Is Oracle 11i online a winner?

Oracle wants you to go online to use its applications. Is this really a win-win for the company and IT departments? Sonya Rabbitte has been hanging out with the company's bigwigs to find some answers.

Consider this: IT directors willing to give up control of their budgets are few and far between. Oracle doesn't need a consultant to tell it that - its own customer figures prove the point.

Now digest this: just 10 EMEA customers have signed up to an Oracle application service provider (ASP) service since its launch in Europe last year.

Now try marrying these two things together. Unveiling details of a new strategy in front of a 6,000 strong crowd at this month's AppsWorld in Amsterdam, Oracle CEO Larry Ellison outlined what sounds like a very simple deal: give clever people Oracle your IT budgets, let them host your network and they'll guarantee you five per cent savings a year.

It is so simple Oracle is confident half of its customers will migrate to the ASP service over the next five years.

This is how it works: a customer hands over its IT budget to Oracle, specifies its IT requirements, signs a five year contract and then lets the vendor take care of the rest.

In return for this considerable investment of trust, Oracle will provide customers with an upgrade to 11i software, hardware, maintenance, technical support and consulting. And of course it promises a five per cent year-on-year reduction in IT expenditure over the five-year duration of the contract.

Sounds foolproof - only customers don't seem to agree. Out of Oracle's 12,000 customers worldwide, 1,100 are live on its 11i set of applications but just 150 are using the ASP model.

In EMEA 1,200 customers are upgrading to 11i - that's about one third of Oracle's total customer base for the region - and 380 are already live. Yet just 10 European customers have opted for the ASP model.

Oracle's online offering has been available in the US for two years now and about nine months in EMEA. It may have been dressed up, fleshed out and presented as something new and exciting at AppsWorld but it's still a two-year-old strategy that hasn't quite worked.

Speaking at the recent conference, Sergio Giacoletto, Oracle executive VP EMEA, explained why he believes the project hasn't got off the ground.

"2001 was a transition year in IT. Many examples of companies using ASPs came from dot-coms. [They were] the first wave of adoption. And a lot of them are gone now," he said.

A lot of ASPs have also gone away, which leaves an empty playing field for Oracle. On this note of optimism, Giacoletto said 2002 will go down as the year when companies realise internet applications are a must.

And why wouldn't they. Another Oracle exec added: "There are no business or technical reasons why every deal is not an online deal. It is an aggressive target, but we feel we've dealt with customer fears and objections."

Ovum analyst Katy Ring gives Oracle points for spotting the market opportunity ahead of competitors such as PeopleSoft, SAP and Siebel. But she remains unconvinced Oracle will meet what she calls "aggressive" targets in an outsourcing market dominated by non-proprietary giants such as EDS and IBM.

"Oracle seems be moving into territory dominated by IBM and EDS and I'm not terribly convinced by [the move]. Very few customers will take up the wall-to-wall deal and most would prefer to go for a neutral vendor who supports non-Oracle applications," she said.

To ensure eventual success, Oracle is casting its customer net far and wide. Government bodies and SMEs are particular targets.

Oracle has already illustrated its increased interest in government accounts, with recent clinches such as the NHS and Glasgow City Council as well as government deals in Dubai and Iceland.

And the company claims 20 per cent of its 12,000 worldwide customers are SMEs, although Oracle's definition of a SME is quite loose - companies worth up to $250m.

The ASP strategy is obviously a push to accelerate customer upgrades to 11i but senior Oracle officials did admit uptake is not progressing as quickly as they would like.

AMR analyst Beth Barling backs this up, pointing out just 10 per cent of worldwide customers have actually migrated to 11i. And evidence from AMR clients in the US suggests for some the move has been a slow and tricky process.

But while national governments may understandably be reluctant to hand over billions of IT dollars to Oracle, the lure of free 11i upgrades could be a temptation for some, according to Barling, although she errs on the side of caution.

If Oracle does make its five-year target it could prove lucrative. If half of Oracle's customers - each controlling IT budgets worth between hundreds of thousands of dollars and millions of dollars - opt for the ASP model, they pay an annual service fee higher than the promised five per cent savings.

So even accounting for the annual year-on-year five per cent reduction Oracle has promised each customer, the company will still enjoy a nice, tidy and reliable revenue flow.

That's the Oracle vision for now. If it is to achieve its target of migrating 50 per cent of customers to hosted software it needs to increase the dismal take up rate of the last 18 months - by a high multiple. How worthwhile that proves to be remains to be seen.