Paging Mr. Ellison
"There has developed an almost irrational exuberance about what IT can do for you—with a lot of promises about how technology is going to improve processes, and open up the world, and make us all safe," Kelso says, echoing the stock market slam made famous by Fed chairman Alan Greenspan. "This can lead you to make decisions that are not well-grounded in the operational details of a big organization. Of course, technology ends up being more expensive. And desktop technology proves to be not as reliable as you thought."
Although Kelso places blame squarely on state bureaucrats, he acknowledges that Oracle's aggressive salesmanship contributed mightily to the problem. CEO Larry Ellison's software behemoth, Kelso says, wasn't "dealing 100 percent forthrightly" with the state during negotiations.
"When you contract with someone to help you build a system, or purchase proprietary software, there tend to be things that come along with it. You then get yourself tied to particular vendors where the cost of disengaging starts to be very large. It's a bad position to be in," he adds. "I think the government should be putting more of its weight behind open architectures. But you're still going to have this pressure. It's just something that you guard against so you don't tie yourself to one vendor until the end of time."
Because of its cutthroat approach to the California deal, Oracle's reputation suffered somewhat, too. The Financial Times called this summer a "torrid time" for Ellison. Patrick Walravens, a senior equity research analyst for Jolson Merchant Partners, told USA Today that the California situation would create a "chilling effect" for Oracle in future government transactions.
Walravens tempered his statement in an interview a few months later. "As time has passed, it looks like it had less effect than I initially suggested," he said. "Kevin Fitzgerald [the Oracle vice president who oversaw the California deal] responds to government customers that Oracle got caught in the middle of a political firefight. There's some truth to that." Oracle spokespeople say they've changed nothing about their software-sales policies, to state governments and other entities, in the wake of the California deal.
"Software companies get paid to be aggressive," adds Charles Phillips, a managing director at Morgan Stanley Dean Witter. "Asking a sales rep not to sell what he can sell is like asking a dog not to bark. That just kind of goes with the territory. And smart buyers recognize that."
Forrester's Schadler disagrees. Software companies, he says, are still at varying levels of maturity—he ranks fixtures such as IBM and SAP at the top of the list, with the relatively young Oracle toward the bottom. "This thing for Oracle is going to be culture-changing. It's not just California—it's Ohio, it's Toronto. It's not just an isolated situation, it's a cultural behavior," he says. "It will drive big shifts in their behavior over time. When the CEO of Ford or GM calls you up and says, 'Are you kidding me about all this crap?' you listen. So they're listening now to all their biggest customers."
Smaller versions of the California-Oracle problem include the city of Toronto, which is attempting to cancel a $12 million deal with Oracle for ten thousand software licenses—ten times as many as it needs, auditors have said. The contract is under city investigation. The state of Ohio, according to USA Today, criticized Oracle's estimates of cost-savings figures in recent contract talks. Oracle predicted that one Ohio agency's software spending would be $2.4 million this year; the state told the newspaper the figure is closer to $182,000.
For large entities, dealing with an established, on-the-level software company such as Oracle can be difficult enough. In these times of corporate accounting shenanigans, however, some tech departments have encountered far shadier problems. Former executives of the California software companies Quintus (now bankrupt), Unify, and Legato Systems were indicted in May for fraud and insider trading, all charged with "round-tripping," in which they loaned clients money to buy their software. They recorded these non-transactions as actual sales, falsely boosting their earnings figures.
The reported victims of indicted former Quintus chairman Alan Anderson include Ticketmaster, Sun Microsystems, AT&T, and Siemens, all of whose executives' signatures were allegedly forged on orders.
Too Much to Chew
It's enough to make a company want to wash its hands of software vendors. Or at least partially. Shortly after the near-century-old Monsanto Company spun off Solutia in 1997, the newly formed St. Louis chemical firm immediately went into cost-cutting mode to stay afloat. Solutia's information officers went through a laborious software and hardware inventory, cutting out all redundant and unnecessary pieces.
In the end, the company scaled down from 1,500 software applications to three hundred. "We were in situations where maybe of twelve or fourteen business units, two or three of them bought the same thing," says Johnnie Foster, the company's vice president and CIO. "In some cases, we had overbought licenses—and that created an opportunity [during the inventory process] to pull our software vendors in and renegotiate and rationalize."
The process wasn't popular among all the vendors. "Some companies, whose names I won't mention, will pin you to the wall and say, 'If you're going to use our stuff, you have to relicense.' We made some great relationships with some of our key vendors and, obviously, the other people were disappointed," Foster adds. "But when you're spun off and you've got $250 million worth of net equity loss and $1 billion in debt, you've got to make some decisions. I think everybody understood what our position was."
"Some people are going to be winners and some people are not," he adds. "There's nothing like being up front and honest with people about what you're doing and why you're doing it."
Had California gone through the same process in advance, state taxpayers may not have lost $41 million, and Governor Davis, a Democrat, might be cruising to an easy reelection. But as anybody who ever visited a used-car lot can tell you, being up-front and standing your ground with salespeople is easier in concept than in practice. When buying large software packages, experts suggest:
Be transparent. In the case of a government, university, public corporation, or other large public institution, remember how hard it is to keep bad decisions secret. "Big transactions are going to come under scrutiny—they're not going to be kept private. People are going to look at them," California's Kelso says. "The entity [such as the state of California] is under a fishbowl. Ultimately, there's a high risk you're going to get caught."
Exercise restraint. Know what you want and don't fall for extra packages—even if it's not your money to spend. Says Forrester's Schadler, "The salesperson doesn't want to hear that because they like to run and gun. They want to get in and get out."
Practice due diligence. Contact research companies to get better background. Demand customer references. And make sure the companies you consult aren't like Logicon, which is accused of having a conflict of interest in the California situation. "People need to realize these are complex contracts that the vendors thought a great deal about," says Selwyn Goldberg, a partner with the Palo Alto, Californiabased law firm Wilson Sonsini Goodrich & Rosati. "They need to get legal counsel involved."
Pay attention on the front end. "The parties on both sides talk in general terms about needs, functionality, platforms—the kinds of things that get people excited," says Stephen Davidson, an attorney and chairman of the intellectual property and information technology law department at Minneapolis-based Leonard, Street, and Deinard. "They do not want to spend much time on things they consider boring or mundane, like details or legal terms. More often than not, these eventual disagreements don't result from any bad faith. They stem from the fact that parties didn't have a common understanding in the beginning."
Compare prices. "Competition is the best way to ensure a fair price," advises Laurence Lubka, principal at a Pasadena law firm specializing in public and government contract law.
Don't rush. Until recently, Oracle, like many other software companies, offered clients deep discounts if they bought products toward the end of the fiscal quarter. This caused a sort of gold-rush mentality—to buy, buy, buy before a tight deadline, and perhaps cut corners by not hiring consultants, lawyers, and other experts and giving them time to scrutinize the contracts. But Oracle is phasing out such deals in favor of volume discounts.
