Proposed Oracle-PeopleSoft deal could change the face of outsourcing

Since the beginning of this month, the ERP arena has seen a flurry of proposed acquisitions, mergers and partnerships that promise to change the face of the market. But in evaluating the potential effects of these deals on ERP applications, many observers have overlooked a critical factor: outsourcing and professional services.

For those of you who came in late, here’s the soap opera thus far. On June 2, PeopleSoft announced plans to acquire J.D. Edwards in a stock deal valued at $1.7 billion. The merger combines two of the largest enterprise applications vendors – and two of the biggest enterprise applications service providers – into a $2.8 billion company.

On June 9, Oracle made a bid to acquire all of the outstanding shares of PeopleSoft for $16 a share, or $5.1 billion. On June 12, PeopleSoft’s board rejected the offer, citing concerns about antitrust conflicts. On June 13, PeopleSoft filed a lawsuit against Oracle, alleging that the acquisition offer was only a ploy to create uncertainty about PeopleSoft and give Oracle a window to steal ERP customers from PeopleSoft and J.D. Edwards. On June 16, PeopleSoft and J.D. Edwards announced plans to expedite their merger so that it could be completed earlier than initially planned. And on June 18, Oracle bumped up its offer to to approximately $6.3 billion and announced that it was filing suit against PeopleSoft, its board of directors and J.D. Edwards for their efforts to stave off the acquisition.

Much has been written about the proposed mergers, both to examine the efficacy of Oracle’s offer and the potential impact of integrating two or three of the industry’s leading enterprise application suites. Clearly, a combination of even two of these software suites would constitute a major threat to the market leadership of SAP, which continues to be the dominant force in ERP and other enterprise applications. By unifying their suites using the best of each, the combined company might present a real alternative to the SAP software line, which is both broad and deep.

These observations are all valid, but they fail to take into account the potential of a combined professional services organization that unifies diverse expertise on implementation of J.D. Edwards, PeopleSoft and/or Oracle enterprise applications.

Both PeopleSoft and J.D. Edwards generate a high percentage of their revenues from consulting and professional services organizations that are very mature and compare favorably with the services offered by major systems integration vendors. By unifying their service organizations, the partners will put themselves in a position to offer not only enterprisewide application support, but full business process outsourcing.

Similarly, both PeopleSoft and J.D. Edwards have developed strong application hosting infrastructures to help deliver their software as a service. By combining these infrastructures, the two companies could become formidable competitors in the hosting arena, perhaps even beyond their own application sets.

In looking at the professional services potential of the combined PeopleSoft-J.D. Edwards company, it becomes credible that Oracle’s bid for PeopleSoft might be serious. Oracle has long been interested in selling its software as a service, and the application hosting capabilities of PeopleSoft and J.D. Edwards would help significantly in achieving that goal. Likewise, Oracle has been gradually expanding its professional services organization – a combined unit that comprised consultants from J.D. Edwards, PeopleSoft and Oracle would be a real alternative in any enterprise outsourcing opportunity except SAP shops.

Was Oracle’s bid for PeopleSoft sincere? Only time will tell. If you look at it only as a software merger, then it appears to be a simple attempt to eliminate the competition, since Oracle already has most of the applications that J.D. Edwards and PeopleSoft sell. However, if you look at the professional services side, a deal with PeopleSoft offers some real benefits for Oracle – and has the potential to significantly change the face of the enterprise outsourcing market.