Ellison: Oracle will buck services-buying trend

Oracle will not follow HP and Dell's lead to buy IT services, said CEO Larry Ellison.

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SAN FRANCISCO -- Oracle will not follow Hewlett-Packard and Dell into an IT services buying binge, CEO Larry Ellison said Thursday.

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Given Oracle's acquisitive nature and that many of its competitors have splurged on IT services, it would seem a reasonable strategy to do likewise. But, Ellison pooh-poohed the notion at a meeting with press and analysts, saying that services earn lower margin than software sales.

A large services acquisition would also put Oracle at odds with its large systems integration and consultancy partners like Capgemini, Deloitte and others.

Still, Ellison has seen the advantages IBM gets from its huge services organization, so it might make sense for Oracle to reconsider, said some of its biggest partners.

Oracle is still trying to complete its $7.4 billion buyout of Sun Microsystems and its hardware franchise so some say it's plate is full. But, Ellison also left the door open, somewhat surprisingly, on future hardware acquisitions. That raised some eyebrows because hardware margins have thinned considerably in recent years, which is one reason big hardware companies like HP are building up their presence in more profitable services.

"It's inevitable that any large IT company will build or buy services over time," said an executive with one of Oracle's biggest outsourcing partners. In his view, hardware companies are moving first because hardware margins are tighter than software margins, but margins in both categories are falling.

Hewlett-Packard last year bought Electronic Data Systems for more than $12 billion and later rechristened it HP Enterprise Services. Earlier this month Dell pledged nearly $4 billion for Perot Systems, and a week later Xerox said it would buy Affiliated Computer Systems.

Oracle Consulting does some integration and services work, but company executives paint it as a modest effort and one that has not grown in past years. Consulting reportedly makes up about 20% of Oracle's revenue.

"Oracle Consulting is the one area we have not made acquisitions in the last four years. We spent time and money in acquiring products but consulting has remained relatively flat," said Judson Althoff, senior vice president of worldwide alliances and channels, speaking at Oracle OpenWorld 2009 this week.

And, Oracle Consulting's mandate is to ensure that Oracle software gets implemented correctly and to provide subject matter expertise, often to outside services companies, another Oracle exec said.

"Our consulting [group] is to support license sales. We have no ambitions on developing and increasing our consulting community or size. If you need experts to help implement -- we're not here to drive the service business, this is key. Our top five systems integrators have 30,000 people on Oracle practices. We rely on those guys," said Altoff.

Ray Wang, an analyst with the Altimeter Group, said the time is not right for Oracle to bulk up IT services. In fact, he said, with Sun and its own professional services staff coming aboard, he expects small cuts in internal staff rather than any IT services acquisition. Oracle relies on partners for more than 40% of its revenue -- and nearly 59% of its U.S. revenue, Wang said.

Even some Oracle partners who've worked at Oracle Consulting in the past think near-term deals unlikely. "The dirty little secret about Oracle Consulting is [that Oracle] can't make money on it," said another longtime Oracle partner. "Customers expect to get it for free."

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