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Tuesday, February 21, 2017

Cooking the books: How Oracle inflates cloud revenue figures and what it means for you

The truth will always out
Technology firms have never been stranger to hyperbole, whether discussing the alleged value their products bring, customer numbers or the size of their business. As I described in my book, High-Tech Planet: Secrets of an IT Road Warrior, being creative with facts is par for the course for most of them. However,  those vendors scrambling frantically to move from a legacy on-premise business to the brave new world of cloud-based systems, find themselves so desperate that creativity with reality takes on new forms.

Oracle, though by no stretch of the imagination the only offender, is doubtlessly the worst one. This is compounded by the fact that it came late and reluctantly to the cloud (watch this video of Oracle's boss Larry Ellison pooh-poohing the cloud). After its on-premise succession product Fusion failed to gain much traction and its Sun hardware acquisition turned out to be in the words of former Oracle Über -VP of Sales, Keith Block, " a dud", Oracle and Larry Ellison (the two are interchangeable) had no other choice but to go down the cloud route.

Unfortunately the software industry, among others, is known for its first-mover advantage meaning that by the time Oracle decided to do something about (in) the cloud, many of its customers had already defected to Salesforce (for CRM) and Workday (for HR.) Resorting to its good old ways, Ellison didn't hesitate to predict quite outlandishly that his company would bury Workday. Post-truth statements and alternative facts didn't premiere with the Trump administration; Oracle had started the ball rolling earlier. However, since "facts are stubborn" as Lenin said, Oracle felt it had to go one step further: falsify its cloud revenue figures.

Last June, a courageous Oracle employee, Svetlana Blackburn, a finance manager, came forward denouncing Oracle for pressuring her to inflate cloud sales figures (here's another report by Reuters). The various tricks used by a vendor trying to inflate its cloud figures include, but are not limited to, the following :

  • Lump on-premise and cloud figures together and then pretend it's all cloud
  • Give huge credit to customers moving their on-premise license value to the cloud and consider it as booked cloud sales
  • Give a cloud product for free and then extrapolate its sales value to other modules
  • Sell a cloud subscription for a pilot population but book it as if it were for the whole company headcount.
Of course, Oracle immediately fired the whistleblower claiming she was being terminated for low performance. Yeah, right! Ms. Blackburn went to court, Oracle stood its ground saying it had done nothing wrong until last week it capitulated by offering an out-of court settlement. As we all know, nobody offers a settlement unless they have done something wrong. Oracle hoped to put behind it the embarrassing scandal and avoid more damaging revelations to come forward.

What does this mean for you?

As a customer, you need to get a sense of how serious an offering is, what its long-term prospects are and how likely that a sizable customer base will ensure that continuing investment in the platform is assured. Most of the clients I work with and who include Oracle Fusion in the evaluation, end up not shortlisting it for various reasons including fuzzy economics and product strategy. 

As an employee/candidate, especially from the sales function, you need guarantees that your employer will not fiddle sales figures with the aim to shortchange you. Interestingly, the same week that it was confirmed that Oracle indeed forges its cloud sales figures (last week), the company was on the receiving end of a $150 million class-action lawsuit by sales employees complaining about the company's efforts to avoid paying them their commissions.

Finally, as an investor you want to ensure that your investment dollars are well used and that you are not throwing good money after bad*.  Interestingly, too, when the whistleblower revealed Oracle's accounting shenanigans last June, a group of investors launched another lawsuit against Oracle. And for the past (rolling) year, as the below graph shows, Oracle's stock has been languishing whereas its pure, native cloud competitors' has shot up by 40 to 50%. 

A tale of two vendor types: native and adopted cloud

In summary, we  can see that Oracle's desperate behavior, far from helping it, is making matters worse: customers are not joining in droves, cloud sales remain stubbornly a tiny fraction of its overall revenue, in spite of all the figure massaging, and the stock price evolution reflects that situation. Until and  unless Oracle makes some serious changes to its product strategy/sales approach, and culture, it is no rocket science to see what the end game is likely to be: increasing irrelevance. 

Losing steam

*The blogger's clients include not only end-user organizations evaluating/selecting/ implementing/expanding new HRIS systems, but also investors requesting analysis as to HR system vendors' market potential.

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