SAP vs. Oracle: Is Vertical the Only Winner?

Oracle has been getting a lot of attaboys for its recent Applications Unlimited show in New York, from both the financial analysts and industry analysts. Much of the credit comes from pushing a vertical industry strategy that targets a set of verticals that have come to Oracle through its acquisitions.

So kudos all around, and a warning shot not just to SAP – despite the fact that it has had vertical industry expertise in spades for years – but also to Microsoft Dynamics, which has a horizontal legacy that puts it at a disadvantage too.

Or so the common wisdom says.

But what if vertical industry strategies weren’t the only path to success? What if big, horizontal initiatives also mattered? What if innovation in the traditional sense – something we can label with a three-letter acronym or buzz-term – was also a way forward for vendor growth?

The answer is that the analyst and financial community would have to look a little more closely at how they judge the future value of key players like SAP, Oracle, Microsoft Dynamics, and others.

SAP would probably stand to gain the most from this perspective, as its governance, risk, compliance (GRC), master-data management (MDM), xApps, and Duet initiatives are generating serious revenue and serious horizontal customer value, despite the glum news during the last earnings call.

But, in the surreal world of quarterly performance goals, SAP has the most to lose from this emphasis on more than just vertical apps, and hence the pummeling it has taken, despite the value of the many initiatives that SAP has promoted over the last several years.

One problem with layering strong horizontal innovation on top of vertical industry functionality is that it compounds the selling problems for a sales force that would rather sell what they know best. This “sell what you know” attitude is one reason that vertical industry strategies are working: It’s relatively easy to get a rep to understand the ins and outs of a particular industry well enough to speak intelligently about its main issues and sell a relatively standard product set to fix them.

Take that same rep and add new, innovative, and potentially complex products, and you’ve just made the job all the more hard. I would argue that the absence of a wide range of innovative new applications and initiatives at Oracle – other than those directly acquired through acquisition – has made it easier for their reps to specialize in the products and industries they know, and thereby meet their quotas.

It’s a lot harder when a constant stream of new and innovative products make “sell what you know” more difficult. And while many of the above SAP initiatives are making solid revenues, they are apparently not earning enough from many analysts’ point of view to give SAP the innovator’s edge in the market that it deserves.

Microsoft Dynamics is in a similar boat: While the applications are innovating relatively slowly, the back-end software from the rest of Microsoft – Office, Sharepoint, Longhorn, etc. – is on a fast track that may make it harder for the Microsoft channel to also “sell what you know.”

Of course, the proof is in the pudding, so more common wisdom dictates, and that means that we need to judge SAP vs. Oracle by the quarter by quarter revenue horserace they’re currently engaged in. In that race, SAP has ceded some early gains to an Oracle juggernaut that is executing the hell out of what is largely a “sell what you know” strategy.

How long can Oracle’s advantage last? “Sell what you know” implies “buy what you know.” I have to believe that customers are still looking to their vendors for innovative best practices that are more than just minor enhancements, but represent, like SAP’s GRC, a radically different way to look at – and solve – a set of never-ending problems at all levels of corporate life.

When – or if – this notion hits its prime, the ball will potentially shift to SAP’s – and Microsoft’s – court. At which point Oracle will need to show where the next set of applications innovations are coming from, and there will need to be some horizontal innovations in the mix as well. Going vertical is good, but it ain’t the only game in town.