Q&A: Oracle's President Charles Phillips

Jul 27, 2007 (08:07 PM EDT)

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One of the most influential people in the software industry these days, Phillips is a hard man to pin down, due to the demands of a hectic travel schedule meeting with customers, startups, and potential acquisition candidates. Editor-at-large Mary Hayes Weier got him to sit still long enough to answer an e-mail enquiry on several facets of Oracle's acquisition strategy, the company's upcoming Fusion technology, its Web 2.0 push, and its competition with archrival SAP.

InformationWeek: As a result of Oracle's acquisition strategy, you've helped turn the company into a Wall Street darling and greatly improved its market cap. But is it good for customers?

Phillips: Customers now recognize that Oracle acquiring a product is a very good thing for them. The product will be quickly enhanced and tested more thoroughly, supported globally, and integrated into the Oracle stack. Our strategy is consistent with the decisions customers are already making: They want fewer software suppliers and more accountability, more standardization and pre-integration, and less complexity. We are removing the complexity from their environments by taking responsibility for integration, certification, and testing across all these products. We can do it once instead of each customer doing this on their own.

Our renewals on support agreements reached an all-time high last quarter. We have to earn the renewals each month, and customers generally don't spend money with vendors that aren't providing value. Our customer satisfaction ratings are also at an all-time high. We've shipped more updates to the products we've acquired than anyone anticipated. Call any of our user groups and they'll register their satisfaction on the product improvements. We've improved the quality, broadened the language support, integrated the products where appropriate, expanded support to more countries with more localizations, and updated the underlying tech stack with modern middleware. We've done what we said we would do, and customers are rewarding us for providing value.

InformationWeek: Oracle can't possibly replace the majority of SAP ERP deployments since companies have gone through so much time and expense putting them in place. So what exactly is Oracle's endgame in business software?

Phillips: We've been trying to educate the press and analysts that ERP is but one component of the enterprise applications market. It's the one people know the best, but things are changing and that's an opportunity for us. We're going well beyond ERP to CRM where we are the leader, and the extremely large opportunity for industry applications.

The industry applications are line-of-business applications such as communications billing, utility billing, core banking, and retail merchandising. These applications are a higher value-add than a general ledger and drive the core business of our customers. We're selling them into SAP accounts because SAP only has administrative applications and lacks the expertise in these industries. The person who builds a good general ledger isn't the person you want building a billing engine for telcos. We've found that these industry applications are so strategic that customers will often give us the back-office administrative applications if we're providing the line-of-business applications.

In other cases, we simply surround SAP's general ledger with best-of-breed functionality in areas where SAP is weak. A very common scenario is the SAP GL surrounded by Siebel CRM, PeopleSoft HR, G-Log for transportation management, Hyperion for consolidation of those GLs, and Demantra for demand planning -- all sitting on Oracle Fusion middleware and the Oracle Grid. Many SAP customers also use Agile and Siebel CRM On Demand.

So we make sure we integrate well with SAP using standard technologies such as BPEL and our Application Integration Architecture, which supports a common object model across all applications. In this scenario, the customer simply decides they are a two-vendor applications shop: SAP for GL and Oracle for everything else. They can continue to run the GL but get world-class functionality, standard integration via our middleware suite, which most of them are already using, and support for all these other applications from the largest enterprise software company.

So the answer is that the applications market is changing. Customers spend more on custom line-of-business applications than they spend on ERP. We're aggressively pursuing the rest of the market that SAP seems to be ignoring, and we're betting that more customers will buy these processes off the shelf as their legacy applications age. Meanwhile, we'll let SAP add more complexity to their general ledger.

InformationWeek: Some analysts state matter-of-factly that there will be no super-set of Fusion applications within the next few years; that Oracle has changed its strategy here and will instead focus on a small set of Fusion applications and integration with the other software apps. Has there been a shift in strategy?

Phillips: We certainly recognize the tremendous value and brand loyalty associated with JD Edwards, PeopleSoft, Siebel, and Oracle EBS, and we plan to aggressively enhance those products for many years to come. We could have communicated that more clearly on day one, but now I think people understand what we're doing and they're responding well.

We've never said that every single feature in every single application would end up in Fusion Applications. We said we'd use our existing applications as a blue print to determine what represents the "best of " features, and we'd concentrate on those in Fusion Applications. But Fusion Applications will simply be an additional choice along with all of our other applications. The object model in AIA is the same one that will be used in Fusion Applications, which is a logical design, so it will make co-existence and upgrades easier for those customers that choose to go that route. But many will stay with PeopleSoft, Oracle EBS, Siebel, and JD Edwards, and that's fine with us. All these products will continue to have dedicated development teams that deliver enhancements based on conversations with our customers.

InformationWeek: You're asking customers to achieve innovation by integrating applications using Application Integration Architecture and Fusion at a time when many companies are attracted to simpler, easier answers to software and IT, such as hosted software. Doesn't that put Oracle at risk of being perceived as moving in a different direction than the Web 2.0 approaches to innovation?

Phillips: We were an original on-demand pioneer. We've been at this for nine years, and the current crop of press analysts don't remember how much time we spent educating the market on why on-demand was so important to the future of software and for customers in general. That is, of course, a separate discussion from Web 2.0, which we're also doing, but you can do one without the other. We have over 2 million subscribers to our on-demand service, and it's posting strong subscription growth.

Oracle is in the great position of not having to force customers to on-demand or on-premise. Enterprise customers are complex and have different needs and constraints. We understand what they're dealing with. Some will go all on-demand, some will stay with on-premise, and some large percentage will do both. We're the only company that accommodates all scenarios with proven, pre-integrated products. I'd also invite you to use release 14 of our CRM on-demand service, which is a fully Web 2.0 mashup, collaborative environment built using Oracle JDeveloper (the same IDE we're using to develop Fusion), which is turning out to be a major differentiator against the competition. We plan to be the largest on-demand company in the world, period. That's a lot easier to do if you're already providing customers their key ERP, CRM, and industry applications, as well as their technology infrastructure.

InformationWeek: Some CIOs complain communication breaks down after an Oracle acquisition. How would you convince them Oracle's strategy is in their long-term interests?

Phillips: Most of our customers see the same sales rep post-acquisition because we simply fold in a specialized salesforce and tell them to keep doing what they've been doing. We've had very little turnover in the field as a result, and we've become the employer of choice in software. We maintain the continuity so we don't break relationships. The results over three years suggest we're connecting well with customers, very well. As time has gone on, customers are not only understanding what we're doing but encouraging us. They continue to suggest acquisition ideas for us, and I routinely get calls the day of acquisition congratulating us [for] helping them to further simplify their architecture. So opinions have changed.

We do have various experts by product in the field. Customers have complex problems, and they need a functional expert to solve the problem at hand. We do not field the traditional generic account rep who knows his golf game better than the product. We want well-trained experts that can map our products to customer needs and help them solve problems.

Most of our customers also make acquisitions, and they're not only comfortable with our strategy but very interested in how we've executed so well. We routinely get asked by senior executives to discuss our acquisition methodology. Many of them believe we can better understand what they're going through as a result of our acquisitions. It has been a tremendous advantage for us to bring in proven innovation into Oracle quickly and solve customer problems. If we can bring them great technology instantly and then add value around it, they see that as a good thing.

At the same time, we continue to invest heavily in development to enhance what we have. The acquisitions are nothing but proven research and development moved under the Oracle umbrella, so our development budget is actually much larger that it appears, in a sense. Lastly, almost every interesting startup wants us to know what they're doing because we're the likely exit strategy given the tough IPO market. As a result, we get to see everything, and customers benefit from that.

InformationWeek: Is there a point when the aggressive acquisition strategy must end, due to integration overload or just the physical difficulty of managing it all?

Phillips: We have a very well-developed process, and it's pretty efficient. We have more capacity for acquisitions because we don't take very long to get them integrated, and in the software industry, that's a unique skill set to Oracle. We innovate in many areas, including around our business model itself. We aren't afraid to do something different because that's how you change the game. By now, our customers are telling us that it all makes sense, even if they didn't see it four years ago. We don't get these types of questions anymore because we have delivered.

InformationWeek: As a top Wall Street analyst, what would have scared you most about Oracle's acquisition binge?

Phillips: The stock is up 41% over the last 12 months. That usually assuages fears on Wall Street.

InformationWeek: What's the hard evidence that the PeopleSoft and Siebel acquisitions have been successful?

Phillips: The hard evidence is in our SEC filings. Our financial results speak for themselves. We described a five-year plan to our investors, which was to grow 20% a year on average with this strategy. We've exceeded that plan handily. That wouldn't be possible if our major acquisitions hadn't worked. Our customer satisfaction ratings and renewals are at an all-time high for both product families. The evidence is so overwhelming that I'm surprised the question is still being asked at this late date. I'm going to have to provide you guys with a list of new questions to ask.

InformationWeek: Do you view Oracle as a pioneer in overall software industry consolidation? Are you showing the rest of the industry the future?

Phillips: There's no question that we're changing the game. We took some arrows early on because that's what happens when you do something unconventional. But I think customers have benefited from what we've done, and they're encouraging us to do more, and that's always the bottom line.

InformationWeek: Is this acquisition strategy Larry Ellison's vision that you were tapped to carry out, or is this your vision that you convinced Larry to support?

Phillips: This has been a team effort. We all play a role and make each other smarter. It's about winning.

InformationWeek: SAP is planning something called A1S, an on-demand service for small and midsize companies. What's Oracle's position on software as a service (SaaS) and its response to A1S?

Phillips: They're nine years behind us on SaaS, and they don't know what they don't know. We have everything they're trying to build in SaaS. This will divert their resources and focus from their core product, mySap, while they walk up the learning curve. They now have at least four code bases: A1S, All in One, BusinessOne, and mySAP. And they still have to maintain R/3. By our count, they're using seven different development tools and five data models within mySap alone. In fact, given that many of the product groups in mySAP have separate schemas, separate installation processes, and significant integration gaps, I'd argue they have different product lines even under the mySAP umbrella, which can happen if you build a monster with 270 million lines of code. It has a life of its own and represents the very definition of complexity. That's why SAP had to start over for the small-business market.

So we both have multiple product lines, but we have critical mass on all of ours and a standard integration platform, BPEL orchestration layer, and object model -- all in AIA -- across all of our products. SAP does not. In fact, there are more SAP customers using Oracle Fusion middleware to integrate SAP applications than those using Netweaver. Netweaver appears to be directionless, as their Palo Alto people head for the exits with all the internal struggles with Waldorf.

InformationWeek: How will you keep Oracle database competitive with the rising threat from Microsoft?

Phillips: This question has been asked for the last five years, during which time we've expanded our database market share, delivered the only enterprise grid computing platform that works, and innovated with an entire family of options around the database for security, partioning, and performance. At the same time, we've gone down market and made our products much easier to use and install. We have cheaper entry-level pricing than Microsoft, and we also have a free version, so you can't get much cheaper than that.

The key change over the last few years is that we've added Ingram Micro, Tech Data, CDW, Arrow, and Dell as distributors. We didn't have the low-end distribution in the past. But with the packaging and pricing changes, those distributors are asking for our product because our brand name has grown so strong. Plus, they all need an answer for Linux, which is growing on the low end, and we have an 80% share on the Linux platform and built the clustered file system in Linux.

They also need an alternative to Microsoft, and it's all upside for us. We run well on Linux and Windows so customers, distributors, and resellers now have a choice. Our low-end database business has been exploding as a result. Our numbers are real sales and not allocated revenue from client access licenses. We now have a dedicated SMB business unit led by Tony Kender, focusing on this market. Dell is bundling our database pre-installed on servers with other hardware partners signing up shortly.

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Oracle's Secret Weapon: Charles Phillips