The dip back into loss reported by Salesforce.com in its latest quarterly financials isn't that surprising. The company is making some crucial investments to set up its next phase of growth, which is bound to hit the bottom line. It wants to get its AppExchange offering established as a platform for on-demand application delivery, which in the short-term inevitably means a lot of spending on marketing and R&D for very little initial return. It's also striving to build its presence among large enterprises, which means investing in R&D to find answers to the recurring enterprise objections around integration and customization. That effort too is an exercise in deferred gratification, bearing in mind the typical length of sales cycles into large enterprises.
So it was a timely moment for me to meet company president Jim Steele on a visit to London yesterday. When Marc Benioff hired Steele in 2002, he described him as the company's "enterprise experiment": could Salesforce.com become as successful selling into large enterprises as it already was among smaller companies? Steele's verdict yesterday was robust: "Absolutely. No doubt." But although the signs are good, my take is that the evidence today remains equivocal.
The key metric to watch is one that's easy enough to calculate. Simply take the number of paying subscribers — 444,000 according to the latest earning release — and divide by the number of customers — 22,700, according to the same source. That gives you the average number of seats per customer, which stands tantalizingly just below the 20 mark at 19.56. If the figure rises over time, then it implies that Salesforce.com is gradually edging its customer base into the larger enterprise space (although other factors will influence this ratio too, such as the rate at which recent adopters scale up their usage). Compared to a year ago, there are signs of progress: it's gone up by more than two seats, from 17.2. But compared to the previous quarter, it's moved a bare fraction (up 0.1 of a seat) — despite adding 3000 seats at Cisco during the quarter.
Growth among smaller companies is still going strong, so it's an achievement in itself to keep the average rising. "Our SMB business is on fire," Steele told me. And Salesforce.com wants to keep it that way: "We're not growing the large customers at the expense of the small customers," he said. "We love that market."
But the omens are good for the larger enterprise opportunities, too, he told me. One factor that's become obvious over the past six months is the disappearance of Siebel from competitive pitches. "Siebel now accouts for a half of what it accounted for six months ago." Once Oracle gets its message realigned, that competition will resurface, but today customers are running shy of what many of them term Oracle's 'con-Fusion' strategy, said Steele.
Getting in through the front door is easier than it used to be, when Steele's sales strategy was to avoid calling on the CIO, pitching directly to line-of-business decision-makers instead. "Today I go in and I've got a story for you whether you're the head of sales or the CIO," he said. It helps having a clutch of reference customers to cite.
But having a better story on integration and implementation is something the company is aware it must work on. The recruitment of CRM implementation expert Cindy Warner earlier this year is a key part of its response (see my March interviewed with her for more on this). One of the fruits of her work came this week when Salesforce.com announced a set of partner offerings from Above All, Bluewolf, Bridgewerx, Cast Iron Systems, Integration Technologies and Pervasive Software to aid SAP integration. There's an interesting mix of on-demand and on-premises components here — something that doesn't really help the clarity of the message but can't be avoided when linking from on-premises apps out to an on-demand solution. In the future, said Steele, the company wants to simplify the picture by 'productizing' some of its integration solutions.
"Right now, it's a consulting engagement," he said. "But what we do differently with Salesforce is, we sit down with the customer and figure out what you want to expose to your sales force and focus on that." That's diametrically opposed to the SAP or Oracle approach to integration where the tendency is to try and link up everything at once, he explained. "We want to do a few integrations really well rather than doing everything average. We say, let's just focus on point-to-point integrations."
It's not what enterprises are used to as an integration proposition, but then the same is true of a lot of Salesforce.com's approach, which like any true on-demand vendor, puts the focus on getting a result for the customer.
"When you're an on-demand company, you don't have the luxury where you sell the customer a perpetual license and they're stuck with it for five years whether they use it or not," said Steele. "With us, the customer always has the right at the end of the contract to turn it off. Every single month, some percentage of our customer base is coming up for renewal. If they're not using the application, we want to know why."