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MARCH 11, 2005
By Nicholas G. Carr Big Software's Blood Sport Oracle and SAP's battle to buy Retek reveals some uncomfortable truths about the info-tech business's basic instincts
Enterprise-software makers are like vampires. They need fresh blood to survive. That's why SAP (SAP ) and Oracle (ORCL ) have both made aggressive bids for a little-known Minneapolis outfit named Retek (RETK ). The small software company has carved out a niche providing complex applications tailored to the needs of chain stores and other merchants. For SAP and Oracle, the retailing business stands as one of the last great pools of virgin customers (see BW Online, 3/9/05, "Oracle Parries a SAP Thrust"). Retailers have long taken a go-it-alone approach to software development. Because they have unique operating requirements, like getting the right mix of merchandise onto many different stores' shelves, they've tended to shun the standardized programs offered by the enterprise-software giants like SAP and Oracle. They've continued to run their businesses on custom code. LUCRATIVE DOORWAY. But Retek's recent success -- its clients include top names like Nordstrom (JWN ), Gap (GPS ), and Tesco (TSCDY ) -- reveals that retailers are beginning to covet the cost savings offered by off-the-shelf programs. They're increasingly amenable to buying packaged applications, as long as the systems are geared toward the distinctive characteristics of their trade. Both SAP and Oracle see Retek as a doorway into this lucrative new market. And both of them need fresh revenue-producers. The dirty little secret about enterprise applications is that once businesses have spent the large sums necessary to get them up and running, they have little incentive to continue making investments. The big gains in process automation come fairly early, and then the returns diminish steadily. Why go through the pain of buying and installing a new package if the old one works? As their traditional markets have tapped out, enterprise-software makers have had to seek new avenues for growth. One way that has worked in the past involves simply jacking up the maintenance fees charged to existing customers. Over recent years, according to Computerworld, maintenance charges for enterprise systems have jumped from about 10% of licensing fees to as much as 25%. But customers are beginning to rebel against such tactics. A 2004 study by AMR Research revealed that corporate software buyers are "furious" about escalating maintenance costs, and at least a third of them are planning to demand changes in their software contracts. ZERO-SUM GAME. Another way to grow is to corral new customers by acquiring a big rival. PeopleSoft did just that when it purchased J.D. Edwards in 2003, as did Oracle when it took over PeopleSoft late last year. But such opportunities are decreasing. Not many major players exist in enterprise software, and at this point, another large-scale acquisition would almost certainly run into antitrust barriers. If you can't buy your competitor, you can at least try to steal its clients. That was the impetus behind SAP's purchase of the consulting firm TomorrowNow earlier this year. TomorrowNow made its name by offering maintenance contracts to PeopleSoft customers. SAP is hoping it will now entice those customers away from Oracle and into the SAP camp. But raiding the client base of a rival is still a zero-sum game. All of which explains why companies find the fresh-blood strategy so compelling -- and why SAP CEO Henning Kagermann and his Oracle counterpart Larry Ellison are looking so hungrily at Retek. When growth options narrow, the competition for untapped markets gets ever more brutal. EXPLOIT AND PENETRATE. Lest you think the vampire metaphor too harsh, just listen to how Ellison justified his bid for Retek in a conference call with Wall Street analysts: "The combination of Retek and Oracle would certainly put us in an extremely strong position to exploit a market that is underpenetrated." Ellison gave the game away. The enterprise-software business is no longer about brilliant innovations, whiz-bang features, and great feats of code-smithing -- though all of those may still happen from time to time. It's about exploitation and penetration. More and more, it's a game for marketers, financiers, and CEOs with sharp teeth.  Carr is the author of Does IT Matter? Information Technology and the Corrosion of Competitive Advantage
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