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Global CIO: Oracle President Phillips Says 22% Annual Fees Great For CIOs

Oracle plows all of your support fees into new products and innovation and will offer Fusion "at our cost," vows Charles Phillips.

In the brutal economic environment of 2009, few IT issues stirred the resentment of CIOs as deeply as annual maintenance and support fees. And fairly on unfairly, SAP and Oracle, as the two biggest enterprise players on the planet, bore the brunt of that resentment as many CIOs believed that their 22% maintenance fees were not being reciprocated with 22% worth of value in return.

In the eyes of those CIOs, it was all a great deal for the software companies and not such a great deal at all for their customers, many of whom felt Oracle and SAP were taking serious advantage of them during a time when those customers were at their most vulnerable and in desperate need of some flexibility.

Oracle president Charles Phillips begs to differ with that assessment—hardly a surprise. And in a recent wide-ranging discussion, Phillips ventured into what for me was uncharted territory by offering a fairly extensive explanation of Oracle's 22% annual fees and how the company uses those funds. You may agree with Phillips' explanation, and you might well consider it little more than happy-talk rationalization—but I give Phillips credit for addressing the situation head-on and trying to offer some clarity to what had become for many a very murky picture.

(To read Part 1 of our two-part interview with Phillips—"Global CIO: Oracle's Phillips Says Standardizing On Oracle Is The IT Cure"—as well as other related analyses, please check out our "Recommended Reading" list at the end of this column.)

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Part of the problem, I think, comes from the terminology itself: the specific line-item term Oracle uses on its formal financial reports is "software-license updates and product support," and that term does indeed suggest something a bit more relevant and dynamic than just "maintenance." So I was surprised to hear Phillips frequently refer to the 22% fees generically as "maintenance" while taking great pains to describe how those funds are actually funnelled into product updates and new-product development.

The bigger part is simply one of perception: Oracle's perception is that over the long term its customers are getting enormous value from their 22% annual fees, but many CIOs have the perception that they don't want or need all the updates that Oracle cranks out and that they simply should not have to pay for things they say they're not using or interested in.

"The maintenance thing is a popular topic because we do it one way and SAP does it another, but at the end of the day it's the dollar figure that counts: how much do I have to write out on the check?," Phillips said in our discussion last week. "SAP tries to maximize for the license—we'll charge less for the license, but our 22% compared to some lower number for them—it varies—but of a larger [license] number.

"You have to do the math—the market is the market and the people will do the math, and so it turns out we emphasize recurring revenue because over the long term that is what funds product development (emphasis added). That's how we get all these updates out," Phillips said.

"That's why we can have 25,000 developers, and all these releases that come out every year—we'd rather have that and focus on the product over the long term versus getting the big, $100M deal—I mean, we never get $100M deals for our applications; that's too much. Anyway, they go for the big pop and they're willing to take less maintenance revenue over time. So it's just a different approach and we've been doing it for years."

In emphasizing what Oracle does with the 22% fees, Phillips said the telephone support for "break/fix stuff is essentially free. We have to do that; that's not what we're charging for." Instead, he said, those funds—which account for more than half of Oracle's total software revenue—are plowed into the new products that many customers believe are essential to their ongoing success and competitiveness.

"But what we do have to charge for is updating the products because that's what, at the end of day, solves all the problems: if the product is there and the product does what it's supposed to do, customers are happy, and we're happy cause we've solved their business problem," Phillips said. "So we've put the resources into that: the R&D investments that we make, and you see that even in downturns we didn't lay off developers. We don't cut back.

"That's what the support stream funds—you're buying a long-term future with that product. And your support dollars make sure you get new features, enhancements, patches, platforms that you want to take advantage of—all that is wrapped up in support. The innovation, and the change, and the underlying fact that we invest in the next generation and don't charge you more for it."

That is the critical point for Phillips:

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