The Tough World of Enterprise Applications

At an analyst day event in January 2005, Oracle CEO Larry Ellison sent a stern warning to rival SAP.

It was just a month after Oracle’s controversial takeover of PeopleSoft, a move that kicked off a two-year-plus buying spree that has put the Redwood Shores, Calif., software maker into the middle of the highly competitive enterprise application market. In re–sponse to the PeopleSoft deal, SAP was in the process of buying TomorrowNow, a third-party-support company designed to help SAP make inroads into Oracle’s customer base.

Ellison warned SAP about not stepping over the line from support into copyright issues. “SAP has every right to provide support for PeopleSoft applications as long as they don’t violate our intellectual and contractual property rights,” Ellison said in measured tones. “It might make it awkward for them. That’s our intellectual property, and they should be cautious.”

Two years later, Oracle filed suit against SAP, saying the Walldorf, Germany, applications vendor, through its TomorrowNow subsidiary, had inappropriately downloaded Oracle files through its work supporting Oracle customers. After months of denials, SAP CEO Henning Kagermann admitted July 3 that violations occurred.

To read more about SAP’s admission of wrongdoing, click here.

SAP’s admission was the latest event in what has become an increasingly bitter competition with Oracle for dominance in the enterprise application space. The company’s admission of wrongdoing was its first formal response to the lawsuit filed by Oracle March 22 that claims corporate theft on a grand scale, with more than 150 allegations against SAP that include illegal downloading by Tomorrow-Now of Oracle’s support documentation and other IP.

Oracle amended the suit in June to include additional charges of patent infringement and breach of contract.

In past responses, Kagermann said SAP would vigorously defend itself against Oracle’s claims. However, that changed when the company discovered that employees at TomorrowNow had indeed downloaded more information than the company had rightful access to through the standard practice of supporting Oracle customers.

Kagermann also said the Department of Justice has requested documents from SAP and Tomorrow-Now, an indication that U.S. investigators could get involved in the suit and possibly press criminal charges against SAP and its subsidiary. Oracle said in a statement that it would cooperate with the DOJ.

With SAP’s admission and the DOJ’s involvement, a key question will be the impact this will have on customer confidence in SAP and in its burgeoning third-party-support practice-—which, with its deeply discounted prices, could have an im–pact on both Oracle’s and SAP’s revenues. At the same time, Oracle risks harming itself by exposing competitive tactics that could shed a bad light on itself as well as SAP.

Ovum analyst David Mitchell said in a July 3 research note that irrespective of how the legal wrangling turns out, the real battle will come down to how SAP and Oracle public relations representatives handle the spin on this suit. The PR arena, Mitchell said, is where this battle will be won or lost.

“SAP’s Henning Kagermann is taking a stance very similar to that taken by [Hewlett-Packard President and CEO] Mark Hurd [last year] when it ex–perienced difficulties concerning inappropriate corporate behavior, being quoted as saying ‘even a single inappropriate download is unacceptable’ and taking action to strengthen controls at TomorrowNow,” Mitchell said. “This is a sensible and en–tirely appropriate public relations response and exhibits a proper recognition of the potential impact on both SAP and Oracle.”

Mitchell said Oracle is taking a strong PR perspective, “avoiding the temptation to enter into hand-wringing righteous indignation.”

Oracle’s suit has its roots in the increasingly bitter battle for enterprise dominance, one that started with Oracle’s hostile takeover of PeopleSoft (the No. 2 competitor behind SAP, a spot that Oracle now holds). SAP acquired Tomorrow-Now, which provides third-party support for Oracle’s acquired assets from People-Soft, JD Edwards and Siebel Systems–—at about 50 cents on the dollar.

TomorrowNow’s relatively cheap support is a key piece of SAP’s Safe Passage program, designed to lure Oracle customers to SAP. Oracle has its own strategy, dubbed Surround SAP. Oracle has spent billions of dollars to acquire more than 30 companies over the past two years in hopes of knocking SAP out of the top spot in the business applications market.

While SAP presents a more amicable front—Oracle is by any measure more outwardly brutal toward other companies in its competitive methods—both companies have been ruthless in their tactics to win business away from each other. During Oracle’s last brush with the DOJ—which tried unsuccessfully to block Oracle’s purchase of People-Soft—it was revealed that both SAP and Oracle took drastic measures to discount deals and win contracts. Similar information can surface if the current case goes to trial, and that’s data neither SAP nor Oracle wants its customers to be privy to.

But Oracle is taking a different tack with SAP. In a June 1 amendment to its suit, Oracle added the allegations of copyright infringement and breach of contract. Buried in the amended claim are allegations that SAP not only illegally downloaded documents but also sold Oracle’s IP and profited from the practice.

In two July 3 press conferences, Kagermann said that most of Oracle’s documents were downloaded properly and that SAP does not have access to the wrongfully downloaded documents or any Oracle support documentation because Tomorrow-Now’s data is strictly confined behind a firewall. He also said that SAP had proper downloading procedures in place, which were not followed, and that SAP is taking corrective actions to ensure the problem doesn’t occur again.

Kagermann appointed SAP America Chief Operating Officer Mark White as TomorrowNow’s executive chairman charged with managing operations and a compliance program at the subsidiary. TomorrowNow CEO Andrew Nelson will report to White. Kagermann hinted that White may fire the people who downloaded the documents in question. Business at the subsidiary will continue as usual, he said.

“Third-party-support providers like Tomorrow-Now depend on their customers permitting the service provider access to their support documents, to provide support for those applications,” Kagermann said. “Even Oracle admits to the appropriateness of this practice. But even a single inappropriate download is unacceptable from my perspective.”

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