On Monday (21 July), SAP announced what had long been expected in enterprise software circles: That its troubled subsidiary, TomorrowNow, which SAP had attempted to sell, would cease operations at the end of October and the turbulent chapter in SAP's history will officially end.
"SAP is working directly with TomorrowNow's more than 225 current customers to help them return to support from Oracle for those customers on PeopleSoft, JD Edwards or Siebel applications or to smoothly transition to new support options," noted the SAP announcement.
Or at least SAP executives hope it will end. Much damage has already been done. "This has been a major embarrassment to the SAP executive team," notes Bruce Richardson, chief research officer at AMR Research who has closely followed the SAP and TomorrowNow relationship.
However, enterprise software analysts say that even with the trouble that TomorrowNow created, the third-party maintenance market will remain strong because customer demand is growing.
SAP purchased TomorrowNow, a rising star in third-party maintenance and support for Oracle enterprise applications such as Siebel, PeopleSoft and JD Edwards, in February 2005. TomorrowNow, under the SAP umbrella, was eager to offer "safe passage" to Oracle's customers-maintenance and support for Oracle's stable of applications for half of what Oracle charged. And if those same customers decided to move to SAP's product sets at some point and time, all the better for SAP.
The acquisition was aggressive and somewhat peculiar, noted industry watchers at the time. It seemed out of character for SAP, which normally grew its products organically.
But there was also something implicitly troubling about TomorrowNow's business model for SAP: "If TomorrowNow is good for Oracle customers, why is it not good for SAP customers? Why don't you offer SAP customers something similar?" says Vinnie Mirchandani, a former Gartner analyst and founder of vendor consultancy Deal Architect.
In other words, where was the "half off" maintenance support for SAP's products?
For more than two years, TomorrowNow slowly grew its customer list under SAP's logo. But its fate was most likely sealed when, in March 2007, Oracle filed a federal lawsuit in San Francisco alleging that TomorrowNow employees had illegally accessed Oracle's proprietary software products and materials, and had downloaded those materials onto TomorrowNow's computers.
In court papers, Oracle alleged that TomorrowNow had "engaged in systematic, illegal access to-and taking from-Oracle's computerized customer support systems." And as a result, "SAP has compiled an illegal library of Oracle's copyrighted software code and other materials," the suit stated.
What has followed has been "he said, she said" legal wrangling and millions spent on attorneys' fees. In late 2007, SAP dismissed TomorrowNow CEO and cofounder Andrew Nelson, and put up a "For Sale" sign on TomorrowNow that found no buyers. "Given the pending litigation with Oracle, it makes it quite difficult for any suitors to join," says Ray Wang, a principal analyst at Forrester Research. (The most recent trial date has been set for February 2010.)
According to SAP's 2007 annual report, the TomorrowNow subsidiary had an operating loss of approximately US$35 million in 2007.
Since all that happened, many TomorrowNow customers have given their business to another third-party maintenance provider, Rimini Street, which was founded by Seth Ravin. Ravin was the other founder of TomorrowNow but left after just three months after SAP acquired it.
SAP's formal announcement that it was "winding down" TomorrowNow's operations was a mere press formality. According to Forrester's Wang, "SAP has made it clear that this would be coming." He says that Forrester clients have all seen the writing on the wall and that SAP had sent advanced communications to customers about TomorrowNow's upcoming demise.
The future of third-party paintenance
TomorrowNow's (and SAP's) legal entanglement has cast a harsh light and, possibly, a shadow on the third-party maintenance business. But according to industry analysts, Oracle v. SAP and TomorrowNow's failure is not an indictment of the business model.
"No, not at all," responds Wang. "What has happened is that customers have migrated over to Rimini Street during this time. In many ways, customers want third-party maintenance more than ever today." In fact, in May 2008, Rimini Street proudly announced at SAP's Sapphire event that it will now offer maintenance support for SAP's R/3 products.
Mirchandani maintains that "if anything, these customers should be mad at Oracle and SAP for not providing a choice in service packages and price points: Just because you buy a Porsche you are not required to buy service at their dealers. If anything Consumer Reports has shown independent garages often offer better value and service," he says. "Rimini Street has shown it can deliver regulatory updates earlier than Oracle can. Customers should have the choice, not be intimidated into going back to the auto dealer."
In addition, Mirchandani adds that vendor maintenance fees are still "grossly overpriced," and that software maintenance's 95 percent gross margins are some of the biggest "empty calories" in IT spend. "One price does not fit all in any market category," he adds, "and software vendors keep ignoring that truism for maintenance."
AMR's Richardson notes that he still sees an ulterior benefit for Oracle in continuing the legal proceedings. "It may have scared some customers into continuing to pay Oracle the 22 percent annual maintenance," he notes.
As to whether Oracle will "call off the dogs" now that SAP is shutting down TomorrowNow, Richardson believes there's more to legal rancor to come. "While the judge has urged the two parties to go to arbitration, I think Oracle is relishing playing the Christie Brinkley role of the victim," he says. "SAP would like this to go away as soon as possible. Oracle wants it to last forever."