How to Not Waste Money on Oracle and SAP Support

Executive Summary

• SAP and Oracle have large support margins that they hide from customers.
• This support margin is the secret to understanding the revenue model of these two vendors.

Introduction

The SAP and Oracle revenue models are highly based on support. SAP and Oracle have remarkably similar support strategies and revenue models. First, they both charge 22%+ per year for support and receive more than ½ of their revenues and the majority of their profits from support. Both companies have roughly a 90% margin on their support. Both companies have removed value from their support and made the overall support cost higher because more support services are pushed into premium packages. You will learn how these vendors continually push down what they offer in support and continually push up the costs of support, leading to enormous margins for these companies.

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. 

Shhhhhh…Keep the Support Profit Margin a Secret

While SAP and Oracle report their support profit margin in their financials, they are careful not to mention it to customers. We performed a test and asked many of our readers, both SAP and Oracle consultants or employees, whether they would approve of the following text added to SAP and Oracle sales material.

“We Will Make a 90% Profit Margin on Your Support Contract.”

Curiously, no pro-SAP or pro-Oracle resources said they would endorse such an addition. More concerning is that many of these readers tout themselves as Oracle and SAP advisors, which implies they look out for their customers’ interests. Yet, there seemed to be little appetite for informing customers regarding the support margin.

How Much of SAP’s and Oracle’s Profits are From Support.

“Oracle derives 52% of its revenues from maintenance. Those revenues have operating margins of 94%. The cloud accounts for 8% of revenues and has gross margins (gross not operating) of 48%.

By one calculation, Oracle’s support operating margins constitute more than 100% of the company’s operating profit.”

Oracle is so dependent upon its cloud revenues that Seeking Alpha declares 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)”

Selling Software for Support Margins?

There is no other way to say it: Oracle sells software to its customers to get support contracts and to overcharge customers on those support contracts. (as does SAP). The secret to understanding SAP and Oracle’s model is found in the highly stable support profit stream.

Both rely heavily on outsourced support to inexpensive and usually less experienced resources in India and other low-cost countries (many domestic support personnel have long been fired or reassigned). And for both companies, support is less and less helpful in supporting customers, mainly if premium support is not purchased. We have gone round and round with SAP on support tickets with beyond technical skills. The supporting individuals seem to lack English comprehension skills, leading to miscommunications.

Getting the Perpetual Run Around?

One of the most troubling things about SAP support is how issues are covered if they embarrass SAP. As for Oracle’s support, if you need assistance on a Severity Two issue, you must ask to have your ticket escalated, or it will sit until the next ice age.

Severity One? Escalate it.

Moreover, if you don’t get back to support quickly, your ticket will be closed. If you have a complex problem, watch support pass it around the globe by asking the same question and waiting for the answer, then let it get picked up by the next shift. How about a problem with an engineered system? Well, the best move is to make some popcorn, sit on the phone with several support organizations, and watch them play “Pin the Tail on the Donkey.” What is often little discussed is how the configuration of SAP and Oracle support imposes unplanned costs on their customers. 3rd party support provider Rimini Street raises this topic.

“While support costs have continued to rise, the level of customer service you receive has steadily declined. When you contact vendor support about a problem, a junior-level tech might advise you to upgrade or implement a patch bundle that combines hundreds of other fixes. Before you know it, one small problem has morphed into a big project, with regression testing and downtime that costs a lot of money, time and resources. When you get back in touch with support, you’re unlikely to get access to experienced engineers unless you navigate a maze of escalations. Think about it: How long did you spend on the phone and how quickly was your issue resolved (if at all) the last time you called your software vendor’s support line?”

To be sure, Rimini Street is trying to sell 3rd party support; however, this quotation also conforms with our experiences on SAP and Oracle projects, as well as research in the area. Rimini Street highlights the many hours that SAP and Oracle customers engage in “call avoidance” and spend in researching issues before calling support and how this is a drain on IT departments.

“I used to spend hours researching case resolutions myself and was led around the world with vendor support depending on the time of day.” – City of Cuyahoga

Changing the Support Deal

We cover how Oracle and SAP have changed the “support deal” in the article How SAP and Oracle’s Stripped the Value from 22% Support. Mainly, Oracle and SAP want support to be as close as possible to 100% profitability. Most of SAP and Oracle’s profits come from support. Furthermore, according to Rimini Street, only 1% of SAP support revenue is reinvested in enhancing existing software. This is similar to pharmaceutical companies that spend many more times on marketing than on research and the research they do is to a great deal falsified, and therefore should not be counted as research, but simply what is required to falsify clinical trials.

ASUG, a user group and a marketing arm for SAP, states that support should be used for acquisitions, as we cover in ASUG’s Strange View of How SAP Support Fees Should be Used.

This is odd because if SAP uses the support stream’s income to make an acquisition, the customer is paying for SAP to buy applications that the customer most likely does not own. Therefore, how does this acquisition benefit the customer?

Throwing Away Money on Support

Customers have been throwing their money away on support, seeing it as an automated locked-in cost. However, the 3rd party support firm Rimini Street has spent much time explaining to customers how they can cut their support to ½ by dropping Oracle and SAP support and using their third-party support. For a long time, customers of Oracle and SAP were more difficult to budge. However, as pointed out by Seeking Alpha, this is increasingly changing.

“Until now, the company did not face real challenges in its installed base. Applications had long lives and the databases that they ran on were considered part of the furniture. Renewals came automatically and since maintenance revenues are based on the total number of seats installed, the golden stream of revenues grew every year.”

But while there is some change, the margins in SAP and Oracle’s support indicate that there is still very little competition in these two vendors’ support spaces.

Conclusion

Even though SAP and Oracle’s software is very expensive, they only profit from support. They aim for 100% profit but fall short in the high 80% and low 90%. They do not use that revenue to reinvest in very much in the way of software development, and they have shrunken costs enormously to maintain their profitability levels.