Sources: Oracle Suffers Cloud Capacity Shortage, Some Large Customers Unable To Use Service Credits

Oracle recently experienced a cloud capacity shortage that affected customers of its Infrastructure-as-a-Service and Exadata Database-as-a-Service, multiple sources familiar with the matter told CRN this week.

Though it's not clear how many customers were affected, or whether the capacity issues are ongoing, the sources said some large customers were unable to redeem their "cloud credits" -- licenses redeemable for Oracle cloud services that are increasingly being included in large deals -- before they expired at the end of May.

"When the expiration came up on one of my client's cloud credits, and they wanted to exercise them, Oracle told them they shouldn't have waited until the last minute," said one Oracle partner, who didn't want to be named to protect his relationship with the vendor.

[Related: Here's Why Some Partners Think Oracle Cloud Sales Numbers Are Misleading]

According to the sources, Oracle's sales teams sold a significant amount of cloud IaaS and Exadata during the vendor's fiscal 2016, which ended May 31. Oracle provisioned compute and storage capacity based on the amount it sold, and not actual usage, and that's where the issues began, said the sources.

Because of over-provisioning, Oracle ended up selling all of its available technology resources for IaaS and Exadata, even though customers were actually using only a fraction of the provisioned cloud capacity they'd purchased, the sources said.

Oracle had to scramble to build and set up new IaaS and Exadata capacity, even as it realized that the provisioned capacity was severely underutilized, said the sources, who spoke on condition of anonymity.

An Oracle spokeswoman said in an emailed statement that the vendor has "received zero complaints from customers related to an inability to use cloud credits before expiration."

The capacity shortage may indicate that Oracle is experiencing growing pains as it transitions from traditional "on-premise" software sales to selling cloud services. It also belies "a severe lack of capacity management and operations visibility" on Oracle's part, one industry chief technology officer told CRN.

"If Oracle was simply increasing capacity based on what was sold, without having the ability or thoughtfulness to monitor what was actually being utilized, then I'd say their cloud is hugely mismanaged," said the executive, who didn't want to be named.

Cloud vendors need real-time insight into how much cloud capacity their customers are actually using, along with predictive analytics technology to forecast future needs, the executive said.

"There's no excuse for operations to run out and build to support everything that is sold," said the executive. "A good cloud provider will have very strong capacity management tools and processes, and can expand 'just in time' instead of having to build weeks or months in advance."

Sources said the cloud capacity issue stems in part from Oracle's intent to recast itself as a cloud software powerhouse after making a late entry to the market.

Oracle, in its third quarter earnings in March, reported combined revenue of $737 million for its cloud IaaS, Software-as-a-Service and Platform-as-a-Service offerings, up 43 percent from the year-ago quarter. Gross margin was 51 percent, up from 43 percent the previous quarter.

These cloud services are on track to hit $1.5 billion in bookings during fiscal 2017, Oracle co-CEO Mark Hurd told investors in a conference call.

Yet some Oracle partners have questions about the tactics the Redwood Shores, Calif.-based vendor is using to boost its cloud sales figures.

Earlier this month, a former Oracle employee filed a whistleblower lawsuit against the vendor alleging that her superiors pressured her to bolster cloud services sales figures in financial reports. Oracle has denied the allegations and said it plans to countersue.

Oracle's sales compensation model, in which reps get significantly higher commissions for selling cloud services than for traditional on-premise software, may have exacerbated the cloud capacity crunch, sources told CRN previously.

Oracle salespeople often sell cloud credits to take advantage of the higher commissions. In one typical scenario, an Oracle sales rep will knock the price of a $1 million on-premise software down to $800,000 if the customer agrees to buy $200,000 in cloud credits.

On the surface this looks like a win-win: The Oracle sales rep gets the higher commission rate on the cloud portion of the deal, and the customer pays less on the software support renewal the following year because they're using less traditional software.

However, as evidenced by the recent cloud capacity shortage, Oracle's approach to boosting cloud sales figures also comes with some unintended side effects.

Oracle, in an apparent response to the cloud capacity crunch, recently reduced its cloud commission payments to salespeople.

Oracle was paying salespeople up to five times their normal commissions for cloud sales last summer, but is now paying a maximum of three time their normal rate, according to the sources. Oracle declined comment.

"The commission cut from 5x to 3x was probably a refinement Oracle made when they realized this sort of multiple can result in abuse of the compensation plan," said one longtime Oracle partner, who didn't want to be named.

In another apparent response to the capacity shortage, Oracle has been stepping up efforts to ensure that customers are actually using the cloud services they're buying.

"We're hearing from clients that are getting bombarded with calls from Oracle reps after they sign cloud deals. They're telling customers, you have to log in and use it," said Craig Guarente, CEO of Palisade Compliance, a New York-based firm that helps Oracle customers with licensing matters.

Oracle isn't just doing this to get a better handle on cloud capacity needs. Guarente, who spent 16 years at Oracle and was a former global vice president in charge of contracts, said Oracle -- like Microsoft and other cloud vendors -- wants to ensure customers remain engaged with its cloud services.

"Cloud needs to be sticky, and at some point, if customers aren't using it, they're going to stop paying for it," he said.