It’s the software industry hunt of the season. Oracle, a big ERP fish, has been stalking smaller fish PeopleSoft and J.D. Edwards (PeopleSoft’s friendly merger partner).
Oracle’s $6.3 billion hostile takeover bid for PeopleSoft—under Department of Justice review as of this writing—sounds like a summer blockbuster. But the prospects of PeopleSoft getting swallowed up gives many customers indigestion and visions of their companies’ hemorrhaging money. That’s because their software will eventually be consumed as part of the consolidation meal.
ERP is expensive enough—between $40 million and $250 million for a typical Fortune 500 company, according to AMR Research—without having to change your software and start over because your vendor got eaten.
When Oracle CEO Larry Ellison announced last June that he was launching a hostile bid for PeopleSoft (which had just announced that it was acquiring J.D. Edwards), he said customers of those vendors would move over to Oracle software. Ellison softened that stance when PeopleSoft and J.D. Edwards customers started screaming, pledging that Oracle would continue to support current versions of PeopleSoft and J.D. Edwards.
But that’s cold comfort to customers of the two smaller vendors, who know that even if Ellison keeps his word, future development on their software will cease—it simply won’t make business sense for Oracle to support three different software development cycles—and they will be stuck with multimillion-dollar legacy systems. In a survey on CIO’s Best Practice Exchange, 46 percent of 181 CIOs surveyed said they are worried about soaring prices as a result of market consolidation should an Oracle-PeopleSoft merger go ahead (see “Change Is Hard,” Page 22).
“We already went through the process of evaluating Oracle, SAP, J.D. Edwards and PeopleSoft, and we chose PeopleSoft,” says Wynne Powell, president and COO of London Drugs, a chain of 59 pharmacy stores in Canada. “If we have to change, it won’t be for business reasons, it will be because one competitor is trying to crush another.”
Powell estimates that it would cost his 7,500-employee company $25 million to rip out its PeopleSoft system and replace it. And he says he bought PeopleSoft because it has some functions that the other vendors’ software didn’t. “Unless Oracle adds some capabilities to its software, I’m not sure we could move over even if we wanted to,” he says.
Of course, you can’t blame Oracle for wanting to gobble up its competitors. That’s business. But the degree of angst among users of the gobblees’ software illustrates just how dependent ERP customers have become on their ERP vendors. And it’s not just software. Rip out the software, and you can cripple essential business processes. That’s because those processes got hobbled temporarily the first time companies installed their ERP systems. Switching would likely cause them to relive that nightmare.
Analyst Barry Wilderman of research company Meta Group estimates that switching ERP systems from one vendor to another could take at least a year. “Anybody who considers switching ’a walk in the park’ is wrong,” says Wilderman. “It is like a new install.” He estimates that less than 2 percent of ERP customers switch vendors willingly. The vast majority of switches occur when a company buys or merges with another that has a different ERP system.
If Oracle does swallow PeopleSoft, CIOs may want to advise their CEOs to go on the hunt for a company with a different ERP system—at least then the switch might make business sense.