In August, 2017, Oracle’s massive salesforce received an email from Rich Geraffo, Oracle’s executive vice president responsible for North American sales.
In it, he told the 35,000-strong sales team to essentially quit gaming the system in the way they were landing cloud sales, according to the email viewed by Business Insider.
He discussed “winning with integrity,” and set out a long list of no-no’s for salespeople. The items included things like only selling products and services that customers will really use, putting all terms in writing, and justifying discounts offered to customers.
Some 10 months later, in June, Oracle surprised the financial world by changing the way it reported cloud revenue, blending it into its traditional software sales, which essentially hid cloud revenue from view. Oracle didn’t wait until the fiscal year ended. It made the change to the fourth quarter results, which ended in May. That meant it did not report the full year’s final cloud performance, even though cloud has become critical to the company’s future.
When concerned Wall Street analysts asked if this change was an attempt to hide problems in Oracle’s cloud business, Mark Hurd, one of Oracle’s CEOs, called the change a “nothing burger,” and attributed the change to adopting new accounting standards.
However, an Oracle salesperson who’s been with the company for several years told Business Insider that the change could reflect something else: that not all of the cloud revenue was from customers who were really using Oracle’s cloud.
It’s not clear that there’s a connection between the email from Geraffo asking salespeople to only sell products and services that customers will really use and Oracle’s decision to stop reporting cloud revenue separately.
But the change in reporting does give us a reason to explore the tricks of the trade that may have helped Oracle jump start its most important new business.
‘Cancel and replace’
One of the ways Oracle’s sales people beefed up cloud sales — and their own commissions, which were heavily tied to how much cloud they sold — was a tried-and-true method, according to the salesperson. It involved including cloud credits on a customer’s contract even if the customer didn’t want the cloud product, this person said.
The customer would get discounts on the products they did want for agreeing to buy the cloud products they didn’t and save money overall.
That’s a common practice. By bundling in products and making them essentially free to the customer, they get to try them with little risk and will maybe sign on later for real. And Oracle isn’t the only enterprise company to do this for a cloud business.
“Thousands of deals happens every week, where customers buy more than they need,” the salesperson said.
But there was a second, more questionable tactic being done three and four years ago, according to the people familiar with it, which could have impacted Oracle’s business in its fiscal 2018, which ended in May.
It’s known as “cancel and replace,” according to Craig Guarente, CEO of Palisade Compliance. Guarente is a former Oracle vice president who now works on the other side of the table, helping Oracle’s customers negotiate contracts with the software giant.
“Cancel and replace” is essentially a grand bargain with customers that lets them out of paying a lot of money for a support contract on those unwanted products, if they agree to spend that money instead on Oracle’s cloud even if they don’t want and won’t use the cloud, Guarente and the salesperson said.
Unwanted bills, unwanted products
To understand “cancel and replace,” it’s important to understand how Oracle makes its money.
The company makes three times more money on support contracts and on renewing licensing with existing customers than it makes on selling new products to customers.
And Oracle has become a master of locking customers into paying more and more for their support and renewals over time through tough contractual terms, Guarente said. Anything that lets them out of those contractual terms would make customers happy, but wouldn’t be as good for Oracle’s bottom line.
For instance, companies that want to use Oracle’s database or its popular HR or financial software will get discounts on those products if they also agree to add products they don’t want to their contracts, products Oracle wants them to try, and to pay for support for all the products on the contract. Support helps companies properly install and troubleshoot their software.
These are typically three-year contracts and, with discounts, it can cost them less overall to take all those products than to simply pay for the ones they want.
The second year, when the customers receive a hefty bill for support, they may tell Oracle they don’t want to pay for support on products they don’t use.
Oracle might tell them that if they cancel those products, their discounts are voided and the cost for just the products they want will cost them far more than to continue paying support.
The tactic of “cancel and replace” allowed customers to cancel their long-term, expensive support contracts and replace them with ones that had them paying for “cloud credits,” aka hours of usage of Oracle’s cloud, even if they never planned to use the cloud.
But it’s what happened after those revised contracts expired that caused the salesperson we talked to concern.
What the salespeople were doing
Both the internal salesperson and Guarente described what the salespeople were doing.
Three and four years ago, some Oracle salespeople used the situation of customers wanting to get out of their support contracts to sell customers cloud credits, the salesperson said.
At first salespeople were offering a dollar-for-dollar trade, too, Guarente said. So if a customer was paying, say, $2 million annually in support, the salesperson would allow them to convert that to $2 million in cloud credits, even if they didn’t want to use the cloud. And when the three-year contract was up, they could stop paying.
Then the salespeople upped the terms. They started requiring customers to agree to $2 of cloud credits for every $1 of support revenue they cancelled and replaced, Guarente said. At the end of three years, customers could stop paying, so it was still a good deal in the long term for customers.
The problem with these deals is that this cloud revenue could go away when the contract expired, if the customers didn’t really want Oracle’s cloud.
Internally, these were considered sketchy deals, but tempting ones, the salesperson said. “I personally know people who made $500,000 to $1 million in commissions doing this,” the salesperson said.
But, on a corporate level Oracle “hates” cancel-and-replace deals, for obvious reasons, Guarente said.
The top execs didn’t know about, and weren’t condoning these cancel-and-replace deals, the salesperson said. Some sales managers frowned on the practice. But others pressured their salespeople to risk their jobs and do such deals to make their quotas, the salesperson said.
And if a salesperson didn’t go along with the team’s plan for making numbers, “they’ll make your life hell,” said the salesperson. For instance, the manager could do everything from rejigger a territory to subject the person to a lot of nitpicking when trying to get deals approved, this person said.
While plenty of Oracle customers have legitimately signed up for Oracle’s cloud and use it, ultimately, many of these deals for unwanted cloud credits didn’t entice the customers to use the cloud, both the salesperson and Guarente said. They merely allowed them to stop paying big support bills when their three-year contracts expired.
Oracle saw the light sometime last year on this practice and stopped letting those types of deals get through, both the salesperson and Guarente said. And Geraffo’s email drove the point home, the salesperson said.
While some customers have since successfully negotiated an exchange of support payments for cloud credits, Guarente said, they can no longer stop paying at the end of the contract. If they don’t use the cloud and want to cancel it, they’ll be billed for support instead, he said.
Oracle says the practice is forbidden. “Oracle has a policy not to reduce support payments in exchange for cloud credits,” a spokesperson told us.
It’s unclear what impact these deals had on Oracle’s financial results, if any. But a good many of those three-year contracts were coming up for renewal over the past several months, the salesperson said, meaning those customers could simply stop paying for cloud if they weren’t using it.
When asked about these sales tactics, an Oracle spokesperson told us, “Our pricing is aligned with how our customers want to buy and consume cloud offerings.”
The spokesperson added. “We allow our customers to bring their existing on-premise database licenses to the cloud so long as they continue to pay support for those licenses. We call this policy ‘Bring Your Own Licenses’ or BYOL. When the customer chooses BYOL, they pay an incremental monthly fee for the cloud infrastructure they use to run the database. We believe virtually all of our database customers will use BYOL to migrate their database workload to the cloud.”
Oracle is not the only enterprise software company to grapple with salespeople using loopholes to make their cloud numbers. Several years ago Microsoft faced similar issues, Business Insider reported at the time.