Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

There has been a lot happening recently. I have found three articles I think will be of interest to all of you. The first presents anecdotal evidence that SaaS is steadily becoming accepted in the IT world, but doubts still linger regarding security. The article presents some interesting clues on what’s important from a contracting standpoint. The second article provides some insight into the global marketplace’s emergence from the slump of demand for IT (i.e. companies increase spending for IT services). And the third article is a very witty compilation of the Board Room melodramas over the past few months. Space constraints prevent me from a full analysis of the three articles, but I think I can give you enough information to whet your appetites for more, and of course I’ll provide the links.

I.                    SaaS Adoption Continues:

Patrick Thibodeau provides examples of the continued adoption to the SaaS cloud based system in his article in Computerworld.com entitled IT shifts to the cloud; anecdote by anecdote. It appears that the reasons given by the CIO’s and IT Managers are of no surprise. Mark Stone, the CIO at Safety-Kleen Systems Inc. states:

“With a cloud-based approach, he said, "I can go today to a variety of SaaS providers and put in software that's every bit as functionally rich as anything I've developed on-site" -- without having to worry about the upkeep of an IT infrastructure.”

Lien Chen, CIO at RAE Systems Inc. had an Oracle ERP system that she wanted to integrate with Salesforce CRM. She could have purchased an integration package, which of course would necessitate hiring consultants to implement (i.e. factor in those costs as well). Instead she opted for the less costly cloud-based integration from Informatica. Security issues prevent her from moving all apps to the cloud.

From a contracting perspective the comments I found most informative were from Robert Scott, managing partner at Scott & Scott LLP, a Dallas-based law firm that advises clients on IT contractual issues. He acknowledges the angst over security concerns. His advice when developing the contract for cloud-based services is “You own everything you bring and everything you pay for.” Scott went on to say:

“That means, for instance, that if a cloud vendor undertakes integrations and customizations or builds templates and layouts, users have to be certain they can take that work with them if they move to another provider. This could have a big impact on your ability to switch."

II.                  Infosys Profits Up: Forecasts revised

As for evidence that the slumping world economy and in particular global enterprises’ spending estimates for IT is on the way back, see Ketaki Gokhale’s article in Bloomberg Businessweek entitled Infosys Profit Beats Estimate; Increases Forecast. It appears the rebound may be a double edged sword for India’s second largest exporter of software. Yes, Net Income is up 13% for the first three months of their fiscal year, and yes, Infosys joins the likes of Intel in reporting that IT spending is likely to increase in the coming year. However a stronger rupee is stifling the return of those monies earned abroad back to the owner’s in the country of origin, India. Infosys derives 66% of its revenue from North America and 23% from Europe. Gokhale reports on the latest from Forrester Research Inc. that “Worldwide information technology spending, which includes computer equipment and software purchases, will grow 7.8 percent to $1.58 trillion this year after falling 8.9 percent in 2009, according to July estimates.”

III.                IT Street Fighting Hollywood-Style

As an attorney involved in the intricacies of software contract drafting, I have a special place in my heart for lists. For a very informative and also enjoyable read, I highly recommend Thomas Wailgum’s article in CIO.com entitled 10 Lessons Learned from the HP-Oracle-SAP-NY Times Saga. In case you haven’t noticed there have been some very high-profile and entertaining board room antics for the past several months. It appears that the CEO, now the ex-CEO, of HP might have been involved in a dalliance that caused the HP board to summarily dismiss him. Not to worry his tennis partner and uber-rich CEO of Oracle, Larry Ellison, hired him in an instant as co-President. Apparently a New York Times columnist wrote nasty things about SAP’s former CEO and this columnist’s girlfriend is employed by the law firm suing SAP. And it seems everybody is taking pot-shots at HP’s board and HP’s board is fighting back. And what about IBM? Looks like they want in on all the tomfoolery. 

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This sort of activity is common in mergers and acquisitions. I wish I could say that I had experienced this only once, but the sad truth is I have been on the inside and watched this happen several times. And it always is the same. Something big happens, (e.g. a merger, an acquisition, a new “C”-Level Executive) and people leave. In my last corporate counsel position a new CEO was hired just two months after I had come onboard. The General Counsel who had hired me, an intelligent attorney with a superb management style, abruptly announced his untimely retirement just three months later. His replacement lasted a short 12 months. Within a year and a half the new CEO’s friend and confidant had assumed the General Counsel position and the department I had been a part of was completely eliminated.

So is it any surprise that Sun is experiencing a bit of a brain-drain after the acquisition by Oracle? Andy Patrizio reports for InternetNews in his article Defections Batter Sun Microsystems that some key Java-based developers are reading the writing on the wall and have decided to avoid the tap on the shoulder and request to come to some non-descript conference room. Patrizio reports that so far Java’s creator, James Gosling, has not jumped ship. Josh Farina, analyst with Technology Business Research, states:

"It'd be in their best interests to make offers to get people to stay on board … Oracle is really good at making companies run better, but ultimately it needs the talent to stay because … it's in the line employees who make it happen.”

And the affect is not solely on the software side of the business. To get a preview into this slippage in Sun’s sales see the posts in this Blog Oracle’s Purchase of Sun: A Game Changer and IBM and SAP vs. Oracle and Sun: Let the Speculation Begin. Scott Handy, vice president of marketing, strategy and sales support for IBM Power Systems, reports that customers are calling IBM requesting migration assistance. Sun’s customer base looked at Oracle’s track record and see price increases in the future. Handy states,

“They are all quite concerned. When Oracle bought Siebel and PeopleSoft, they increased the maintenance licenses by 25 percent per year. With BEA, licenses went up 45 percent. So they are looking at OPEX going up just to keep what they had".

IBM is geared up and ready for these migrations. In 2003 IBM acquired a company called Sector 7, a company specializing in migrations. IBM created a program entitled Migration Factory and to date have performed over 1800 migrations. Before the Sun acquisition the ratio was about 40% of the migrations were from Sun but now that percentage is starting to increase. For the first six months of this year IBM has migrated over 170 Sun customers and another 66 Sun storage customers. 

It appears that IBM is doing what it has always done and that is using their hardware to get business in the door and then turn that into sales for long-term services and software.

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It is important to note that Oracle does not have the familiar 12/31 year end, but rather a 5/31 fiscal year end.  Ahead of their conference “Oracle OpenWorld 2008” held in San Francisco this year, Oracle released a wave of glowing financial successes for its first quarter for 2009.

·         Net Income increased 28% to $1.1 Billion

·         Revenues increased 18% to $5.3 Billion

The second quarter is more in question.

·         Non-GAAP revenues could fluctuate anywhere between a 12-15% increase or drop as low as only a 9% increase due to currency fluctuations

·         Non-GAAP EPS should be around 26¢ due to earnings split between higher and lower tax jurisdictions.

The forecast for new software license revenues are also susceptible to the fluctuating currency markets with estimates at 5% - 15% without fluctuations and 2% to 12% if fluctuations are taken into account.  Kenneth Chin, and analyst for Gartner, focused on this broad range and stated:

"Foreign currency had a plus seven percent impact on earnings this quarter, and they see a minus three percent impact for the next quarter, which can be fairly significant.  There's nothing to say that, if the dollar moves more quickly and becomes stronger, that the negative impact wouldn't hit five percent or more."

Fifty percent (50%) of Oracle’s business is license revenue and maintenance fees.  The fastest growing part of their business is middleware.  Larry Ellison, Oracle CEO, is confident that they have or soon will replace IBM in this market space.  For a more complete commentary on the second quarter’s outlook and beyond see Richard Adhikari’s article Oracle Sees Tougher Days Ahead. 

With a broader portfolio of software products to bring to the market the emphasis this week at the San Francisco conference will be on the $8.5 billion purchase of BEA.  The BEA middleware products “are key to Oracle's service oriented architecture (“SOA”) strategy.”

Oracle’s next major release will be 11g, expected by the end of the 2009 fiscal year.  BEA will be an integral part of its latest Web and SOA platforms release. 

Also of note is Oracle’s Green Program and its virtualization initiative.  To read the details on the tremendous increase in savings on these two programs and the Integration of the BEA software products into Oracle’s latest offerings see Oracle's Big Show will be BEA's Coming Out Party.

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