Shareholders suing Oracle over ‘misleading statements’ regarding moving clients to the cloud

By Allan Watton on May 28, 2019

You will have probably heard of Oracle. Founded over 40 years ago by Larry Ellison who remains its Executive Chairman and Chief Technology Officer (CTO), along with Bob Miner and Ed Oates. It employs 137,000 people and turns over c.$40bn. An organisation of this size relies on its reputation for delivering robust software solutions. In this vein, ‘optics’, the perception people have of you and your organisation, are important; possibly more so today than ever before, given the current political and economic climate.

So, is Oracle managing its optics as well as it could? In its drive to move its customers over to its cloud services, some observers in the media have raised a number of questions – have Oracle gone too far? Have they employed imprudent practices? How have they handled complaints and claims about this from their customers? This article looks at the uncertainties that have arisen in the media over Oracle’s cloud migration.

Shareholders Suing Oracle – Why?

Oracle put its reputation on the line to promote its cloud services and it seemed to be doing well, reportedly racking up impressive growth throughout 2017. However, by the first quarter of 2018, it’s reported that those figures were waning, with growth apparently down by half. The company then just stopped reporting on its cloud services separately.

But this is not an article about whether Oracle’s cloud migration was a success or not. It is about how the media has suggested Oracle has represented this success to its own shareholders/investors as several of them have filed a lawsuit against the company.

Tactics and Claims

The issues that led to this lawsuit were based on two fundamental claims, that Oracle: (a) had mischaracterised its growth to shareholders, and (b) kept them in the dark as to the reportedly improper tactics that were being employed to convert existing customers to the company’s cloud services. According to an article in The Register, The City of Sunrise Firefighters’ Pension Fund recently filed a lawsuit against Oracle for misrepresenting its cloud services revenue growth, and because of the ‘tactics’ Oracle were reportedly using to ‘coerce’ companies, this “…concealed the lack of real demand for Oracle’s cloud services, making the growth unsustainable.”

A further article in Computing magazine outlined another case,

The company is accused of making “false and misleading” statements to investors because Oracle’s management knew that cloud revenues “were driven, in part, by improper, coercive sales practices”.

Those bringing the lawsuit go on to highlight three tactics which they accuse Oracle of using and which risk a material reputational impact on the company if found to be true:

  1. “Threatening existing customers with ‘audits’ of their use of the company’s non-cloud software licences and levying expensive penalties against those customers, unless the customers agreed to shift their business to the cloud programs”;
  2. “Decreasing customer support for certain… on-premises or hardware systems, in an effort to drive customers away from such systems and into cloud-based systems”; and
  3. “Strong-arming customers by threatening to dramatically raise the cost of legacy database licences if the customers choose another cloud provider.”

According to the Computing article, the lawsuit maintains that “Oracle relied on improper sales practices to railroad its customers into purchasing the company’s cloud offerings.” These are claims that have been raised before.

Five Strategies to Entice Clients to Use Cloud Services

In a previous post, we reported on a Forbes article by veteran contributor, Dan Woods, who said that despite similar techniques admittedly being used by others in the software sector “Oracle spends a lot of its energy and effort on persuading, some would say strong-arming, its clients into adopting its cloud technology. And lately, every year, Oracle rolls out some new techniques to get clients to pay for its cloud technology even if they don’t use it.”

The Forbes article cites five strategies Oracle has employed to ‘entice’ its customers to its cloud services:

  1. The perception of legacy status. Oracle is not unique in the software sector in doing this, but in the view of the article’s author, releasing all new versions of their software on cloud-based platforms first spreads the message that anything else is a legacy format, which the company may, at some point discontinue support for.
  2. The ‘try before you buy’ trap. Oracle’s unlimited licence agreement gives you a chance to test the software before determining the number of licences you’ll need. However, it is reportedly not in fact unlimited, as use of third-party cloud platforms will require you to purchase additional licences. The aim is to seemingly encourage clients to use only Oracle cloud.
  3. Support issues. The article also mentions that the support information required to manage the software is particularly difficult to find, once again steering clients to use Oracle services as opposed to third-party support specialists.
  4. Licence limit warning. According to the article, the purchase of universal cloud credits when a client moves to the company’s cloud services requires regular payments which may mean paying for a service the company does not need further down the line, and more importantly, it does not warn the client when they are going over their usage limit. This could mean a company being stuck with a rather large bill at the end of a quarter.
  5. Audit, bargain, cloud. Once again, it’s not uncommon in the sector, so this was not uniquely aimed at Oracle, but the article also points to what it calls ‘strong-arm tactics’. When a client ramps up a large bill that they didn’t know about because they were not warned of going over their usage limit, Oracle can run an audit of their client’s usage. On completion of this audit the company is asked to either pay up or move to the cloud with the sweetener of some of the money owed being deducted.

This is of course not the first time that Oracle has been in court over its reputation in the cloud side of its business. In June 2016 an ex-employee – and subsequently, Oracle shareholders – are reported to have sued Oracle for making “…materially false and misleading statements regarding the company’s business, operational and compliance policies” when the company was accused of making up its Cloud sales figures.

The Shareholder Lawsuit

These tactics were specifically mentioned in the most recent shareholder’s lawsuit, coming back to what was reported in the Computing article, where it states “The company’s use of audits was well known within the industry, but the extent to which the company was using threats of audits to coerce customers to purchase cloud products was not known to investors, and expressly denied by the company.

In addition to threatening customers with audits, the company also decreased its customer support for certain of its en-premise and hardware systems in an effort to drive customers away from such systems and into cloud-based systems. The company also strong-armed customers by threatening to dramatically raise the cost of legacy database licences if the customer chose another cloud provider.”

In another article on this story in The Register, it’s reported that ‘The complaint argues that Oracle’s executives and directors have breached their fiduciary duty because they knew, or should have known, that the glowing growth reports were inaccurate.’

Conclusion

So, while much of what has been said in the case of the latest lawsuit by Oracle’s shareholders is already in the public domain, the question is: should these investors have expected more from the company, and should they have been informed of previous customer issues and suits, and of the true picture of the financial stability of the growth they’d been told about?

And, while it is true that others in the software sector use some of the tactics Oracle has been accused of using, do you think this makes these practices ethically acceptable?

So, if you are a customer of Oracle’s en-premises services, let us know if you’ve been ‘encouraged’ to move over to their cloud services, how you felt they approached this recommendation, and whether you have positive or negative stories to tell of your experience with Oracle.

If you would like to understand more about cloud computing procurement, download our free white paper: How to Successfully Contract for Cloud Services.

Leave a Reply

Your email address will not be published. Required fields are marked *