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SaaS ERP company NetSuite is the latest in a long line of Oracle acquisitions aimed at transforming the legacy software giant into a leading cloud player. We read the runes with Mavenlink CEO Ray Grainger.
When Oracle announced that it was buying cloud ERP company NetSuite last month for $9.3 billion, few observers expressed great surprise — for one thing, Oracle's founder Larry Ellison provided the initial backing for NetSuite back in 1998 and held over 40 percent of its shares at the time of the acquisition.
However, there's plenty to chew over with this latest in a long line of Oracle acquisitions, as the database giant seeks to pivot from being a supplier of traditional on-premises software to a key player in the cloud computing market, alongside rivals such as Salesforce, SAP and Microsoft.
Here's Oracle's recent acquisition record, which includes plenty of cloud companies and shows that the NetSuite deal is the biggest in the last few years by some distance:
|Company||Date||Business||Price ($ million)|
|NetSuite||Jul 2016||cloud-based Enterprise Resource Planning (ERP) software||$9,300|
|Opower||May 2016||cloud-based customer engagement and energy efficiency services for utilities||$532|
|Crosswise||Apr 2016||machine-learning based cross-device data||$50|
|Textura||Apr 2016||cloud-based construction contracts and payment management services||$663|
|Ravello Systems||Feb 2016||cloud application hypervisor provider||$500|
|AddThis||Jan 2016||publisher personalization, audience insight and activation tools||$100-$200|
|StackEngine||Dec 2015||Docker container management and automation||n/a|
|Maxymiser||Aug 2015||cloud-based software that enables marketers to test, target and personalize what a customer sees on a Web page or app||n/a|
|CloudMonkey||Aug 2015||mobile application testing tools||n/a|
|Datalogix||Dec 2014||data-driven marketing to inform and measure cross-channel digital marketing||$1,200|
|Front Porch Digital||Sep 2014||cloud-based and on-premises content storage management solutions||n/a|
|TOA Technologies||Jul 2014||cloud-based field service solutions||n/a|
|LiveLOOK||Jun 2014||cloud-based, real-time visual collaboration technology for co-browsing and screen sharing||n/a|
|MICROS Systems||Jun 2014||integrated software and hardware solutions to the Hospitality and Retail industries||$5,300|
|GreenBytes||May 2014||ZFS technology (deduplication, replication and virtualization)||n/a|
|Corente||Mar 2014||software-defined networking (SDN) technology for wide area networks (WAN)||n/a|
|BlueKai||Feb 2014||cloud-based big data platform for marketing campaign personalization||$400|
|Responsys||Dec 2013||enterprise-scale cloud-based business to consumer (B2C) marketing software||$1,500|
|Nirvanix||Dec 2013||cloud storage services||n/a|
|Bitzer Mobile||Nov 2013||mobile application management solutions||n/a|
|BigMachines||Oct 2013||cloud-based Configure, Price and Quote (CPQ) solutions||$400|
|Compendium||Oct 2013||cloud-based content marketing solutions||n/a|
|Tekelec||Mar 2013||network signalling, policy control, and subscriber data management solutions for communications networks||n/a|
|Nimbula||Mar 2013||private cloud infrastructure management software||n/a|
|Acme Packet||Feb 2013||session border control technology for service providers and enterprises||$1,700|
|Eloqua||Dec 2012||cloud-based marketing automation and revenue performance management software||$871|
|DataRaker||Dec 2012||cloud-based analytics platform for electric, gas and water utilities||n/a|
|Instantis||Nov 2012||cloud-based and on-premise project portfolio management (PPM) solutions||n/a|
|SelectMinds||Sep 2012||cloud-based social talent sourcing and alumni management applications||n/a|
|Involver||Jul 2012||SML-based (Social Markup Language) social media development platform||n/a|
|Skire||Jul 2012||cloud-based and on-premises capital program management and facilities management applications||n/a|
|Xsigo Systems||Jul 2012||network virtualization technology that simplifies cloud infrastructure and operations||n/a|
|Collective Intellect||Jun 2012||cloud-based social intelligence solutions||n/a|
|Vitrue||May 2012||cloud-based social marketing and engagement platform||$300|
|ClearTrial||Mar 2012||cloud-based Clinical Trial Operations and analytics products||n/a|
|Taleo||Feb 2012||cloud-based talent management software||$1,900|
The Mavenlink perspective
To get an overview of Oracle's ongoing refocus on the cloud, and its prospects in the ERP market in particular, we talked to Ray Grainger, CEO and co-founder of Mavenlink, a privately-held SaaS company specialising in software and services for businesses that work with distributed teams, contractors and clients.
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Grainger has experience of Oracle, having been (pre-Mavenlink) executive VP of professional services and strategic alliances at InQuira, a provider of knowledge-management software ("Siri for the web" as Grainger put it), which was acquired by Oracle in July 2011.
So how does Grainger feel that InQuira has fared in its post-acquisition life as part of Oracle's Knowledge Management solution?
"My own opinion on it is that it's weak," he says. "It's such a powerful tool, and that's just the dilemma of what happens in acquisitions sometimes when you have so many different products that a salesperson can sell. Oracle bought the two leading products in this space: one was a company called Endeca and the other was InQuira. And so they took the two large players off the market, folded them in, and I just think it's taken much longer to take these brilliant technologies and really fold them into a meaningful offering."
And how does Grainger see Oracle's acquisition strategy playing out more generally?
"One of the many things that Oracle has going for it is a very aggressive and exceptional global sales force, and a lot of that leads to its success. But we [Mavenlink] recently competed against Oracle for a key client — a large professional services company that uses Oracle on-premises [ R12 Financials] — and we beat Oracle's products because they've grown, in our space, through acquisition and it's a mish-mash of technologies that really haven't been brought together in a unified way, tied into the on-premises Financials."
"So you've had this 'hub-and-spoke' approach — a kind of thinning-out of on-premises ERP," Grainger continues. "You take this giant ERP and start acquiring cloud companies around the edges of it — very focused point solutions — and integrate them, so you end up with an on-premise GL [General Ledger] and a satellite system of cloud apps around it."
The NetSuite deal
"The NetSuite thing is interesting," continues Grainger. "Does it allow Oracle to move more quickly to migrate mid-market companies off of on-premises onto a cloud ERP, and begin the process, as they continue to grow NetSuite's capabilities, of migrating their larger customers over the next five-plus years? That's one option. The other option is, they truly now have a mid-market offering, and they now have a global sales force to go distribute that offering."
"If you look at what Oracle said, you have [Oracle CEO] Mark Hurd saying that the NetSuite applications will be maintained 'forever'. If you're saying that, you're saying 'We've got an offering for mid-market companies, and now we can distribute it globally'. So both answers might be correct: continue to grow the product to make it solid in all areas, and then have a migration path for large companies over time to a fully multi-tenant cloud-based system."
"It was a brilliant acquisition, in my opinion, and something that everybody's been anticipating," says Grainger. However, he adds that the success of the NetSuite acquisition will be down to the quality of Oracle's execution.
"They've immediately got a mid-market solution that is strong, going on a billion dollars of revenue — hard to achieve in the SaaS world — and now they've got a global distribution capability for it: so go for it, increase that to two, three billion dollars-plus in revenue, spend tens of millions making it ready for their enterprise customers and then they've got a clean and clear migration path for those customers. Oracle may say, 'well, Fusion is that direction' — who knows? But I think it gives them multiple options to go and win long-term in the SaaS space. In my opinion, they've one-upped SAP."
Taming the FrankenCloud
Talk of "multiple options" brings to mind a common criticism of Oracle's extensive but unfocused cloud portfolio, which is often summarised as a 'FrankenCloud'. So, is a spot of clarification in order?
"They are going to have to clarify it over time, because there is a FrankenCloud going on out there," Grainger agrees.
"Having come out of the systems integration world [with Accenture, where Grainger worked for 17 years before joining inQuira], when we would do software selections in the nineties, when client-server was emerging, we would look at the prioritisation in a business from functional needs to maintenance needs — from vendor maintenance to integration maintenance. The thing was, if you could get 80 percent of the integration on a broad sweep versus point solutions, do it, because the integration challenge was so expensive and difficult to maintain that most companies couldn't afford to do that — and of course, it was great business for Accenture."
"With the cloud it's very different," Grainger explains. "The integration responsibility is being borne more and more by the cloud vendors, where you essentially have one integration point to somebody else's multi-tenant SaaS. Take Mavenlink, for example, where we would integrate with, let's say, Salesforce on the CRM side and with any of the ERP players into their General Ledger: we maintain that integration once, and the vendors do it with open APIs and robust integration architecture. This allows companies today to have more applications — a more heterogeneous portfolio of applications than they would have desired in the past."
"So when people talk about 'FrankenCloud', they're going to have a heterogeneous portfolio up to a point, and it's really trying to define what is the optimal number of applications that gives me above the 80/20 — what gets me to 95/5," says Grainger. "Yes, I've got multiple applications, but the vendors are doing the integration, I don't have to worry about it, and I get the best solutions on the market."
"I think Oracle has an opportunity to clarify that message: they own integration infrastructure technologies, so they can make this easier and less of a burden on their clients, and I think they have a story that plays to both the markets that I mentioned [enterprise and mid-market]."
Watch this M&A space
Turning to SaaS ERP in general, how has Oracle's NetSuite acquisition changed the market dynamics with companies like SAP and Microsoft, and what's likely to happen next?
"I think they're all on notice," says Grainger, "because if Oracle executes well, it was a brilliant acquisition and something that Larry Ellison believed 15 or 16 years ago would probably end up being the case. Dave Duffield [co-founder of both PeopleSoft and Workday] has also had great success growing ERP companies under different architectures, but he and Larry Ellison have come at it from different approaches — Duffield with an HR-centric approach, from the employee out, Ellison from the General Ledger out. My experience is, it's from the GL out, so if I'm one of the other providers, I'm looking at, who has the ability to round out my solution with the financial portion and do a complete complement? There aren't very many options."
"You've got Sage Live, that could be a really interesting play. Microsoft is another really interesting case: I'm seeing Microsoft Dynamics a lot — they've spent a lot of money on the cloud, they do have a core GL now in the cloud, and I think that they can crush it. Then you've got, can Microsoft buy Salesforce? They're the only ones that really could."
So can we expect further merger and acquisition activity in the ERP/CRM space?
"I think you can expect it, and I think it's going to be astonishing, the size of some of these acquisitions," Grainger predicts. "I look at Microsoft, with their acquisition of LinkedIn: this idea — in fact it's part of our core thesis at Mavenlink — of combining a social network with a business SaaS product. Everybody's doing business in these products in a single database, and they all have their personnel in LinkedIn. Imagine the kinds of things you can do with a SaaS application where all the personnel are already in your database and you acquire another social network where they are in that database too. That's very powerful for Microsoft to meld those two — and imagine if they acquired Salesforce. That would be a game changer — not just in the SaaS market, but business software in general."
So, if I'm a CIO, are my choices likely to become easier in the light of these current and potential moves by the big software companies, or am I going to be confused about where to go in order to achieve digital transformation via the cloud?
"I still think there's tremendous confusion out there, because the choices are kind of tough — especially for small and medium-sized companies," says Grainger. "I can go Microsoft Dynamics, I can go NetSuite, Intact plays at the next level down, and then you've got Sage, which I think will be the next interesting one. If Oracle executes the NetSuite acquisition poorly, or if they get somehow confused in the early days of that acquisition, that's a tremendous opportunity for Sage Live, which is built on Force.com and can really ride a 'Salesforce wave' and leverage the AppExchange and other things to grow their core financial solution in the cloud, and maybe take some of that market share."
Turning to NetSuite itself, what are the post-acquisition prospects in terms of changes to products for customers, new pricing models, employee layoffs? "All of that is inevitable in some form," says Grainger. "You can expect there to be the typical percentage of people leaving the company — not wanting to work for Oracle, not liking the culture...you can expect that."
And how quickly can NetSuite turn a profit under Oracle's stewardship (in 2015, NetSuite generated $741m revenue but lost $125m)?
"Probably not very quickly," says Grainger. "Part of that is just a function of pure-play SaaS revenue recognition — what I haven't looked at is NetSuite's free cash flow, but that would really be the measure of a healthy SaaS company versus GAAP profitability. That said, I would expect NetSuite's operating margins to improve, given the synergies around operating expenses and leveraging a global salesforce."
What of Oracle itself — what's the likely timescale for its pivot from a primarily on-premises to a primarily cloud-based software company?
"This is a real stab, and it may sound like a long time, but I'm going to say a decade." says Grainger. "That's because I think it's a long-term endeavour for a public company: changing your entire revenue recognition model from on-premises perpetual-licensing — where you recognise all of that revenue in the year you make the sale — to a deferred revenue SaaS model is kind of a shock to the system, and a combination of these things will make it take a while."
Grainger has a final thought on the ERP market: "If I'm SAP, I'm stuck, because you've got NetSuite, which has been doing this two-tier ERP thing, eating into SAP's market from the bottom up — like a shark coming up under somebody's surfboard — and I'm saying 'Where's my core cloud-based GL, built from the centre out, where am I going?' So I think SAP is going to be challenged: who do they buy to get there fast? That's the uncertainty, to me: what SAP is going to do."