The PeopleSoft battle fallout

Oracle's long-drawn-out bid for PeopleSoft could have ramifications for Indian software companies

First, the well known facts. Oracle Corporation's chief executive officer Larry Ellison, the billionaire playboy, sport fanatic and jet pilot who once famously called Bill Gates the 'PC Pope' launched a hostile bid for rival enterprise application software maker PeopleSoft more than 15 months ago.

Ellison's unsolicited take over bid for PeopleSoft may at last pass muster with the Justice Department in the US as well as regulators in the European Union.

But Oracle hasn't bagged PeopleSoft yet. Adding to the high drama, PeopleSoft recently fired the very man who led the fight against Oracle, its CEO, Craig Conway.

Now, the less known facts. Oracle's bid for PeopleSoft could have a fallout in India. Some Indian software companies are rubbing their hands in glee as they scent a medium-term business opportunity. Others that offer PeopleSoft products are beginning to hedge their bets.

The clear winner in all this so far seems to be neither Oracle nor PeopleSoft but SAP AG, the German software multinational. The loser? The Indian customer, primarily companies "� they may have to fork out hefty sums to shift to other applications software.

A word of explanation here. For more than a decade, the Indian software services industry has offered peripheral services and solutions around enterprise application packages "� software applications that help companies to automate their business processes, like the enterprise resource planning (ERP) , supply chain management (SCM) or customer relationship management (CRM) systems of SAP, Oracle, PeopleSoft, J D Edwards or even the smaller Navision.

SAP, Oracle or PeopleSoft only develop these package softwares. They don't install them at customer sites because they would have to do so at hundreds of locations across the globe and each installation takes time.

It could take at least 18 months for a large manufacturing company to implement an ERP package at all its units. If installation takes too much time, vendors' money gets stuck.

Instead, they utilise implementation partners like Accenture, EDS Corporation, Wipro, Infosys or Satyam, all of which implement the software at client locations and collect a fee. In industry jargon, this is called "package implementation."

The key issue here is that Oracle has said that if it takes over PeopleSoft it will not market PeopleSoft products "� instead it will only offer support and maintenance for them.

This means that PeopleSoft customers who get software upgrades from PeopleSoft will not get any upgrades. Against this backdrop, companies would prefer to shift to a new application, perhaps an Oracle application.

That could cost each company a minimum of Rs 1 crore. Consider the implications of this. PeopleSoft had about 130 clients in India in May 2004 and had set itself the target of 200 clients by December 2004 (see "Ice World," 19 May 2004).

Even if we stick to the lower figure, 130 companies (in theory at least) may have to fork out around Rs 130 crore, according to some guesstimates, to switch to Oracle or SAP's application software, if Oracle eventually bags PeopleSoft.

Companies that invest in expensive enterprise applications do so in a phased manner. So for them to change software is not easy.

Says Kris Gopalakrishnan, deputy managing director and chief operating officer at the Bangalore based $1 billion software services major Infosys: "In the medium term, if the acquisition does happen, it is good from an Indian service provider point of view. It may help companies like ours to offer solutions to customers who want to migrate from PeopleSoft applications to Oracle applications.We do not see any revenues upside immediately, and only in the medium term, if at all."

Like other major Indian software companies, Infosys has a package implementation business (implementing enterprise application softwares like ERP, SCM, and CRM of vendors like SAP, Oracle and PeopleSoft) which accounts for about 15 per cent of its total business.  Others agree with Gopalakrishnan. Says Ramakrishnan Ramamurthy, general manager, enterprise applications, at the Bangalore-based Wipro Technologies, which deploys over 2,000 people in the package implimentation business: "In the short term I only see the competition gaining at the expense of Oracle and PeopleSoft.  But in the medium term, there will be a lot of conversion opportunities as customers may migrate to Oracle from PeopleSoft."  

Sunil Surya, the London-based president of the European operations of the $73 million Hexaware Technologies, which is a PeopleSoft implementor, echoes the point when he says: "PeopleSoft has been a great opportunity for Hexaware to win clients, to whom we now have an opportunity to cross sell other services. We have succeeded in doing this at a number of such clients and that will sustain our future growth."

But it's not clear whether PeopleSoft has started losing clients here as yet. In a telephonic interview, PeopleSoft's Pleasanton (California) based director of corporate public relations Steve Swasey told Ice World that PeopleSoft continued to have the support of its customers.

"At our recent Connect event, which brings all our customers together, we had 15,000 customers visiting us. The turnout was twice as large as at Oracle's or SAP's conference. Moreover we believe that recent reports that the European Union is likely to grant permission to Oracle for the acquisition are totally in the realm of hypothetical reporting."  Indian software service companies are fairly certain that the acquisition will go through. "Oracle's communication to its implementation partners in India has been that it is on target on its acquisition.

'We are on track' is the message that they are sending us. Even a couple of weeks ago they sent us a communication indicating that the deal, though on track, would take some more time. Their sentiment is very positive," says an official at the Hyderabad-based Satyam Computers which has a substantial package implementation business.  If Oracle eventually takes over PeopleSoft, the big IT companies here like Tata Consultancy Services, Infosys, Wipro or Satyam won't be affected.  They are consulting and implementation partners for almost all the foreign Tier I enterprise application companies. "From a Wipro standpoint, we are consulting partners for all the enterprise application providers. So it does not make much sense for us worry over who is going to be taken over by whom," Ramamurthy notes.  But mid-sized and small IT companies that have considerable exposure to the PeopleSoft business will have to hedge their bets, if they've not begun doing so as yet.  Says Surya: " About 36 per cent of our revenues come from the PeopleSoft space. Of this about 24-25 per cent is from direct PeopleSoft clients. Being largely maintenance-oriented, there is no risk to this business and to the order book for 2005. Of the remaining 11-12 per cent that comes from ISC (a dedicated centre for PS Corp.), we see no risks for 2004. We cannot say what the impact on this specific portion will be for 2005." Hexaware expects revenues of $114 million in 2004.  Still, smaller implementation partners like the Chennai-based Rs 300 crore ACCEL-ICIM (an implementation partner for JD Edwards before it was taken over by PeopleSoft) are plainly worried.  Says a senior company executive on condition of anonymity: "By default we became an implementation partner for PeopleSoft because of its acquisition of JD Edwards. But over the last 18 months PeopleSoft's business has been affected in India. A lot of opportunities in the small and medium business (Rs 15 lakhs to Rs 50 lakhs) segment in India are now being targeted by others."  Others like Hexaware will, no doubt, try and de-risk their PeopleSoft business. Says Surya: "Any change brings about opportunities, and we certainly believe we will be able to further expand both our larger enterprise solutions portfolio which now includes SAP, BI and Content management package support, and PeopleSoft-related opportunities."  The biggest gainer in all this is SAP. Its market share has, according to analysts, been growing ever since the Oracle -PeopleSoft tussle broke out.  "Most Indian package implementation players have seen their SAP practice grow much faster than their Oracle or PeopleSoft practice. This trend is being played out in India too, where SAP already had a much bigger presence than the others.  "Typically sales cycles take months in this business. But ever since Oracle announced its bid for PeopleSoft, buyers have been confused and we are trying to take the maximum advantage. We are benefitting and adding to our market share in India and else where in the world," a top SAP official told Ice World.  The Indian ERP market was worth Rs 570 crores in 2002 and was growing at a compound annual growth rate of 10.4 per cent, according to IDC, the global IT data tracking firm.  IDC estimates that the market will be worth Rs 800 crores by 2006. SAP is the Indian market leader with close to 60 per cent of the market, followed by Oracle and Peoplesoft.  SAP is also at the top of the North American enterprise application software (EAS) market, the biggest market in the world, with a 34 percent share.  The big Indian IT service companies have a substantially bigger exposure to SAP than to any other enterprise application vendor. Infosys and Wipro, for example, have a majority of their package implementation staff dedicated to their SAP practice.  The big loser in all this will be the customer. Gopalakrishnan sums it up when he says: "From a customer point of view, the choices will shrink. In the long term it is definitely not good for the industry. As an industry professional I feel that whatever reduces choices for clients is not good."

Who'll be affected?

• Companies. Oracle has said that if it takes over PeopleSoft it will not market PeopleSoft products "� instead it will only offer support and maintenance for them. So PeopleSoft customers that get software upgrades won't get these anymore; customers may have to shift to a new application
  
  
• Software companies like Infosys, Wipro and others that offer package implementation services. They'll cash in by offering solutions to customers who want to migrate from PeopleSoft applications to Oracle or other applications
  
  
• Mid-sized and small IT implementation companies that have considerable exposure to the PeopleSoft business: They will have to switch to Oracle or other applications
  
  
• SAP AG: The German software company is trying to take maximum advantage of this opportunity
  
  
• The customer: He loses because his options shrink