Product Managers on the Road, Weekend Edition
Burn the Ships

Don’t Blame Your Salespeople

I read yesterday that Oracle blamed its latest quarterly earnings miss on a "lack of urgency" by the sales force.

Anytime you blame the sales force for missing revenue or earnings targets it's usually a bad sign. But in this case, Oracle's CFO may be right… although not in the way she meant.

Oracle's cloud-based revenues, which it had forecast to increase by three percent year on year, instead fell by two percent. Oops. To be fair, Oracle was affected more by its declining hardware sales, but it was the cloud-based revenue performance that caught my attention. I recently attended some Microsoft Office 365 partner events and I got to hear from partners struggling to adapt to a subscription revenue model. That experience made me think of one explanation for Oracle's situation.

What I heard from partners at these Office 365 events was that they were accustomed to making a good deal of the revenues in any deal from the sale of software licenses. Now, with the subscription model (and given the current structure where Microsoft has a direct billing relationship with the customer), these partners are seeing a big chunk of up-front revenue disappear, to be replaced by much smaller commission payments, spread out over time. It was clear to me that these partners recognized that their business model had to change to adapt to market acceptance of cloud-based services. But they were trying to understand how they would replace the revenue they were losing from up-front software license sales.

So how does this apply to Oracle?

First, understand that sales people are not stupid. And the best ones would never be characterized as having a "lack of urgency". So what gives? It may be a simple matter of economics.

You're an Oracle sales rep. Which would you rather sell to your customer?

  • $50,000 worth of software, where the customer pays up front
  • A three-year subscription for a service for 100 users, at $20 per user per month

In the first scenario, you make $50,000 towards your revenue goal for the quarter. And (depending on your commission rate) you make a nice sum over your base salary. In the second scenario, your up-front commission is much lower and (depending on how compensation is set up for selling cloud-based services) your contribution to quarterly revenue goals might be much lower. There's a saying that "salespeople are coin-operated," which I always took to mean that they well understand their marginal revenues and costs and act accordingly.

So it wouldn't be a surprise to find that Oracle reps are favoring on-premise vs. cloud-based applications in their selling efforts. This just illustrates Clayton Christensen's thesis in The Innovator's Dilemma, that it can be very hard to make the shift from one disruptive technology to the next one. Oracle no doubt understands that it has to change its business model. Understanding what's needed and executing, however, are two different things.

So maybe Oracle's sales reps don't lack a sense of urgency. Maybe they just understand math.


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