Oracle reported their numbers on Wednesday, and the results weren’t pretty by Street standards. The company missed pretty much across the board, and in particular in Europe. Oracle blamed foreign exchange for much of their problem, but the general financial-industry consensus is that it’s deeper than that, including dragging hardware, poor execution, and perhaps a lack of an effective cloud strategy overall. One Street report said that few would doubt that Oracle will be a major cloud player. That may well be true, but many (including me) doubt what the profit implications of being a major cloud player will turn out to be.
The overwhelming majority of business IT executives and general management teams say that the reason for cloud adoption is reduced cost. OK, but if that’s true then we also have to ask how vendors and providers will end up making money on the cloud. Remember that old joke, “I’m losing money on every deal but I’m making it up in volume?” For any provider of cloud services or equipment, particularly the CFO in such a company, this is a bad joke indeed.
Business spending on IT (compute and networking) is made up of two components; what can be called “budget” spending and what can be called “project” spending. Budget spending is allocated to sustain the IT operations in place, operations that were previously justified by business improvements they supported. Project spending is allocated to reap new business benefits by adding IT features or capabilities.
Any buyer would look at this picture and come to two important conclusions. First, the smartest thing for me to do with budget spending is to reduce my budget by getting a better deal on technology. In fact, on the average, companies say they would like to see budget spending decline by about 5% year over year. Second, I need to justify my project spending carefully because it first has to meet my company targets for ROI and second it will be contributing (through modernization and replacement) to budget spending for some time forward.
CIOs and IT planners understand budget spending pretty well; it boils down to getting more bang for your buck. They generally don’t understand project spending all that well because in many cases they don’t have a good opportunity model in place. Projects are driven by benefits, and if you can’t identify opportunities to reap benefits you’ll not justify projects. That means specific benefits, with quantifiable outcomes, not catch-phrases like “agility”. Oracle’s first problem is that they have not effectively presented project-oriented benefits, so their cloud offerings tend to fall into the budget buying that’s based only on reducing cost. Oracle is the cost getting reduced.
Historically, project spending has been driven by what could be called “waves”. When computers came along and batch processing of information contributed to better management reports and operations, we had a wave. Distributed computing produced a second wave, the minicomputer and real-time applications. Personal computing produced a third wave. With each wave, the new compute paradigm was widely socialized in technical media and the essence of the value proposition for that new paradigm was quickly spread through management. Project spending ramped up, until eventually all of the new benefits were reaped. At that point, project spending declined and IT spending overall dipped relative to GDP growth. You can see this sinusoidal set of peaks and valleys for the three waves we’ve had.
The challenge of project spending today is that there is no clear fourth wave, nor IMHO is there a clear way to socialize a candidate for it. There’s no real trade media insight any more. The climate of technology today is controlled by budget spending, which you’ll recall is an area where the target is always to lower IT cost. If the cloud is important, it’s because it lowers IT costs. Same with SDN, NFV, or whatever. No new benefits, no new spending, and what you face is a period of commoditization and decline. Oracle’s second problem is that the natural direction of IT coverage in the media today, the natural focus of CIOs, is cost reduction.
But does it have to be this way? The interesting thing about past cycles is that each of them have showed about the same peak/valley relationship. The problem is that while in the past one valley was followed within a few years by the ramping to a new peak, and since 2002 we’ve had no such ramping—we’ve stayed near the historical lowest ratio of IT spending growth to GDP growth. There has been no driver to a new cycle, and because we’ve had over a decade of cost-driven IT most of the management on both the seller and buyer side have lost the charts to productivity benefits’ safe harbor. That includes Oracle.
Part of the problem is that each past productivity cycle, and likely all future cycles, are driven by a new way of supporting workers. In the past, the change was easily visualized by everyone. No computing to batch computing—easy to understand. Batch to real-time—also easy. Same with remote real time to personal computing. You can see that each of these trends seem to move computing forward in the worker production cycle—closer to the worker in a physical sense. But with personal computing we’re there at the worker. Do you go inside for the next cycle? You see the visualization problem.
I’ve grappled myself with understanding what the next cycle driver might be. Clearly it has to have something to do with work and workflow in an IT sense, because the best way to look at past cycles is really not where the computer is but how it plays in the worker’s activity. My current thinking is that the next cycle would be driven by point-of-activity empowerment. The difference would be that the worker would no longer even be going to IT, they would be taking IT with them. Thus, it’s about mobility.
Even if I’m right about mobility, though, it’s not as easy a thing to exploit. If PCs are a new productivity wave, you buy PCs. What do you buy if mobility is the next wave? Mobile phones or tablets aren’t the answer. First, users have them already—from their company or personally. Second, the application of PCs to productivity was clear. Microsoft Office or Oracle’s Creative Suite were the embodiment of PC-based productivity enhancement. What’s the brass-ring mobile app? For the first time, perhaps, our next wave is enabled by something (mobility) but is realized in a more complicated way, through a lot of changes in a lot of areas.
Sales stories based on complicated value propositions have always been difficult, and in an age where an insightful online article is about 500 words long, it’s almost impossible to guide planners through mobile-enhanced productivity changes. Oracle’s sales failure is probably more a marketing failure, because complex new stories have to be told first, broadly, and inspirationally, in the marketing channel. A salesperson will never be able to drag a buyer out of total ignorance of a benefit case into the state of good customer-hood.
It’s not that Oracle got to the cloud too late, but that they’re apparently (at the marketing and sales levels) getting to it wrong. At the root of Oracle’s problems is the fact that they’re seeing the future as a cloud transition. It’s not; it’s a mobile transition that will convert the cloud from a cost-saving-and-revenue-killing strategy to a strategy to gain new benefits and increase total IT spending. They’re not the only ones with that problem.
The cloud, mobility, and virtualization can change the world and probably will eventually. The question for companies is whether they’ll be able to navigate those changes, and the long-standing tendency to take an easy sales argument like “Saves money!” and run with it in the near term in the hope of gaining market share is hurting them. You’ve got to be committed to revolution and not contraction. True for Oracle, true for us all.
