SAP brought to an end its difficult and expensive acquisition of TomorrowNow because it no longer wants a part of third-party support or the Oracle lawsuit that came with it, analysts and lawyers said.
Unable to sell TomorrowNow
"We looked into a number of options, including selling TomorrowNow," SAP spokesman Saswato Das confirmed. "It would have been an extremely complex transaction for both seller and buyer."
SAP bought Bryan, Texas-based TomorrowNow in 2005, in a move to coax newly acquired Oracle customers onto SAP software. Yesterday, SAP announced that by Oct. 31 all 225 TomorrowNow customers will either be moved back to Oracle, which charges support at 22% of net licensing fees, or to much cheaper third-party support, like Las Vegas-based Rimini Street. TomorrowNow's 160 employees will have to look for new jobs.
In addition, Oracle's costly lawsuit -- at one point Oracle's lawyers claimed damages amounted to more than $1 billion -- has made running the company nearly impossible for SAP, analysts said.
"They would have been profitable at the trajectory they were moving at," had it not been for the lawsuit, said Ray Wang, principal analyst with Cambridge, Mass.-based Forrester Research.
Apparently, SAP ultimately decided it didn't want to be in the third-party support business, analysts said.
"We believe in customer choice," Das said. "We also believe that third-party maintenance has its strongest appeal to customers who are at the end of lifecycle for legacy applications. And that does not apply to the bulk of SAP applications."
Or, as Seth Ravin -- co-founder of TomorrowNow and current CEO of third-party support provider Rimini Street, and the man who stands to benefit most from its fall -- puts it, "In the end, SAP decided they're in the software business."
TomorrowNow's closure is a sign that Oracle and SAP are close to settling the year-and-a-half-old lawsuit, as well as an acknowledgment that Oracle's claims of copyright theft were merited, according to attorney Hillard M. Sterling.
"This is SAP's way to rid itself of a troubled subsidiary, as well as a problematic lawsuit," said Sterling, an attorney who specializes in information technology litigation with Chicago-based Freeborn & Peters LLP. "Clearly there was impropriety. SAP's only hope is to settle the lawsuit quickly and avoid becoming connected with the allegations."
SAP has denied, however, that TomorrowNow's closure is connected to the lawsuit, in which Oracle charges that TomorrowNow downloaded Oracle's support materials and that SAP knew about it. Oracle declined to comment on SAP's decision yesterday. The ERP rivals' next talks are scheduled for October, and Sterling suspects they'll settle then.
Just how big a mistake TomorrowNow was for SAP isn't clear, analysts said. Terms of the acquisition were not released. But analysts agree that, in the short term, it will be a boon for third-party support providers like Rimini Street, which provides support for PeopleSoft, JD Edwards and Siebel applications.
The three months SAP is giving customers to find new support arrangements is not enough time for companies to determine whether they want to move back on an upgrade track with SAP or Oracle.
"That's not a short-term decision," said Pat Phelan, research director at Stamford, Conn.-based Gartner Research. "They are still going to need some sort of interim cushion, support strategy, so they can keep their applications up and running until they can get to the next step."
Ravin said Rimini Street has already had several calls from TomorrowNow customers since SAP's announcement, and over the last couple of months, it's moved about two dozen TomorrowNow customers to its services.
"We've been preparing for this for quite a while," Ravin said, adding that they're nearing 100 customers, some of which are signing upwards of 10-year contracts for service.
But whether SAP's move will result in more companies providing third-party support isn't clear. With SAP raising maintenance fees to 22%, it stands to reason that more alternatives would spring up, said Paul Hamerman, vice president and principal analyst at Forrester Research.
"I think third-party support is a viable business model, provided they don't run afoul of intellectual property rights," Hamerman said. "I'm thinking we'll see some on the SAP side of the house."
But Oracle's success in this lawsuit could scare off potential support providers.
"Technically, the market is there," Phelan said. "From a customer standpoint, the need is there. From an entrepreneurial standpoint, [they] need to be willing to step up to the plate and assume the potential risk. Third-party support could get such a bad name, everybody's scared to do it."