore probably a reflection of a change in their services portfolio mix toward higher value, more differentiated services rather than any significant shift in the theory of how much value added services it takes to drive a successful software business.

    What you’re seeing is, at the end of the day, a ramification of doing commodity services purely for the revenue and GM rather than restricting the services business to areas where services can add strategic value to the mother ship software business.

    For what it’s worth, I suspect that the commodity business will come back at some point when there are fewer freelance engineers on the street (we’re not there yet), but I also suspect that there will be hesitation on the part of well run companies like Oracle to re-enter that segment of the market given the pain of a downturn like we’ve just weathered.

    My two cents from the outside looking in.

    Paul Hofstadler, VP Worldwide Consulting, Mentor Graphics

  2. Bob Westerkamp Says:

    Paul makes some strong points regarding the impact of a down economy on a increasingly commoditized product line. Our PS business saw similar revenue and margin increases, more in line with Paul’s experience than with the Oracle business..

    I would just like to add that I don’t think Oracle is a passive victim of the economy. I believe their situation is the result of a purposeful strategy designed to make their technology ubiquitous at the expense of their PS business. They have very aggressive partner programs and do little to protect their “how to” IP (they have proven very aggressive about preserving the software maintenance revenue and its associated IP – witness the SAP / TomorrowNow lawsuit). Oracle has intentionally grown vast numbers of low cost off shore resources and it was always their intent to commoditize the skill sets around their technology. In theory, a ready supply of skilled resources in the market place will increase overall market adoption and lead to more license sales.

    The Oracle gross margin line is also the result of this intentional strategy. Although, their gross margins have climbed a few points over the last few quarters they are always 5 to 10 percentage points lower than their competitors, even in the best of times. I am, not saying that Oracle wants to have lower PS margins, rather it is the result of having a strategy that places PS at a lower priority than new product footprints and behind maintenance revenue.

    So, Thomas I would not be so quick to change your second law – a simple footnote stating “As technology markets mature, revenues and margins become services-centric, unless otherwise manipulated by corporate priorities.

    Just my two cents…


  3. Ravi Says:

    Oracle has consiciously nurtured their services ecosystem through robust partners network; Although overall services is about $50B market based on their license sales and OC is doing $660M (mentioned earlier in the article). They strongly believe partners effectively enable them to sell and support product licenses. It is a win win, I agree, not so much for Oracle Consulting though.

    Elsewhere, Microsoft, Android follows a similar strong partner model for their services and enlist even the undergrads and grads with free products. Hey you need student ambassadors who can carry your banner to the corporate world!!

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