War Looms in the On-demand CRM Market (and Beyond)-But Will You Profit from It?




Salesforce.com: On-demand in Demand

Salesforce.com (NYSE: CRM), sometimes informally referred to as SFDC, has come a long way since introducing its on-demand customer relationship management (CRM) service in February 2000. One of the keys to its success was its self-described guiding design principles for Salesforce.com's software as a service (SaaS)—see What Is Software as a Service?), which will be referred to as "service" in the rest of the article.

Per its 2006 annual report, the service is designed to be

  • low-cost and easy to use
  • easy and quick to deploy
  • customizable
  • integrable with other software applications
  • useful for businesses of all sizes and from all industries

All this is in theoretical contrast to the undeniable complexity of deployment (and integration, and customization, and support, and upgrade …) for non-hosted on-premise enterprise applications, which has been documented amply (and ad nauseam) elsewhere. However, see also the article Software as a Service: Not without Caveats.

Salesforce.com's guiding principles are ambitious, and largely successful, if its 2007 revenues (over $700 million [USD]) and current brand leadership are anything to go by. Salesforce.com also raised its guidance for fiscal 2009 (ending January 31, 2008) to a range of $1.070 to $1.075 billion (USD).

Add to this a 40 percent user growth rate year over year (paying subscriptions rose from 393,000 to 646,000 from 2006 to 2007 alone) and you have what appears to be an unstoppable force of nature. As of July 31, 2008, Salesforce.com manages customer information for approximately 47,700 customers, including ABN AMRO, Dow Jones Newswires, Japan Post, Kaiser Permanente, KONE, Sprint Nextel, and SunTrust Banks.

Indeed (and perhaps ironically, as we'll see later), the success of the Salesforce.com product has gone a long way toward improving the credibility of on-demand/SaaS products generally and globally.

That's partly because CRM and "hosted" tend to fit together like hand and glove, if only by default, since traditional on-premise CRM applications suffer from a number of stumbling blocks, low user adoption and lack of access-everywhere-anytime chief among them.

As Salesforce.com explains in its annual report,

The pervasiveness of the Internet, along with dramatic declines in the pricing of computing technology and network bandwidth, have enabled a new generation of enterprise computing in which substantial components of IT infrastructure can be provisioned and delivered dynamically over the Internet on an outsourced basis and as a service.

Salesforce.com's Strategies for Success

Of course, there are reasons for Salesforce.com's success that go beyond "an idea whose time has come." Besides being one of the earliest hosted CRM vendors, Salesforce.com also provides a mature and solid product, with a primary focus on the following functional areas:

  • sales force automation (SFA), under the brand Salesforce SFA

  • partner relationship management (PRM), under the brand Salesforce Partner Networks

  • marketing automation, under the brand Salesforce Marketing

  • customer service and support automation, under the brand Salesforce Service & Support.

Salesforce.com has also had success in targeting multiple market segments, via different "editions" of its service (the latter three introduced during fiscal 2007):

  • Group Edition (formerly Team Edition), which is targeted to up to five subscribers, and is aimed primarily at rapidly growing small businesses and workgroups that seek a basic SFA and case management solution, without the advanced features required by larger companies.

  • Professional Edition is targeted primarily at medium-sized and large businesses that need a complete CRM solution, but do not need some of the more advanced administrative features and integration capabilities.

  • Enterprise Edition is aimed at large organizations with many divisions or departments.

  • Unlimited Edition is the company's most fully featured edition, and includes unlimited installations from the Salesforce Appexchange directory (to be described shortly), increased customization and extension possibilities, Salesforce Sandbox (which will also be described shortly), Apex Mobile, premier support with administration, and more storage capacity.

  • Partner Networks was introduced in mid-2006, and is also known as Salesforce PRM (mentioned above).

  • OEM Edition targets start-up software companies and established independent software vendors (ISVs) that want to develop new on-demand applications (not necessarily CRM-related) in an original equipment manufacturer (OEM) manner.

See http://www.salesforce.com/products/editions-pricing/feature-comparison/ for a more detailed breakdown of the various editions.

Promoting Platform as a Service (PaaS) Too

Having practically set the standard for on-demand CRM applications, Salesforce.com has more recently made forays into the realms of an on-demand platform and programming language.

Known as Force.com (and previously as Apex and, somewhat confusingly, as AppExchange, which is not the Appexchange directory and marketplace of about 800 on-demand applications), the platform is billed as an "on-demand application-sharing service." Although Force.com is new, aspects of the platform had their roots in the 2003 announcement of sforce—an open source SaaS application programming interface (API) that allowed ISVs to build on top of the platform.

In theory, the platform gives developers and users an environment to build and download business applications. According to Salesforce.com,

Apex provides a complete set of features for building business applications—including data models and objects to manage data, a workflow engine for managing collaboration of that data between users, a user interface model to handle forms and other interactions, and a Web services API for programmatic access and integration.

In practice, the platform does provide a community-based environment for technological innovation, but it also serves Salesforce.com fairly well, as it provides a basis not only to test and deploy third-party applications, but also to deploy Salesforce.com application services.

Furthermore, the Force.com platform is a rather nifty viral marketing tactic that further solidifies the viability of hosted applications in the perception of customers. According to Salesforce.com, more than 125,000 custom applications and objects have been created, and over 40,000 AppExchange installs have been completed.

Customers are not alone in being convinced. Thanks in large part to the vendor's success in forging new ground, other vendors are also buying in to the hosted philosophy with a vengeance. In other words, Salesforce.com is largely the architect of its own challenges (or downfall, if the likes of Microsoft have their way).

We'll return to that thought in a minute, but it's worth noting that in mid-2007, the vendor announced the availability of Salesforce Platform Edition, giving customers and ISVs the ability to deploy the platform independently of Salesforce.com's traditional applications.

See http://www./company/news-press/press-releases/2007/04/070423.jsp for more information on Salesforce Platform Edition.

On a final note, Salesforce.com is certainly not reluctant to conduct occasional acquisitions in order to expand its functional footprint (although it appears the vendor is trying not to tread on the turf of its AppExchange add-on application providers). In early 2007, Salesforce.com acquired the start-up content management provider Koral Technologies, while in 2006, it acquired the handheld/mobile computing software company Sendia, and Kieden, a software provider for managing Google AdWords-based marketing campaigns.

Most recently, Salesforce.com acquired InStranet, a provider of knowledge management (KM) technology for business–to-consumer (B2C) call centers. This event deserves a blog post on its own (look for that down the track) due to the crucial importance of the KM tools and because of InStranet's on-premise nature (which flies in the face of Salesforce.com's "No software" mantra).

Pretenders to the On-demand Throne

Success aside, Salesforce.com is not without its share of challenges—or challengers.

The vendor itself identifies four segments of current competitors:

  • large enterprise software application vendors, including Amdocs, Infor, Epicor, SAP, Oracle, etc.
  • packaged CRM software vendors, some of whom offer hosted services, such as FrontRange, Onyx (now part of Consona CRM), Pivotal (which is owned by CDC Software), Sage Group, Microsoft Dynamics CRM, and SugarCRM
  • on-demand CRM application service providers such as Oracle CRM On-demand, SAP Business ByDesign, NetSuite, and RightNow
  • large enterprise application service providers (ASPs), including British Telecom (BT) and IBM

The Microsoft Live Factor

Competing against Microsoft is not everyone's idea of a good time (unless your name is "Google" or possibly "Oracle"), especially since Microsoft can devote far more resources to the development, promotion, and sale of its products than, say, Salesforce.com (or anyone else for that matter). And although this allows the giant to respond more quickly than others to new technologies and changes in customer needs, Microsoft still has not arrived on the hosted CRM scene in full force—although Microsoft Dynamics' 150 hosting partners in about 30 countries are not to be sneezed at.*

However, when we contacted Salesforce.com, the vendor had this take on Microsoft Dynamic's hosting partners:

These partners are not yet very successful on the SaaS scale, and Salesforce.com still has a unique advantage in that we are fully dedicated to the services we deliver, while Microsoft must struggle to compete with Google, Oracle, SAP, Apple, the Internet start-ups, and to get its operating system (OS) working. Microsoft also has tried and failed to buy large Internet companies, such as Yahoo!, and instead is buying its own stock back in order to prop it up.

* Gesundheit.

Still, the biggest threat to Salesforce.com's on-demand CRM supremacy might have come in July 2007, when Microsoft kicked off its "partner-led customer early access program" for Microsoft Dynamics Live CRM (recently renamed as Microsoft Dynamics CRM Online), as well as product and pricing information for the new on-demand service. We should note here that Microsoft officially launched Dynamics CRM Online in April 2008, just five months ago.

The service uses the same code base as the on-premise (and partner-hosted) versions of Microsoft Dynamics CRM, and is available in a range of service offerings:

  1. Microsoft Dynamics CRM Online Professional offers full-suite CRM through Microsoft Outlook and browser clients, a customizable workflow powered by Windows Workflow Foundation (WF), and rich configuration and extensibility capabilities.

  2. Microsoft Dynamics CRM Online Professional Plus offers the capabilities of the Professional product as well as offline data synchronization.

With Microsoft Dynamics CRM Online Professional Plus being priced at $59.00 per user per month (and $44.00 per user per month through the end of 2008), while the Professional edition is priced at $39.00 per user per month, Microsoft's prices seem at least 30 percent cheaper than the equivalent Salesforce.com edition. (All prices in USD.)

Salesforce.com contends that there is no equivalent version actually, since Dynamics Online is English-only and has a basic SFA functional footprint. It does not reportedly work with the workflow foundation yet, and it has few integration points and no major success stories. To put this in context, Microsoft launched its CRM offering in 2002 (quite late to market) and has since really only released one or two full new versions. This pace is slow compared to Internet companies such as Salesforce.com. For more context, Salesforce.com had fewer than 72,000 users when Microsoft CRM was first launched. Salesforce.com now has over 1.2 million users (paying), while Microsoft still does not release its real numbers.

Incidentally, Microsoft announced its first service update in September 2008, and the plan is to launch two to three service updates per year. With the Dynamics CRM Online service, partners in the Microsoft Dynamics CRM ecosystem develop and deploy solutions across the three deployment options: 1) live/online (on-demand), 2) on-premise, and 3) partner-hosted models (such choice is certainly not a trait of Salesforce.com).

As far as other differentiators (e.g., from Salesforce.com) are concerned, for revenue in the new Live/Online model, partners are compensated on a recurring basis, not on a one-time basis: each year they receive 10 percent of the yearly SaaS subscription revenue for each customer for whom they are the partner of record.

However, Microsoft still has not developed a true counterpart offering to Salesforce.com's Appexchange directory of on-demand third-party applications. To be fair, Microsoft has launched Microsoft Pinpoint beta, which is a community-based online marketplace for Microsoft customers to find software and services. Instead of being narrowly focused on CRM, Pinpoint addresses all business software and service needs. We should still note that this version is in beta release, with more functionality coming soon.

Microsoft Dynamics CRM Online is based on the release of Microsoft Dynamics CRM 4.0, a fully multi-tenant application platform that supports deployments in on-premise environments, in partner-hosted environments, and via the new Microsoft Dynamics CRM Online service. To nitpick, the "fully multi-tenant" term may not be correct, since multi-tenant means that all customers are using the very same version. This is not a possibility with different deployment models. What Microsoft is doing is allowing multiple customers to share the same stack in some situations.

Before developing a true multi-tenant architecture, Microsoft offered hosting options for partners and customers via a service provider license agreement (SPLA) option, whereby partners could buy Microsoft Dynamic CRM on a per user per month basis and then resell it to end consumers as a hosted application.

According to Microsoft, the Microsoft Dynamics CRM Online service offers solid application configuration capabilities—and thus (together with the on-premise and partner-hosted offerings), Microsoft hopes to offer real and meaningful "power of choice" to customers and partners. Microsoft Dynamics CRM currently has over 15,500 customers and over 750,000 users.

Again, Salesforce.com contends that this number is used only in promotional appearances and press interviews, but cannot be validated since Microsoft does not disclose these figures publicly. Also, even if it did have numbers on this scale, this does not include usage. Microsoft may throw in CRM seats for customers who have or have not actually used it, whereas SaaS companies like Salesforce.com know the exact usage, since they charge subscription fees on that basis.

We'll have to wait and see how simple it might be for customers to simply switch from one deployment model onto the other, but the idea of choice will certainly resonate with customers. Microsoft Dynamics CRM is already one of the fastest growing CRM applications on the market (at about 100 percent annual growth, and with [reportedly] 85,000 new seats in a single quarter in 2007) and a low-cost SaaS version will do nothing but accelerate that growth and put increased pressure on the competition.

Salesforce.com and Microsoft Dynamics CRM Head-to-head

It should be said that Salesforce.com provides value that Microsoft is not likely to be able to compete with any time soon, especially with midsized and large user companies, and also when you consider the Salesforce.com ecosystem, the breadth of its CRM suite (SFA, service and support, marketing, and PRM), and its integration/customization capabilities.

Certainly, Microsoft will be hard pressed to fully execute on its broader Microsoft Live/Online vision and its solutions marketplace initiatives, although the behemoth has an astounding track record in terms of successfully transitioning its business through major architectural and inflection point cycles, as witnessed with both client/server computing, via Internet-based architecture and Web services, and now to Web 2.0.

What might be different today, though, is that the on-demand/SaaS model requires a holistic services-based way of thinking pervasively throughout the organization (and the channel).

And despite its worldwide installed base and value-added reseller (VAR) and ISV partners for sales, implementation, and hosting, Microsoft has thus far been largely a product company. Therefore, while Microsoft top execs are clearly on board with Microsoft Live, it remains to be seen whether this has trickled down to those facing the customer.

Therefore, some market observers' predictions of the "beginning of the end" for Salesforce.com (which has a significant early entrant advantage) are certainly exaggerated—at least insofar as Lotus 1-2-3– or WordPerfect–type demises are concerned.

After all, Salesforce.com has a brand that is technologically easier to protect. And as long as Salesforce.com is perceived as the premium on-demand CRM brand, it will get its fair market share (and possibly more), and it can focus on new functional areas and vertical solutions.

Microsoft, on the other hand, is betting that the all-too-familiar Microsoft Outlook metaphor will encourage adoption of its CRM offerings, and it's true that it will help mitigate traditional complaints about the complexity of CRM products. In other words, the alignment of the user experience between CRM, e-mail, calendar, spreadsheets, and OS will make users of each more productive across the whole set, but this still will not necessarily eclipse the similar qualities of the Salesforce.com CRM offering.

After all, even if we all use Outlook umpteen times a day, we also (as often) search for information by using Google or Yahoo!, check stock ticker alerts and flash news at Bloomberg.com, shop at eBay or Amazon.com, or network socially at Facebook or LinkedIn, which are all almost equally familiar metaphors to users, and which are part-and-parcel of Salesforce.com. Also, Outlook, although a familiar metaphor, is not necessarily an ideal CRM experience, as it is contact-focused (as opposed to account-, opportunity-, channel-, or service-and-support–focused).

The Salesforce.com product has an excellent graphical user interface (GUI), a simple design, and intuitive navigation (with recently added mouse "popovers" for quick, click-less event details and editing), and offers a number of dynamic portals or dynamic dashboards. These interactive, dynamic portals act as a single point of aggregation for multiple data feeds, and have a back-end database that they use to connect information from those feeds.

Also, the ideal audience for such portals is poorly served by current standard desktop applications, since users need such rapid access to disparate sources of information (neatly aggregated in a single place) that they cannot afford the time (which is sometimes inordinate) to open a resource-intensive application and look for the information they need.

Usability is at a huge premium in these products, while for any Outlook addicts, there should be a number of Appexchange add-on offerings that provide that metaphor. Hence, a "Coke vs. Pepsi" choice will rather be the outcome of the Microsoft Dynamics CRM vs. Salesforce CRM duel (or MSN vs. Google search engine war for that matter too), rather than the outright demise of a competitor.

Yet, once Microsoft starts to deliver on its own company-wide SaaS strategy (under the Live/Online moniker), Salesforce.com will begin to face the kind of competition it has not experienced before. In fact, "choice" will be a catchphrase that customers will most certainly like, and Salesforce.com (or NetSuite) not so much.

Unlike Salesforce.com, which generates revenue only from CRM SaaS subscriptions, Microsoft does not keep "all its eggs in one basket" (i.e., it does not rely on a single source of revenue). As Salesforce.com itself concedes,

Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to an on-demand application service. Furthermore, some enterprises may be reluctant or unwilling to use on-demand application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If enterprises do not perceive the benefits of on-demand application services, then the market for these services may not develop at all, or it may develop more slowly than one would hope, either of which would significantly adversely affect operating results.

Microsoft, on the other hand, has outlined the go-to-market strategy with its partner ecosystem, whereby partners will eventually be selling on-premise, live/on-demand, or partner-hosted. Salesforce.com maintains that the key here is connection with customers. By distributing its eggs, Microsoft loses the direct connection it has with customers, just as the client/server product companies did. Salesforce.com believes this is its biggest competitive weapon, in that it allows the vendor to focus on success of the customer rather than on the release of a product.

Where Salesforce.com might indeed start feeling the pinch—even in the shorter term—would be in terms of price pressures, given that customers will increasingly begin to ask the vendor to justify its sometimes exorbitant subscription prices. To put this in perspective, a more advanced Salesforce CRM service typically starts at $69.00 per user per month, which, with a number of Appexchange add-ons (20 bucks or so per additional application) can even approach $200.00 per user per month.

For comparison's sake, Oracle Siebel CRM On Demand starts at $70.00 per user per month, SAP Business ByDesign is $150.00 per user per month (albeit for a far broader functional footprint than mere CRM), and even open-source based SugarCRM Professional On-Demand is at $40.00 per user per month. Given that Microsoft can afford to be a loss leader (if necessary) and absorb the financial shock of moving upfront revenue recognition to deferred monthly revenue, its pricing strategy is aggressive (to put it mildly), as it is undercutting pricing for virtually every other on-demand CRM service in the market. (All prices in USD.)

Furthermore, if you also have to account for integration costs to existing on-premise back-office applications, the five-year total cost of ownership (TCO) of the SaaS model can be difficult to justify, particularly when your alternative is an on-premise system bundled with an application suite.

Understandably, Salesforce.com takes the position that its product is superior to Microsoft Dynamics CRM, but you need to take that with a grain of salt. The Dynamics CRM product has gone a long way since its initial launch back in 2002 (see Microsoft Paints CRM Landscape On Lately A 'Still Nature' Business Applications Scenery) and the growing pains of the first releases. In fact, Microsoft seems to have nailed a great combination of functional and technical capabilities with the fourth major release. For more information on the product, see Agile ERP Vendor Ditches a Microsoft Dynamics CRM Alliance for, well, its own CRM Solution (Part II) and It's About Process (or Ability to be Responsive) – Part I.

While it still does not have much to offer in terms of PRM capabilities (compared to Salesforce.com), the Microsoft Dynamics CRM suite's SFA, service and support, and marketing automation capabilities have reached a respectable maturity level. Blue Roads' PRM partnership is like an Appexchange add-in for Microsoft Dynamics CRM.

Also, the product has been written in the latest Microsoft technology (managed .NET code with all its advantages—see Microsoft .NET-managed Code Enablement: Examples and Challenges) and it integrates to all necessary and popular Microsoft technologies, such as Microsoft Office, Microsoft Tablet PC Edition, Windows Mobile, Microsoft Content Management Server, and Microsoft MapPoint. Caveat: Microsoft has several variations of .NET, and these products are thus not all on the same version.

Microsoft is working feverishly on end-to-end CRM process support by integrating (through Microsoft SharePoint Server and other middleware products) the Dynamics CRM products with, for example, Outlook, Microsoft BizTalk server, Microsoft Exchange, Instant Search, and Microsoft Office, to foster tight integration, internal collaboration around the customer and, later, externally to support customer communities.

User Recommendations

More choice can only be a good thing for prospective and existing customers. Prospective customers should not get hung up on vendor semantics and marketing gimmicks, but should rather view their CRM needs as part of a long-term strategy, where the decision on whether to go for on-premise, single-tenant hosted or SaaS (on-demand) multi-tenant deployment mode will transpire.

After identifying which parts of business can be served well by SaaS or on-demand applications, these should be piloted in an isolated part of operation to fairly quickly test the features and identify possible flaws.

Generally speaking, deploying CRM solutions is much more involved than the decision about whether to be on-demand or not, and it should start with a strong CRM vision that should help the organization articulate the ideal customer experience ("Why are we doing this? How can we become more customer-oriented?").

Executive ownership, internal motivation, customer validation, differentiated offering, and core value proposition to customers are key components of a compelling CRM vision. Once the CRM vision is defined, the organization has to undertake steps toward formulating and executing a CRM strategy, such as identifying key metrics, auditing the targets' achievement, analyzing customers' spend and preferences, and creating a segmentation strategy (i.e., turning the customer base into an asset).

The critical steps to improving customer experience entail instantly fixing customer problems, integrating all customer data and communications, building (positive) customer memories, and keeping employees happy too.

Therefore, besides necessary functions and features checklists, the contesting vendors should exhibit deep experience in helping the user enterprise master its customers' experience (e.g., collecting feedback, and refining and acting upon it) and instill the sense of high organizational collaboration. This includes organizational and behavioral shifts to deliver a better customer experience, by having a single source of customer truth, workflow management, e-mail templates, document management, and similar supporting technologies.

The vendors' staff or integration partners should also demonstrate expertise in defining and automating business processes that should be reengineered to be more customer-centric and deliver greater value proposition.

You should not try to automate flawed processes; rather, you should continuously re-examine processes and focus on high-touch customer interactions. Sleek and intuitive reports and dashboards to monitor and track CRM metrics (and success) go without saying.

Small and midsize businesses (although many reference Dynamics CRM customers with over 1,000 users have been noted), especially those using Microsoft Dynamics back-office applications and smaller organizations that have already standardized on Microsoft technology and that have moderately complex CRM product needs (i.e., SFA, marketing automation, and customer service activities) should react positively to this news. They should evaluate CRM functional enhancements as a way to add value to their existing applications and should consider adding the announced functionality to their requirements list, so as to secure value in terms of both cost savings and increased efficiency.

The addition of Dynamics CRM into these Microsoft-centric environments carries relatively low resource burden on an IT department, which can be even further mitigated with the online release.

However, due to relative product immaturity and nascence globally (i.e., with a double-byte character set, multicurrency capabilities, an accompanying documentation, etc.) large multinational businesses might want to consider other CRM products until 2009 in the rest of the world. In July 2008, Microsoft announced eight Dynamics CRM "solution accelerators," including data/workflow, operations, and localization, which should help in certain regions. Again, the online version supports only English, whereas the on-premise sibling is in 25 languages.

On-demand customers should check and observe how "Live/Online" (on-demand) other Microsoft technologies have become, and whether and how it affects integration with Dynamics CRM Online.

Moreover, enterprises that have integration needs outside of the Microsoft environment, or that have complex PRM and call-center service business practices, or that need advanced CRM functions such as product configuration, knowledge management, personalization and relationship optimization, will have to look at more sophisticated offerings for the time being. These offerings, in many cases, might be from Microsoft Dynamics CRM partners.

Microsoft has not garnered sufficient best-of-breed community à la Appexchange in the enterprise level business application market (although Pinpoint may change that equation down the track), such as for enterprise incentive management (EIM), channel management/PRM and product configuration/quote-to-order (Q2O). On the other hand, the Salesforce.com's ecosystem has to show many more viable and renowned best-of-breed applications that can support very large enterprise requirements—and the vendor also has to reassure IT organizations that can't simply get rid of their on-premise legacy applications at the drop of a hat.

 
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