Oracle Using LMS License Audit to Drive Cloud Revenue

This is part 1 of a multi-part series on Oracle’s LMS Audit of the City of Denver.

In a recent CBS News investigative report that you can watch here, Brian Maass uncovered a large Oracle audit on the city of Denver that resulted in Denver paying Oracle almost $4,000,000.  While this type of audit might have been unknown to the innocent tax payers of Denver, at Palisade, we’ve seen this move by Oracle over and over again.  The Denver Audit showed exactly how Oracle audits their customers and forces them to buy cloud subscriptions to resolve those audits.  In the past, we’ve talked about these ABC Audits – Audit, Bargain, Cloud.  But now, completely through documents available in the public domain, we can show you exactly how Oracle does this.

Step 1 – The Audit

The city of Denver received an audit letter from Oracle on July 27, 2016.   Below is an email from Oracle to the city of Denver.

Despite the client’s contract providing an extended notice period, Oracle insisted on starting the audit within 3 days (see above).  In addition to this, when Denver asked that all audit activity be done over email, because, according to one Denver employee, “Colorado has an Open Records Act, and we value transparency in government.  We want to make sure that if any member of the public wishes to scrutinize the actions of either party, that we have a complete and accurate trail of correspondence.” (August 30 email) Oracle insisted on a face-to-face meeting.  Denver sent another request to the Oracle LMS Audit team stating, “Concerning the conference call and face-to-face meeting that you [LMS] have requested, we reiterate our earlier request that all audit-related communications continue in writing.” (September 15 email).  To which Oracle LMS responded, “we are now officially demanding a face-to-face meeting to conduct the audit.”  In addition, as an added threat, Oracle LMS brought in their legal counsel in the same email which continues, “Oracle’s Legal Counsel, is copied on this e-mail.  Please provide the contact information of City and County of Denver’s attorney should the matter need to be handled by our respective Counsels.” (October 4 email)

And there you have it, a legitimate request by a customer is met with the threat of legal escalation by Oracle’s LMS audit team.

Step 2 – The Bargain

The onsite LMS audit meeting was held on Thursday, October 20, 2016.

The interesting thing here is that we were not able to find any interim LMS audit report or final LMS audit report in our research.   What we do know is that Oracle decided that Denver was out of compliance, and Denver agreed there was a compliance problem.  In fact, on November 28, a little more than a month after the LMS Audit meeting demanded above, the CIO of Denver wrote to Oracle and said, “the City and County of Denver would like to move forward on “right sizing” our licensing agreement.”   (November 28 email)

Something happened between October 20, 2016 and November 28, 2016.  We haven’t seen any reports produced by Oracle that show the non compliance allegations.  Maybe there was a report, we just have not seen it.  Why is this important?  Well, at Palisade we’ve been saying for years that Oracle’s LMS audit team does not have to finish the audit to drive the deal to completion with Oracle sales.  In fact, by not finishing the audit, Oracle makes more money.  LMS can put some fear into the customer and have the sales teams close a new deal, while LMS moves on to their next target.

Step 3 – The CLOUD

Remember, Denver was audited for their use of on-premise software.  They were not audited for cloud usage.  Therefore, any non compliance findings should result in Denver acquiring licenses for on-premise software.  In this case,  Oracle sales put two offers in front of the client, one with cloud, and one without.

The email excerpt below shows both options.  While the math is not exactly what Denver signed up for, you can clearly see the message…buy Oracle cloud or we will make you pay more money.  In the case below, almost 2 million dollars more if the customer doesn’t buy cloud.

 

And just in case you think there is a difference between the licenses in Option 1 vs Option 2, the Oracle sales manager who sent this letter states “Please note that the list of products included within the Unlimited License Agreements (ULA) in both options is exactly the same.” (Letter from Oracle to Denver. December 22, 2016).  The Oracle sales manager wrote in an email accompanying this letter, “As shown, including Oracle Cloud will save the City and the County of Denver just under $2m over the next five years.” (email Dated December 22).

Conclusion

The dollars finally spent by Denver and sent to Oracle were slightly different than the numbers above.  In the end, Denver spent approximately $3.9m total.  The picture below shows the exact breakout.

The cloud numbers above of $1,895,178.96 are in fact only one year of cloud subscription services.  This is very important for two reasons.  First, for the city of Denver, it means that if Denver actually uses the Oracle cloud, then the Denver taxpayers will have to pay Oracle almost $2m a year MORE than the numbers indicated in the sales offers above. Oracle sales’ numbers were only based on a one year cloud subscription. Any cloud usage more than a year means the on-premise only offer would have been less money.

Second, and most important for us who follow Oracle, is that it appears Oracle was only selling a one year cloud subscription to Denver with no anticipation of Denver actually using the cloud beyond the first year.  If Oracle sales thought Denver was going to use the Oracle cloud, then they would have priced it out in their option 2 offer above and the 5 year cost for Denver would not be $6.1m, it would have been approximately $14m.

Now we can put all the pieces together.  Had Denver not been audited they would not have bought the Oracle cloud subscription.  If buying only the on-premise licenses was less expensive, Denver would not have bought the cloud subscription.   It is fair to conclude Denver did not buy Oracle cloud because they wanted Oracle cloud.  Denver bought Oracle cloud because Oracle pushed Denver into a corner with a coordinated LMS audit and sales pressure tactics.

Only time will tell if Denver actually uses the Oracle cloud they bought.  The information we have in the emails and contracts we’ve reviewed showed nothing about Denver acquiring this cloud subscription for any reason other than Oracle making it less expensive than buying on-premise only.  The Oracle LMS audit of the City of Denver has all the makings of the ABC Audit – Audit Bargain Cloud.

In part 2 of our report, we will highlight in more detail the tactics and methods deployed by the Oracle LMS audit team.  In part 3 we will highlight what Denver should have done in response to Oracle’s audit letter.  Stay tuned.