Oracle's acquisition of PeopleSoft says a lot about the current state of the software market. The twin pressures of consolidation and commoditisation are shaping the industry -- forcing enterprise software providers to look for new opportunities through changing focus or acquisitions.
The market for customer relationship management (CRM) software could be seen as a microcosm of the issues affecting the rest of the business application market. According to industry analyst DataMonitor, with a saturated enterprise CRM market, vendors are turning their attention to smaller companies. Global CRM spend among small and medium-sized businesses will total close to $2bn by 2008 – more than double what it is today.
"A new CRM market is being created, one which encompasses those businesses which were not part of the initial CRM adoption phase; CRM is being pressed into the mass market," says Datamonitor Technology analyst Tom Pringle.
This massive growth in companies looking to invest in CRM is especially surprising given the horrendous reputation the technology earned itself in the late nineties and early 2000s. CRM horror stories of hugely expensive but inefficient implementations were commonplace. But somehow the CRM vendors seem to have not only escaped that legacy but have convinced customers that another previously risky technology -- hosted or on-demand applications -- also makes sense.
The single biggest debate shaping the CRM market at the moment is the means by which the applications are delivered to customers, says Pringle. Traditionally, companies such as Siebel have made a good living from selling on-premises applications to large corporations but a trend towards hosted applications targeted at smaller companies has altered the dynamics of the CRM market.
Two of the biggest players in the hosted software arena currently are Salesforce.com and RightNow Technologies. Both firms have announced massive increases in their customer base during 2004, which has fuelled moves by both companies to launch successful IPOs.
In October Salesforce.com announced it had added some 85,000 individual subscribers to its online customer information system, an 85 percent increase on the same time last year. RightNow also reported a 78 percent jump in third-quarter revenue and announced it had recruited around 26 public sector customers in the UK alone.
Salesforce.com is probably the better known of the two due to it aggressive marketing campaign over the last two years fronted by rambunctious chief executive Marc Benioff. The Salesforce.com mantra is based around the concept of 'No software'. The company claims to be all about eliminating unnecessary infrastructure by allowing companies to use its hosted applications rather than having to go through the hassle and expense of installing software locally. The Internet has replaced the operating system as the integration layer for applications, Salesforce.com claims.
While Salesforce.com, as the name suggests, is concerned with the sub-section of CRM that relates to applications used by salespeople to manage contacts and leads, RightNow Technologies operates at the other end of the sales process. Montana-based RightNow deals with applications for call centre and customer support. Although it is less visible than Salesforce, the company has a considerable reputation in this area having accrued around 26 different UK public sector customers in the last year.
RightNow's chief executive Greg Gianforte claims that hosted CRM have succeeded this time round because of advances in the architecture. "In the first go-around the applications were not written for a multi-tenant architecture. Essentially they were taking client server apps, taking a rank of hardware out of the client's location and putting it in a co-lo facility, adding a margin and charging the customer back. What is different this time is that the applications have been written from scratch for a multi-tenant architecture."
RightNow and Salesforce may appear to have almost complimentary market focuses at the moment -- a merger would make sense -- but both firms are very focused on spreading the breadth of their product sets and being able to offer a complete range of CRM applications including sales, customer support, analytics and marketing. But while relative newcomers like RightNow and Salesforce.com and other players tussle it out to become the de facto hosted CRM player, companies such as Siebel, which has traditionally been exclusively focused on larger fish, are trying to reposition themselves. Last week Siebel launched a marketing offensive to try and build some bridges to smaller firms who until now would have regarded Siebel's CRM software as overly-expensive and overly complex.
"Small to medium-sized organisations have an unmet need for proven, complete CRM solutions that enable them to upgrade from spreadsheets, home-grown contact development tools or legacy software systems they are currently using," says Bruce Cleveland, general manager of Siebel OnDemand and SME.
Enter the big boys
However, the likes of Salesforce.com and RightNow are understandably threatened by a sleeping giant like Siebel waking up and going after the very customers they have built their businesses on. RightNow's Gianforte claims that not only has Siebel got little or no expertise dealing with small companies, it's also pretty inexperienced when it comes to the whole hosted model for application delivery. He claims that Siebel's decision to host applications using a third party is an ineffective way of going about the job and the costs accrued involving a middle-man ends up being passed onto customers.
"Siebel is trying to expound is that it is not relevant whether it is the vendor or a third party that hosts the software. Does this mean that Siebel is willing to disclose how much it costs them to use IBM as a hosting partner and how that cost is passed on to its customers?," he says. "At RightNow hosting is 6 percent of our top line revenue, we rent a pipe and rack space -- that's it, everything else is RightNow, not some third party that maybe doesn't have such an emotional investment in the company's success. This third-party hosting just underlines what we already knew, Siebel is incapable of delivering software outside of a complex ecosystem"
Salesforce.com has been similarly scathing off Siebel's ambitions for the SME market. Phill Robinson, VP of marketing at Salesforce.com Europe, says Siebel does not understand the SME market and doesn't know how to sell to smaller firms
"The major vendors are all starting to exploit the SME opportunity despite having engineered software architectures built for the larger enterprise. Siebel has failed three times over the past five years. What says they'll make it this time?"
Robinson claims that Siebel's channel strategy has always been a "dog's breakfast" and the company doesn't how to partner with other organisations. "What SME's are looking for from CRM is to reduce cost, risk and complexity. Siebel is expensive, difficult to use, over-engineered and fraught with danger," he says.
Siebel however is not the only entrenched software giant throwing its weight around in the CRM market. Microsoft has also staked a claim and is hoping that the tight integration it can offer between its CRM product and its Exchange/Outlook email software will give it an edge in the market.
The SME equation
Jason Nash, UK CRM product manager, Microsoft Business Solutions, says current market conditions demonstrate the need for CRM products built specifically for small and mid-market customers, since scaled-down enterprise products are too complex for the business needs of smaller organisations. "The success of Microsoft CRM, which has achieved 110 customers since its UK launch 12 months ago, can be attributed to a number of elements, but the chief among them has been the heritage of our partner community in delivering products to the SME," he says.
However like Siebel, Microsoft has shied away from hosting applications directly opting instead to use third-parties which in the UK such as Aspective. Aspective recently acquired another Microsoft partner Erudite -- another indication that the hosted CRM market is hotting-up.
"The focus of the CRM market is definitely shifting towards the SME segment," says Javaid Aziz, CEO of Aspective.
But once again RightNow and Salesforce are quick to dismiss Microsoft as a potential competitor. RightNow's Gianforte argues that Microsoft would have to fundamentally alter its business model to compete effectively in the hosted-CRM space.
"They have a lot of resources but the structural impediment they have is that at its heart, this on-demand model is about eliminating infrastructure -- Microsoft's core business is selling infrastructure. To really embrace this model, Microsoft has got to be prepared to cannibalise its core business," he says.
Datamonitor analyst Pringle claims that price, functionality and deployment are the three factors most customers are likely to use to differentiate between the various players in the CRM space. "Key to success here lies in the flexibility of access provided by the vendor. Much in the same way phone operators offer their customers different headsets, tariffs and options within their price plan, vendors of CRM in the SMB market must be similarly flexible," he says.