How do SAP and Oracle’s Support Profit Margins Compare to Pablo Escobar?

Executive Summary

• SAP and Oracle have tremendous profit margins on their support. However, how do their support margins compare to international drug cartels? Find out in this article.

Text Introduction

SAP and Oracle have virtually an identical support model, with an identical profit margin on their support. You will learn about the approximate margin of SAP and Oracle versus Pablo Escobar. Some SAP and Oracle consultants have found parts of this article offensive — but the offensive part is that Brightwork published on the profit margins of SAP and Oracle, not that SAP or Oracle charge customers and provide such little customer service that they have nearly identical profit margins to those of Pablo Escobar in his illicit drug trade.

Our References for This Article

If you want to see our references for this article and other related Brightwork articles, see this link.

Notice of Lack of Financial Bias: We have no financial ties to SAP or any other entity mentioned in this article.

• This is published by a research entity, not some lowbrow entity that is part of the SAP ecosystem. 
• Second, no one paid for this article to be written, and it is not pretending to inform you while being rigged to sell you software or consulting services. Unlike nearly every other article you will find from Google on this topic, it has had no input from any company's marketing or sales department. As you are reading this article, consider how rare this is. The vast majority of information on the Internet on SAP is provided by SAP, which is filled with false claims and sleazy consulting companies and SAP consultants who will tell any lie for personal benefit. Furthermore, SAP pays off all IT analysts -- who have the same concern for accuracy as SAP. Not one of these entities will disclose their pro-SAP financial bias to their readers. 

About the Medellin Cartel

While watching documentaries on Pablo Escobar, the scale of his operations boggles the mind. Pablo Escobar and his associates were a corporate conglomerate. Pablo was making close to 1/2 a billion per day. The Medellin drug cartel operations were an extensive network of drug factories and air transportation bringing cocaine from Columbia to the US (primarily). They were the world leader in the manufacture and distribution of cocaine and the category leader. If the Medellin drug cartel had been a listed company, it would have been an attractive stock and they were a great growth story. They had high profitability and very low debt. What was not to like?

One can imagine hiring marketing and PR people to recast the Medellin drug cartel in the “pharmaceutical business.” Undoubtedly, many people in the marketing and PR community would have loved to have had the Medellin account.

Pablo Escobar and the Medellin Cartel’s Profit Margins on Cocaine

Pablo Escobar also had a profit margin on his cocaine that was very reminiscent of two other companies, as the following quotation can attest.

“The profits were astronomical at every step. In 1978 each kilo probably cost Escobar $2,000 but sold to Lehder and Jung for $22,000, clearing Escobar $20,000 per kilo. In the next stage they transported an average of 400 kilos to south Florida (incurring some additional expenses in hush money for local airport authorities) where mid-level dealers paid a wholesale price of $60,000 per kilo; thus in 1978 each 400-kilo load earned Escobar $8 million and Lehder, Ochoa, and Jung $5 million each in profits. Of course, the mid-level dealers did just fine: after cutting the drug with baking soda each shipment retailed on the street for $210 million, almost ten times what they paid for it.” – Mental Floss

That is a 90% profit margin.

Would Pablo Escobar Have Admired Hasso Plattner and Larry Ellison?

This is actually lower than the profit margin that SAP and Oracle receive on their support, which these companies reported in their financial statements to be 93%. Both SAP and Oracle used to have far better (and less profitable) support in the past. However, SAP and Oracle attain this profit margin by employing less experienced support staff and staffing almost entirely in undeveloped countries. SAP and Oracle’s support is considered extremely poor. This support reduction has had deleterious effects on SAP and Oracle customers, who often feel stranded on an island. We have comments from Oracle customers who question whether Oracle continues to provide support in return for support money.

Now comes the multiple-choice part of the article.

1. Both companies needed to let go of large numbers of domestic support personnel for competitive reasons.
2. Both companies needed to let go of large numbers of domestic support workers for profitability.

Gouging Your Customers

Notice that SAP and Oracle had plenty of money to keep up the support quality, but they preferred the margin from locked-in customers. They also have been steadily increasing the support percentage, and just a few years ago bumped it from 15% to 22%+ (for SAP, 22% is just the starting point. Many of their products or product areas are not covered by the standard support fee). SAP and Oracle support used to be comprehensive, but the primary support is increasingly treated more like a “bottom tier” by these vendors. SAP and Oracle see the 22% as the “built-in” cost that all customers must pay. The actual support starts above that level.

The Secret to SAP and Oracle’s Revenues

Both SAP and Oracle receive over 50% of their revenues from support. This percentage, combined with the profit margin on their support, is the secret to these companies’ revenues. And they float both of these companies. We quote the following.

“These revenues account for more than all of Oracle’s operating profits. (Maintenance revenues do not have sales and marketing costs, they are for the most part, automatically renewed, they do not have R&D costs and they have minimal G&A costs). Without the golden stream of maintenance revenues, there’s no stable, highly profitable and usually predictable Oracle. (emphasis added)” – Seeking Alpha

Monopoly Power Leads to Exhorbinant Profit Margins

For those who would defend SAP or Oracle’s margins, there is a problem. Economists state that excessive profits are evidence of monopoly power. How did Pablo Escobar control 80% of the cocaine distributed and consumed in the US market? He murdered competitors. At one time, Pablo Escobar had 500 sicarios or hitmen working for him. SAP and Oracle use a different approach. They combine a partner ecosystem with constant acquisitions. They also leverage monopolistic control of a core component of enterprise software (the ERP system for SAP and the database for Oracle).

Economists are clear on this, and there is no way SAP or Oracle could maintain such margins unless they possessed and exercised monopoly power against their customers. Criminal organizations like the Medellin drug cartel and large organizations like SAP and Oracle lead to monopoly profits.

Conclusion

Interestingly, there seems to be little questioning of whether such margins are fair to customers and what margin level indicates a problem with greed. The question that should be discussed is, what type of entity charges their customers a plus 90% margin for an item? We know this is roughly the same margin as drug cartels. The second question is, do we hold the profit margins of drug cartels to be ethical? How about blood diamonds? How close must the profit margin be to 100% before some mental alarm is sounded? Because hundreds of thousands of SAP and Oracle employees and followers support it, profitability seems pretty reasonable.

Pablo Escobar was generally considered a bad person and not someone you would have over for dinner. However, it turns out that the margins on his cocaine were less than SAP and Oracle’s margins on support. Yet people like Bill McDermott and Mark Hurd are celebrated in the press.

Article Reactions

Some people reached out to me and expressed surprise at the margins described in the SAP and Oracle support article. This was less common knowledge than I had anticipated. The article’s point was to compare the margin to an illegal operation to understand how SAP and Oracle can do it and get away with it.

We have heard quite a bit from SAP consultants or resources who disliked this article. The primary issue that SAP consultants have chosen to focus on is whether the comparison should have been drawn. As I was reading up on Pablo Escobar, I found out the margin on his cocaine. I thought,

“Wait that is the same margin as Oracle and SAP on support.”

The margin was so high and so rare that the thought was immediate. The proposal by SAP consultants is that I should not have thought that. However, that is automatically what my brain did. I should not have thought this, even though the margins were rare and nearly identical. The argument has been that it was inappropriate to write this article, but if it was inappropriate to write it, was it inappropriate to think it? That is, should the very associative thought be censored? So far, it seems like the answer is yes. The pro-SAP resources have proposed that some thoughts are allowable, but others are not.

The SAP consultants may not have a problem with the margin change on support because they don’t pay it. However, if they paid for it, would they complain? I think they would. Most consultants like to get a good value for things they buy and do not appreciate being taken advantage of. I have had SAP consultants complain about high housing closing costs, which are far less complicated than SAP support.

At this point, I would like to hear from an SAP or Oracle customer who approves of the margin they are being charged. I would also like to hear from a customer that they were told what margin they would be paying on support during the sales process.