Oracle wins $88.5 million Air Force contract

Deals calls for replacement of 500 legacy IT systems with one supply chain management system

Oracle Corp. has signed an $88.5 million, multiyear contract with the U.S. Air Force, which includes a closely watched deal to build a new logistics system for the organization.

The Air Force's Expeditionary Combat Support System (ECSS) is intended to replace more than 500 legacy IT systems with one integrated, commercial SCM (supply chain management) system. Oracle was competing directly against SAP AG and other ERP (enterprise resource planning) vendors for the ECSS contract, which Oracle President Charles Phillips announced Monday in New York during a meeting with financial analysts.

Phillips cited the deal as an example of Oracle's ability to take business away from archrival SAP in both new and existing customer accounts. Oracle's OffSAP campaign, which offers SAP customers a 100 percent license fee credit on money spent with SAP if they switch to Oracle, has netted 1,600 responses in the past four months, Phillips said.

Of course, SAP has its own versions of such campaigns: SAP is running a "Safe Passage" program aimed at stealing Siebel Systems Inc. customers worried about Oracle's planned Siebel takeover, scheduled to close next year. SAP's program also offers license fee credits and other discounts to switching customers.

Competitive campaigns are essentially marketing exercises; in reality, customers don't rip-and-replace complex, expensive ERP systems unless they absolutely have to. Still, customers running aging systems in need of overhauls can be susceptible to overtures from new vendors. Phillips said Oracle has had particular success reaching out to SAP customers still running R/3, who face a steep upgrade curve if they wish to move to SAP's more recent mySAP architecture.

Phillips' overview of Oracle's operations prominently featured a discussion of Oracle's Fusion middleware portfolio, which Phillips hailed as "our next $1 billion business." In Oracle's 2005 fiscal year, which ended May 31, Oracle had $853 million in middleware revenue, Phillips said at a briefing several weeks ago.

Oracle has recently begun breaking out its middleware business and treating it as a software line comparable to the company's applications and database businesses. In the past year, Oracle's middleware business has gained critical mass and began growing quickly, according to Phillips. Undercutting rivals like BEA Systems Inc. on pricing "seeded a lot of initial projects," he said.

In addition to highlighting middleware as a key growth opportunity for Oracle, Phillips singled out two geographic markets where Oracle has big ambitions: India and China. Oracle's license revenue grew 31 percent in India and 52 percent in China in 2005, and similar growth rates are forecast for 2006, Phillips said.

By the end of 2006, Oracle expects to sell directly or through distributors in 30 cities in China, up from the three markets there in which it had a presence just a few years ago. "It's getting to be of meaningful size, so we're putting additional resources on it," Phillips said.

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