War of the words between CRM overlords

This past May, I wrote about how Bruce Cleveland who heads up Siebel's ASP-delivered CRM offering (officially "CRM OnDemand") had emerged from his bunker, apparently ready to take on (with a vengeance) CRM ASP poster-child Marc Benioff and his outfit Salesforce.com (see Siebel's on-demand chief now available on demand).   Back then, Cleveland circulated a letter to "Friends and Colleagues" (the press apparently qualifies) that signaled something of a gauntlet and, in an act of momentum-building, the letters are still coming.  Cleveland's most recent letter starts ofF by talking about how "the hosted CRM market has been growing at a rapid pace" and eventually gets around to making at least four points that, taken together, lead the reader to one logical conclusion: Siebel's CRM OnDemand is eating Salesforce.com's lunch. Those three points were as follows:

• Siebel's CRM OnDemand offering achieved $20.0M OnDemand total contract value (TCV) versus a total of $10.6M in Q1
• Grew user count to a total of approximately 40,000 OnDemand users
• Achieved a 58% overall win ratio vs. Salesforce.com vs. 56% in Q1-2005 and 5% in Q1-2004
  
• Won endorsement by key industry analyst firms (Forrester, Gartner, Nucleus and Yankee) for meeting and/or exceeding the functionality of Salesforce.com

Naturally, I took the next logical step.  In what's probably a surefire way to get taken off of Bruce Cleveland's distribution list, I forwarded Cleveland's e-mail to Salesforce.com CEO Marc Benioff for his take.  Apparently, the top CRM execs are free to engage in rhetoric.  But if you want comment or further expansion on that rhetoric, that's someone else's job.  My forwarding of Cleveland's e-mail commanded a response from Salesforce.com senior vice president of marketing Phill Robinson, who did a little debunking.  

As it turns out, total contract value (TCV) can be misleading unless you know exactly what it means.  Until investigating Cleveland's e-mail, my interpretation of the first bullet point was that Siebel grew its quarter-over-quarter revenues by 100 percent from $10 million to $20 million.  I was impressed (as I'm sure many of his other e-mail recipients were).  I'm not saying that Cleveland intentionally misled his recipients. But it helps to know that TCV represents the total expected value of all the contracts that Siebel has closed for its on demand offering.  So, for ASPs like Siebel OnDemand and Salesforce, if you take the periodic subscription fee that customers pay (monthly, quarterly, annually, etc.), multiply that fee by the duration of the contact (in periods), and total that up for all customers, you get TCV.   TCV is a measurement that helps researchers like Gartner, Yankee Group, and Forrester pinpoint marketshare.  It's also a measurement that venture capitalists use to keep an eye on how their ASP investments are doing since annual revenues and profits don't tell the whole story.

Once you know this, the first bullet point isn't nearly as impressive as it first appears. Over a long period of time, the cumulative contracts that Siebel closed by the end of Q2 should eventually result in $20 million of revenue.  While it's $10 million more than where it was in Q1, when you stretch that out over the life of the contracts involved, it's a little less impressive. (But, hey, impressive nonetheless because who wouldn't want to have $10 million worth of business signed up?!)

The second bullet point gives you an idea of how many end users ($40,000) actually account for the $20 million of TCV.  Averaging it out would be dangerous because different users are responsible for a different share of the $20M pie due to the fact that some are part way through their contract while others are just getting started.   Oh, what the heck. Knowing that, let's average them anyway: $500 per user.  Unfortunately, I can't compare that to Salesforce's TCV since, according to a spokesperson, TCV is "not a value we use."

In response, Salesforce's Robinson had this to say: "They have 40,000 total users? That's how many new users we brought on board in the last quarter alone."   In total Salesforce.com reports that it has 267,000 subscribers.  Robinson continued "They have $20 million in TCV?  We did $62 million in revenue in the last quarter alone."  Then, on the point about Siebel meeting or beating Salesforce.com on features (according to all the analysts), Robinson said "Having just issued our Summer 2005 release, we're two years ahead of where Siebel is."  Having seen Salesforce.com first roll out its namesake service and then subsequently roll out additional functionality through its SupportForce, SForce, CustomForce, and MultiForce offerings (and having seen Siebel stall out on its initial ASP efforts), two years as a quantification of Salesforce's headstart didn't seem unreasonable to me.  To convince me, Salesforce's public relations personnel made sure I had a Summit Strategies' study at my fingertips that basically summarizes how Salesforce.com could end up being the Microsoft of the on demand world if it wants to be and it does all the right things.  Finally, Robinson distrusts Siebel's claim of a 58 percent win ratio over Salesforce saying "we see Siebel occasionally [in when bidding for business], but not most of the time."

By now, if you're a fan of Robinson's rebuttal, then Cleveland's chest thumping looks more like he was pointing at an anemic bicep.  But, unfair as it may seem, I gave Siebel last licks and they gave me Rob Reid, the company's group vice president and general manager for the small/medium business market (which is kind of weird since both companies boast of closing deals with some very big enterprises). 

Reid started out by saying that "Our goal wasn't to do chest thumping, it was to talk about the momentum we have going on in the marketplace."  Sounds like chest thumping to me, but okay. Then Reid dropped the hammer.  Actually, it sounded like the thud an anvil makes after David Letterman drops it from atop a 40 story building: a thud on Salesforce's numbers.  By all measures, Salesforce is taking off like gangbusters.  All measures but one -- the size of the on premises CRM market vs. the on demand market.  This is elephant-in-the-room stuff because, compared to Siebel's total user base for both on demand and on premises versions of it's software, Salesforce.com is a fly on a rhino in wading pool in Africa.  OK, a dragon fly.  OK, a big dragon fly.   Reid admits that 40,000 total subscribers to Siebel's on demand offering is that big a number when compared to what Salesforce is doing.  But then again, Reid points that Siebel scores on average about 250,000 new seats each quarter.  "Four quarters ago, we were at 2.2 million.  We're at 3.4 million now" Reid told me.   So, in Robinson's parlance, Reid could have said "Oh yeah, well, between our on premises and on demand offerings,  we're getting almost as many new subscribers on quarterly basis as Salesforce has in total.  Stick that in your pipe and smoke it."   He didn't say that.  But I'll bet he wanted to.

In the bigger picture, the total number of users going with the on demand option for CRM is a smidgen of the total number going with the on-premises number (Salesforce.com, or not) and this puts Benioff's now infamous "No Software" pitch in interesting perspective.  The "No Software" ASP approach that Benioff advocates may very well be the wave of the future.  Personally, I absolutely love the idea and, if I ever started a company, I would insist on that approach to all of its IT (or as much of its IT as could be dedicated to the approach).  But the bulk of the market isn't with me on that thinking and this is Salesforce's biggest strategic weakness.   Siebel may have had a couple of false starts, but now, it seems to have its act in gear and the question is, given how much faster Siebel is growing the total number of seats it services, if and when the time comes that the "no software" approach starts to look better (as Oracle's Charles Phillips suggested at LinuxWorld today) than the on premises approach to the  majority of the CRM market, will Siebel's on demand offering offer the same value that's causing its on premises offering to win so many customers?

The answer may be yes.  According to Reid, there's a world of difference between his company's on demand and on premises offerings, with the former  trailing latter in numerous areas.  For example, whereas Reid says that Siebel's on premises solution directly addresses six major vertical industries and about 21 minor verticals, Siebel's on demand offering only services four major verticals (automotive, hi-tech, medical, and financial services).  But Reid claims, and I agree, that in terms of potential, there's nothing an on premises solution can do that an on demand solution can't.  In other words, it may only be a question of developer man-hours until Siebel's customers will be able to pick one or the other with no compromise in features or functionality).   By the time that happens, Salesforce.com's two-year headstart may, as a percentage of the life of the on-demand industry, no longer be the ominous headstart that it is now.  And, while the various current and future "Forces" that comprise the Saleforce complement will be forces (pun intended) for Siebel to reckon with, once Siebel's on demand offerings are infused with the industry expertise that the company's older more mature on premises solutions are known for, Siebel's on demand offering will very likely be a force of a different sort, but a force none the less.