In announcing his company's second-quarter earnings recently, Tom Siebel had ample reason for celebration. "We met our plan for the quarter," Siebel Systems' CEO and co-founder told analysts after he bested Wall Street's second-quarter projections. "We're one of the few who did."
Siebel is the world's largest customer relationship management (CRM) software vendor, with about 3,000 customers worldwide - half of them are big corporations such as British Telecommunications, Charles Schwab & Co. and Microsoft, and the balance are midmarket companies. It provides a family of multichannel e-business applications and services. "Think of us as the operating system for channel management," says David Schmaier, Siebel's executive vice president.
At a time when much of the IT industry is in the doldrums and the CRM business is poised for a shakeout, Siebel's revenue jumped 38 percent, growing from $397.5 million for the quarter ended June 30, 2000, to $549.7 million for the same quarter this year. Its net income took a similar leap, increasing from $49.1 million to $76.6 million. During the second quarter, Siebel also signed some major new customers - among them Ingersoll-Rand, NTT DoCoMo, Schering Health Care and Verizon Global Solutions - and the company significantly increased reorders and e-business applications deployment within its existing customer base.
Bayer, for instance, is putting half of its 119,000 employees on Siebel software. Similarly, National Australia Bank, the country's largest, is moving 10,000 customer-facing employees onto Siebel e-finance applications.
Meanwhile, IBM is rolling out Siebel CRM software across the entire company. "It's the largest CRM system in the world," Schmaier says. "It's going out to 120,000 employees, as well as IBM's 300,000 business partners and retailers and millions of customers."
Clearly, not even a recession can slow Siebel down. With a commanding market share of 70 percent, the San Mateo, Calif., company has emerged as the 1,000-pound gorilla in what is today a $6.4 billion market, which is only getting stronger. "We're the world's leading provider of multichannel e-business applications," Schmaier says. "We're about five times bigger than the next player in the space."
Bob Chatham, Forrester Research's principal analyst, says: "They're so far in front, it's hard for them not to become arrogant."
Laying the Foundation
Siebel started in 1993 as one of about 400 software companies in the then-fledgling $100 million sales and marketing automation field. Much of its subsequent success resulted from some early commitments the company made to customer satisfaction and partnering.
"When Tom [Siebel] and Pat [Patricia House, Siebel's executive vice president and co-founder] started the company, they made a conscious decision that they wanted to build a world-class software company," says Mercedes Ellison, Siebel's vice president of alliances. "They made customer satisfaction the key criteria for absolutely everything we do in the company, and decided we would partner with industry leaders that helped our solutions go to market. Having partnering as a core competency allows us to provide the best possible solutions to our customers."
A lot of vendors echo similar refrains, but Siebel takes its commitment to customer satisfaction and strategic alliances much further than most.
Every quarter for the past five and a half years, an outside auditor has polled each and every Siebel customer to gauge its satisfaction with the software. "We pay our people on the basis of those numbers," Schmaier says. "Every incentive plan in the company is tied to customer satisfaction."
The ratings in those surveys mean a lot to the salespeople. Every six months, Siebel fires the 5 percent with the lowest performance scores. In the most recent quarter, with sales under pressure, the company decided to fire the bottom 10 percent.
Siebel also uses these surveys to determine the return on investment that users are realizing from CRM implementations.
"Our latest metrics show that the average customer shows a 12 percent increase in revenue per person, and a 21 percent increase in employee productivity," Schmaier claims. "CRM has an impact on the top-line assets, as opposed to the cost reductions that come out of ERP [Enterprise Resource Planning applications]. At some point, there's only so much blood you can get out of a stone."
Siebel places equal emphasis on its alliances program. "These aren't just press release alliances," Ellison says. "Our alliance program is run like no other alliance organization I know of, primarily because we treat each relationship as a stand-alone business."
"One of the major contributors to Siebel's top line is its partnership program," Chatham adds. "They've got so much critical mass, it's hard for others to compete."
Siebel has alliances with about 750 systems integrators, IT consultants, and hardware and software vendors. It also has relationships with hundreds of resellers that, along with telemarketers, sell to midmarket customers.
The Siebel partner program, which has been named the best in the IT industry by various industry organizations and publications, including Forbes, is divided into five tiers. "The top is the global strategic level, which includes consultants such as Accenture, Deloitte [Consulting] and PricewaterhouseCoopers, as well as vendors such as IBM and Compaq [Computer]," Ellison explains.
The tiers descend to include small, regionally focused integrators and consultants at the bottom end. Together, Siebel and its partners develop and sell Siebel's products, with the partners bringing Siebel business or vice versa. "We measure where the new business comes from when it's generated by partners, and we have strict rules of engagement," Ellison says. "If a partner brings us an opportunity, we will win or lose the opportunity with that partner, unless the customer asks that the partner not be engaged."
Siebel works individually with its major partners in generating annual revenue expectations by region and industry. Based on these projections, Siebel tries to ensure that its partners have ample resources and an adequate number of Siebel-certified consultants on hand to ensure implementation.
"The consulting companies have played a strong role in our success," Ellison acknowledges. " In turn, many of them have built very strong businesses around Siebel, and are more and more willing to invest resources."
If a partner fails to bring in sufficient new business, shows up poorly in Siebel's customer satisfaction polls or doesn't invest sufficient resources - say, by participating in Siebel's certification program - it may be moved down to a lower tier or cut out of the program altogether.
"If a partnership isn't succeeding, we sit down with that partner and put corrective action in place," Ellison says. "And if the partnership is obviously not going to work, we part ways so that we can put resources in those partnerships that are seeing results."
Another cornerstone of siebel's success is its ability to penetrate vertical markets with multichannel applications that have been tailored expressly to meet the needs of those markets. Today, in fact, 70 percent to 80 percent of Siebel's customers purchase the industry-configured apps vs. the horizontal, nonindustry-specific version of the product.
"I believe that Siebel is one of the few applications providers that has done an effective job in verticalizing its products," says Ed Abbo, Siebel's senior vice president of industry applications. "We've been able to accomplish this because of an early realization that an industry focus was important and that from the start the product is designed to allow you to verticalize."
To date, Siebel has targeted a dozen industries, including finance, energy, automotive and health care.
"Our philosophy is that if we pick an industry, we really go after it comprehensively," Abbo says. "This isn't a marketing brochure approach. We're not going to go after 20 to 24 industries like some of our competitors."
When going after a new industry, Siebel pulls out all the stops. It brings on board a general manager and a team of executives with solid industry backgrounds, and puts together a product management organization and a development team that's dedicated to configuring the product to the needs of the specific industry. At the outset, Siebel will work closely with a handful of customers - usually big names such as Citibank in finance or General Motors on the automotive side - to pinpoint their needs and include best industry practices in the software. These are charter customers that drive Siebel's efforts in a vertical market.
"If we're going in, we're going in to be the market leader in that industry and devote the resources necessary to accomplish this," Abbo says.
For example, Siebel recently targeted the public sector, where it already has several significant customers, including the U.S. Postal Service. In recent months, the company has put together what Schmaier describes as "a team that knows how to build and implement a product for the public sector."
Members include heavyweights such as Frank Bishop, formerly Oracle's vice president of public sector product; Michael Mailbach, Siebel's senior vice president of government affairs, who was head of government affairs for Andy Grove of Intel; and Jim McGuirk, Siebel's vice president of federal sales, who previously ran Unisys' public-sector business worldwide.
Schmaier also notes that Siebel recently appointed the former governor of Montana, Marc F. Racicot, to its board of directors.
Bumps in the Road?
For Siebel to continue dominating the CRM market and grow its revenue, it must deal with several potential obstacles. One of these is an underlying angst that the CRM market, which has been growing at a 54 percent compound annual growth rate, may stall or not "take" to the extent that its most bullish supporters are projecting.
Forrester's Chatham explains that, unlike other major enterprise software initiatives such as ERP - which becomes embedded in a company's processes - CRM is successful only to the degree that it's deployed. "The viability of a CRM installation is more dependent on people learning the methodology than with ERP," Chatham says. "CRM is also more selective. Sales or marketing people can simply decide not to use it." In which case, all of that revenue that Siebel and its competitors are counting on from upgrades and expansions may be too optimistic, Chatham says.
A more immediate threat to Siebel's dominance comes not from traditional CRM vendors, but from ERP software suppliers such as PeopleSoft and SAP.
Like Siebel, PeopleSoft registered a profitable second quarter, beating Wall Street's expectations with earnings of 14 cents per share and a 51 percent jump in license revenue, to $166.3 million. PeopleSoft also added 120 new customers, many of them CRM users, and stated "win rates" against Oracle and SAP.
SAP also registered a strong second quarter, largely on the strength of its CRM business, and projects a better than 20 percent growth rate for the full year. SAP is the world's largest applications vendor - Siebel claims the No. 2 position - and in the end may be the competitor that Siebel fears most.
Then, of course, there's the current economic malaise. "It's tough and it's going to get tougher," Tom Siebel concedes.
Long term, however, the prospects are far brighter. "Our estimates are that the CRM market has been penetrated on the order of only 3 [percent] to 5 percent," Schmaier says. "There's a lot of virgin territory out there."
Siebel fully intends to lay claim to the biggest chunk of that territory. But, what else would you expect from a 1,000-pound gorilla?