Onyx Software: CRM Vendor Battling For Viability

Vendor Genesis

Onyx Software Corp. (NASDAQ: ONXS) is one of the larger CRM vendors focusing on such operational CRM (Customer Relationship Management) functions as sales force automation and call center management. Onyx was founded in 1994 by three Microsoft employees who had developed front office software used internally at Microsoft. The founders saw a demand for packaged software that could consolidate customer data from disparate systems into one data repository. Their original product, Onyx Customer Center, was a client-server application that collected customer data from various internal data stores and loaded a single data repository. This product forms the core function of the Onyx 2000 suite. The suite has four components:

• E-business Engine - This is the backbone for the rest of the applications. The engine consists of a data center, process technology (technology that tracks customer interactions across company divisions and routes customer data to the appropriate division), an interface framework that manages the user interface for the other three components mentioned below, and an integration framework to tie Onyx's front end applications to other vendor's back end (ERP and other) systems.
  
  
• Customer Portal - This application allows organizations to provide personalized marketing, e-commerce, and service functions to their customers over the Internet. Capabilities include catalog and campaign management, product configuration and order processing, and online service functions, including a self-help knowledge database.
  
  
• Employee Portal - This application allows employees to manage contact information and sales opportunities, and view customer service queues. The Employee Portal also allows third party products to be viewed in the same interface.
  
  
• Partner Portal - This application allows organizations to provide collaborative marketing, selling and support capabilities to their partner channel. The portal can be configured to distribute leads to partners, configure products and process orders.

The bulk of Onyx's revenues traditionally come from companies with annual revenues up to $500M USD, but Onyx's sales to the Global 2000 have increased significantly during the second half of 2000. From 2Q00 to 3Q00 the average sales price has increased from $275,000 to $325,000. Towards the low-end, the Onyx suite primarily competes with Pivotal's eRelationship 2000 and FrontRange's GoldMine Front Office 2000. In the mid- to high-end market Onyx primarily competes with Siebel and Kana. Siebel sells Siebel MidMarket 2000 and a number of enterprise level applications such as Siebel Sales and Siebel Call Center. Kana sells a suite of applications for managing customer communications and running marketing campaigns.

Onyx's quarterly revenues have on average grown nearly 20% quarter over quarter from 1Q99 to 3Q00. Net income has hovered around break-even for the same period. License revenue has consistently been between 60% and 64% of total revenues for the past four quarters. TEC estimates Onyx's market share at approximately 2% of the broad CRM market. Figure 1 illustrates Onyx's financial performance.

Figure 1.

Outside of Siebel, the clear CRM market leader, Onyx's revenues are consistent with those of its competition. Figure 2 compares Onyx's recent quarterly revenue to its competition.

Figure 2.

*Pivotal's fiscal year ends 6/30. Therefore 4Q00 and 1Q01 were used to compare the same calendar quarters.

Vendor Strategy and Trajectory

Onyx is moving in the opposite direction from Siebel, its largest competitor. Siebel traditionally sold CRM products to the high-end market and recently entered the mid-market (see Siebel Enters Smaller Markets In A Big Way for more information on Siebel's entrance in the mid-market). Onyx traditionally sold to the mid-market and is now beginning to sell more to the high-end market. The average seat count of Onyx's installations has increased from 90 to 140. Onyx has been gaining a share of the high-end market as a result of broadening its product and service offerings and creating vertical solutions in Financial Services, Telecommunications, and Healthcare. The Onyx 2000 suite has functionality demanded by the high-end market, yet was unavailable in previous Onyx products.

Onyx has consistently forgone profits to invest heavily in product development and sales and marketing. Figure 3 indicates Onyx's investments in product development and sales and marketing as a percent of total revenue.

Figure 3.

Onyx is spending heavily to expand product and service offerings and send its message out to potential customers. This trend should continue as Onyx focuses future investment in these areas:

• Add more integrated CRM applications that run off the Onyx E-Business Engine - Onyx believes companies will continue to demand an e-business platform from which they can incrementally add CRM applications and phase implementation across the enterprise. Thus Onyx will continue to develop applications as part of its portal products that run off the Onyx E-Business Engine. More specifically Onyx will focus on aspects of eCRM, such as web-based lead capture, catalog management, customer service, and product configuration. The eCRM components will integrate with traditional CRM applications such as call center management and sales force automation.
  
  
• Develop applications that extend beyond the enterprise - Onyx sees the Partner Portal as the beginning of its B2B information exchanges. Onyx says it will continue to develop the Partner Portal to include business webs that exceed the value of traditional partner networks, but would not disclose additional information at this time. As part of this initiative Onyx will continue to develop XML data outputs to enhance information exchange.
  
  
• Develop wireless capabilities - Onyx has no wireless applications commercially available at this time. Future development will focus on bringing wireless capabilities to the field sales and service staffs. Onyx will use WAP (Wireless Application Protocol) on PDA devices to allow remote use of the Employee Portal.

ANALYSIS

Vendor Strengths

Onyx has two key strengths, developed from serving the mid-market, that will provide competitive advantage in the high-end market. The first is its short implementation time. Mid-market customers demand short implementation times primarily because they cannot afford to devote IT resources to long implementations. Onyx's average mid-market implementation takes approximately 12 weeks. High-end implementations take approximately 16 weeks. This is considerably shorter than Siebel implementations that can take 6 months for comparable projects. This is an attractive selling point to larger organizations that realize risk of failure positively correlates with implementation time.

Onyx's second strength is its 100% web-based architecture. Applications are accessed entirely through a web browser, with no download to client computers. This aids in reducing implementation time and reduces the strain on IT staff for application maintenance.

Onyx's devotion to product development and sales and marketing has pros and cons. Investing to avoid product obsolescence and to develop direct and indirect sales channels is vital to a software vendor, particularly in the CRM market. But if sufficient investment requires the company to operate unprofitably over the long term, there is no viable company. Onyx has been in business for over 6 years without substantial profits. Siebel is able to maintain a commanding lead in the CRM market while maintaining a profit margin around 15% or more. Onyx states that it has chosen a break-even position (before acquisition related charges) in order to gain market share. The company also claimed that it could at any time restructure spending to become profitable.

Vendor Challenges

Onyx's biggest challenge is taking Siebel on in the high-end market. Siebel clearly has more resources to throw at product development, sales and marketing, and partnership development. If Onyx plans on competing with Siebel it must differentiate its offering enough to convince customers and large channel partners that it offers a valuable alternative.

Onyx is slow to adopt wireless technology, and that may hinder future growth. Onyx has no formal wireless product and has yet to announce a partnership with a wireless applications vendor. Onyx has had an Asian systems integrator develop a wireless application that brings some functionality of the Employee Portal to the Compaq Ipaq, but each of Onyx's major competitors has made more progress.

Siebel announced the release of wireless eBusiness applications in February of this year, and has since then partnered with Sprint PCS to bring Siebel applications to Sprint's Wireless Web. In October Kana announced the release of Kana mBusiness, a set of wireless applications that bring some of the functionality of their existing products to wireless devices. Kana mBusiness integrates with the Kana eBusiness Platform. In the same month Pivotal announced the release of Pivotal Anywhere, a set of applications that bring corporate and customer data to wireless devices such as Blackberry. Pivotal also recently announced a partnership with GoAmerica, a provider of wireless data and Internet services, to expand the functionality of Pivotal Anywhere. Onyx has yet to make similar announcements.

BOTTOM LINE

Vendor Predictions

Onyx has a competitive product in a high growth market. TEC predicts that Onyx will continue to see quarterly revenue growth at or near 20% over the next four quarters. We think that Onyx's commitment to 100% web-based products that are delivered on a single platform (the Onyx E-Business Engine) will be attractive to both the mid- and the high-end market.

TEC predicts that Onyx will use partnerships or acquisitions to bring new functionality to its suite of applications. Analytical CRM and wireless applications are two areas they will likely consider. Neither type of product is a natural progression from any existing Onyx product, yet both the mid- and high-end markets demand both. Internal development may prove to be too time and resource consuming making partnerships and/ acquisitions very attractive.

Vendor Recommendations

Onyx's future development plans are primarily focused toward inter-enterprise applications. This is probably a good move, but only if Onyx does not neglect other trends in CRM. One of the larger trends is the demand for a single vendor or single solution to supply all operational and analytics components of CRM. Vendors such as E.piphany, Broadbase, and Microstrategy have focused significant business and product development efforts towards meeting this demand, and Onyx would be wise to follow suit. Onyx does have partnerships with Hummingbird, Hyperion and Cognos (three business intelligence vendors) but it does not have any branded analytical applications that run on the Onyx E-Business Engine. The company relies on these integration partners to develop sophisticated analytics applications.

Onyx should also accelerate its wireless development. Wireless capability is poised to become a significant selling point for CRM vendors as the use of wireless devices in field sales and service staffs increases.

User Recommendations

Onyx provides a good alternative to Siebel because it has much of the operational CRM functionality required and its web-based architecture is particularly attractive. Clients interested in implementing a CRM suite should certainly consider Onyx 2000. Onyx also has a very strong ASP offering that many organizations will want to consider. For more information on Onyx's ASP offering read Onyx Thinks ASP Opportunities Are A Gem