Software as a Service for Customer Relationship Management and Sales

Major Vendors Brace for SaaS

The emergence of independent software as a service (SaaS) providers has created a major competitive challenge for most of the established independent software vendors (ISV). The Wall Street Journal (WSJ) released a series of excerpts from a Microsoft internal memo, where Chairman Bill Gates warned his top executives of the SaaS threat. In these excerpts, Gates called on Microsoft to jump toward the trend of SaaS over the Internet. Some are comparing the memo to his call in the 1990s for Microsoft to embrace the Internet and in the early 2000s to embrace Web services. These calls led to the ubiquitous Microsoft Internet Explorer (IE) browser and Microsoft Service Network (MSN) on-line services, and Microsoft's .NET framework, respectively. Gates also demonstrated a type of "SaaS clairvoyance" in 1998, when he sent a fourteen page internal memo outlining a future, which included what he called a MegaServer, a gigantic server connected to the Internet that would allow on-demand delivery of any type of information to a user from any computer, television set-top box, palm-size personal computer (PC), or other device. A revealing e-mail from Microsoft's chief technical officer, Ray Ozzie, is also about software services, and is especially relevant in light of Bill Gates' memos (http://www.scripting.com/disruption/ozzie/TheInternetServicesDisruptio.htm).

This is Part Three of the four-part Software as Service Is Gaining Ground series.

Now Microsoft includes everything in its SaaS vision, from add-ons to future versions of Microsoft Office, to hosted Microsoft Exchange, to next-generation MSN services. Still, Microsoft's most recent unveiling of Microsoft Windows Live and Office Live ironically did not have much to do with offering Windows or Office as services, and consequently was received merely as a re-branding of MSN consumer services that are already available or under development. In addition to using the Microsoft SharePoint portal technology to support Office Live, Microsoft might tout its experience running enterprise-class services, including Office Live Meeting for Web conferencing and FrontBridge, a managed service focused around e-mail cleanliness. But because those services were obtained through acquisitions, the behemoth cannot point to native expertise in developing enterprise services.

In early 2006, Microsoft plans to release business services linked to internal deployments of Office, targeted at companies with ten or fewer employees. But, it is still unclear how it plans to turn its enterprise-class software into corporate services or how it will offer hosted services for its current collection of Windows Server System and Office System products. At least, the giant has indicated its intentions to bring Microsoft Dynamics CRM (formerly Microsoft CRM) and other business applications into the services fold to combat companies such as Salesforce.com, RightNow, NetSuite, and Salesnet.

However, many other larger vendors initially dismissed SaaS, application service providers (ASP), and other hosted arrangements as lightweight and unsuitable to enterprise-class customers. But they are gradually "reversing course". For instance, Siebel (soon to be part of Oracle) has already offered Siebel CRM OnDemand, which should come in handy for Oracle in terms of its hybrid on-premise/on-demand offering. Additionally, SAP has taken notice of vendors, like Salesforce.com, that are making notable headway in the SaaS market.

SAP's Pragmatic On-demand Approach

Until very recently SAP's SAP Hosting division was not competing directly in this area, since it did not provide a subscription-type service. Instead, it preferred to give cash strapped customers a lower entry cost, giving them the chance to spread out the software cost over a few years through SAP Financing programs. Moreover, SAP Hosting was positioned to provide more complete SAP-centric solutions including operation, application, and infrastructure management.

However, in early February, after nearly a year of flirting with the idea, and in line with its commitment to provide enterprise customers with solutions that meet both current and future business needs, SAP announced it was expanding its on-premise mySAP Customer Relationship Management (mySAP CRM) solution to include an on-demand option. The SAP CRM on-demand solution is designed to allow large and midsize organizations to manage sales, service, and marketing with an easy-to-use solution that is delivered directly via the Internet and is offered through a subscription-based licensing model.

In making the announcement, SAP unveiled its first on-demand product, the SAP Sales on-demand solution, which is designed to help organizations manage their customers, contacts, and sales pipelines with affordable, simple-to-use, and easy-to-configure tools. Available immediately, the on-demand sales solution will be followed by additional on-demand customer relationship management (CRM) offerings, including marketing and service products, intended for release in 2006 in quarterly waves. The SAP Sales on-demand solution is offered to customers on a $75 (USD) per user, per month pricing program based on pre-defined scope. The solution is available globally, with initial language options in English and German. Additional language-specific versions, including French, Japanese, Portuguese, Spanish, and Chinese versions, will be rolled out over the next three months or so.

The SAP Sales on-demand solution enables customers to rapidly meet traditional sales force automation (SFA) business needs, such as account and contact management, activity management, opportunity and pipeline management, calendar and task management, and sales analytics, to help companies better manage new and existing business opportunities, lead generation, sales execution, and client engagement. As expected, these core CRM features are served through a new user interface (UI) tailor-made for sales and marketing users, offering a variety of shortcuts and navigation aids and integration with desktop productivity applications for sales collaboration.

While somewhat late to the SaaS party, and only with basic SFA functionality for the time being, SAP claims to have at least created the first hybrid CRM solution that transcends the on-demand (i.e., immediate deployment, immediate business impact, and fast user adoption) versus on-premise (i.e., strongly customized solutions for differentiation, cross-functional data, analytics, and business processes, with a 360 degree view of the customer) debate, while integrating with core enterprise solutions in both deployment models.

To facilitate this hybrid approach, SAP has introduced the isolated tenancy model, which by having an additional database architectural layer, combines the high availability and low risk of a single-tenancy approach with the efficiencies and deployment speed of multi-tenancy architecture. SAP claims to have thus bridged the gap between single tenancy and multi-tenancy environments, bringing together the best of both worlds to meet the real requirements of enterprise customers today. The vendor acknowledges that customers appreciate the efficiencies of a SaaS model as found in today's niche, pure-play offerings, including speed of deployment, automatic software updates, and central management to help keep costs low. At the same time, customers are seeking the high availability, security, and low risk that come from the isolated and dedicated resources found in traditional hosting or single-tenancy environments. For enterprise customers, the knowledge that their systems' performance and continuous operations do not depend on the overall usage by other customers at any level, including the database level, is particularly important. With its new isolated tenancy approach, SAP hopes to give customers the benefits of centrally-served software, while delivering a level of independence, along with dedicated technology and resources that assure a safe environment.

Thus, though many observers have noticed a lack of functionality even when it comes to SFA (e.g., sales forecasting, lead routing, quotation management, workflow management, price calculation, other formulaic fields, etc.), SAP touts itself as the only provider whose on-premise and on-demand solutions are based on a common architecture, data model, and common UI. This should provide for a transition that is easy to manage, ensure continuity of data and processes, and minimize change management costs.

Another trait that might differentiate SAP is its flexibility, in that, unlike other vendors, SAP will not lock customers into long-term contracts for its on-demand offering. Furthermore, as one would expect (given SAP's larger on-premise install base), the solution was designed from the ground up to integrate (albeit with some tweaking) with enterprise systems, such as enterprise resource planning (ERP) and supply chain management (SCM) solutions, in order to deliver wider business process execution and improve the transparency of customer interaction. The idea behind this is to enable a seamless transition to on-premise deployment when the business is ready for more robust and strategic CRM capabilities. This continuity in customer relationships and adoption should be possible owing to the same data model, consistent user and administration data, consistent customizing and configuration, consistent functionality, and the fact that the UI and database structure are the same between SAP's on-demand and on-premise solutions, which is something that not many competitors can brag about. For instance, the likes of Salesforce.com do have application programming interfaces (API) that support Web services and are simple object access protocol (SOAP) and extensible markup language (XML) compliant, but, given the lack of, for example, an item master in these applications, there are many decisions to be made before truly integrating an order management process into these on-demand CRM applications.

SAP also announced that it has extended its long and proven strategic alliance with IBM in order to provide on-demand application hosting services for the SAP CRM on-demand solution. IBM will supply expertise in helping customers innovate, for example, in how they reap the benefits of their CRM deployments. IBM will also provide safe, secure, reliable, and highly-available hosting services—based on proven IBM eServers and DB2 database technology. The SAP solution will be powered by IBM's Applications On Demand Platform, which automates application hosting and management to provide a scalable and efficient platform for running business applications.

Software Giants versus SaaS Pioneers

There are several reasons why SAP and Microsoft might be delivering limited chunks of SaaS CRM functionality. One reason could be their desire to pick the lowest hanging fruit first (i.e., solutions for mobile, sales personnel, whose processes are fairly common in the early sales stage), while defending their current install bases in need of on-demand software, and without necessarily cannibalizing their on-premise software empires. Regardless of the reason, the biggest current challenge facing these companies is re-engineering the current generation of enterprise applications for an SaaS world. Most notably, this means giving them multi-tenant capabilities to allow multiple users to reside on a single server. Although Microsoft currently has a multi-tenant version of Microsoft Exchange and SQL, being hosted by partners, neither of these companies' renowned enterprise applications was originally built with multi-tenant capabilities, and this creates a security challenge.

As a result, Microsoft is working on multi-tenant capabilities for its next version of Microsoft Dynamics CRM and has developed some customized multi-tenant tools, including one that allows the one-to-many hosting of Microsoft Solution for Enhanced Voice over Internet Protocol (VoIP) services, which combines Microsoft Exchange Server, Office Live Communications Server 2005, and Windows SharePoint Services. Using a similar argument as SAP, Microsoft claims that by combining the strengths of multi-tenancy with the strengths of single-tenancy, the hosted version of Microsoft Dynamics CRM 3.0 enables customers to do the same things they can in an on-premise world, while offering the hosted option. In addition, although given the giant's past practices this may sound strange to some, like SAP, Microsoft claims that this option does not lock customers in an inflexible environment.

These moves by giants such as Microsoft and SAP into the SaaS arena certainly raise questions regarding the future of the SaaS movement. On the one hand, SaaS innovators like Salesforce.com are off to a head start. Salesforce.com promotes The Business Web as the future of computing, where the community can participate in a social production (i.e., the vendor, partners, and customers are the authors of their own content, which is subject to user reviews). Such companies tout the traits of constant innovation delivered as services over the Internet and the survival of the fittest. On the other hand, the traditional giants might be betting on doing the things slowly but correctly, hoping that the likes of Salesforce.com become victims of their (possibly uncontrollable) meteoric success. Only time will tell whether the SaaS pioneers will be the last to laugh (owing to their head start), or whether their recent performance degradation issues are merely the proverbial canaries in the coal mine.

Paradigm Shift Means Major Challenges

Although the delivery models are improving, more open interfaces and better networks will make the SaaS method more popular and achievable, and developing those types of focused offerings will be a major challenge for the likes of Microsoft or SAP. There is a limited set of software services that can be delivered to address the specific pain points of user enterprises, and these vendors need to painstakingly find those pain points and then figure out which of those can be satisfied by a hosted service. For example, SSA Global is currently focusing on how to enable its transport management, global trade management (GTM), and human capital management (HCM) capabilities with SaaS. Vendors will also have to build these services or acquire specialist companies that can meet this need. Finally, vendors will have to build customer loyalty and reduce customer turnover, because the services market does not offer the type of platform lock-in that these vendors can now indulge in. With SaaS, customers can literally unplug from one provider in the morning and start up with another in the afternoon.

The above listed efforts will likely require software re-engineering. In addition, for vendors that try to support both an on-demand or SaaS model and on-premise licensed software, the differences in the business and development cycles are so complex, that it might put their business model at risk. To truly embrace SaaS, these vendors must be willing to cannibalize sales of their proprietary, cash-cow systems, which will not be an easy sell to either shareholders or executive decision makers whose compensation is tied to earnings. Vendors that embark, willingly or not, on the transition to the new model are sure to experience growing pains, since traditional, upfront, "big gulp" license revenues will likely decline, while the recurring, bite-size chunks of revenue from SaaS might generate comparable figures only after some time. This, combined with a waning reliance on margins from the technology-related services that have traditionally made up their repertoire, can produce unsightly red marks on income statements, and success is by no means assured.

Organizationally, vendors must make fundamental changes to sales and support processes for subscription or on-demand transaction-based pricing. The implications for business models are profound, since software vendors must rethink the kinds of functions they provide, how best to deliver those capabilities, and what approaches they should take towards the channel. Ensuring recurring revenue comes with a caveat: the business model must be readjusted. This, however, is not only because the "piece of the pie" that resellers take may be smaller than they have become accustomed to through licensed software on the customer sites. It is because a paradigm shift must occur for the model to be viable. Value-added resellers (VARs) will now have to focus on volume and velocity, and thus rethink their expertise and skills mix, and particularly their vertical savvy. In other words, selling the solutions will now revolve around their acumen in automating and streamlining business processes personalized for the customer, not packaging software technology. Vendors will have to plan for increased costs in managing the wide range of IT licensing and access paths, because they will need to continually develop, refine, and manage pricing and licensing programs in a much more dynamic and flexible manner.

Challenges notwithstanding, there is promise in this new land. Despite common fears, the promise of quick ramp-up, lower implementation, and almost non-existent support costs are making hosted software services increasingly attractive to customers. The benefits of a more reliable, recurring revenue stream, single instance implementation, and the end of disruptive upgrade cycles make the SaaS business model attractive to vendor too. The accelerating growth of key enabling technologies, such as Web services, rich site summary (RSS), and asynchronous JavaScript (AJAX), which enables users to make quick, incremental updates to the UI without reloading the entire browser page, is causing interest in SaaS to grow. However, the widening interest in SaaS offerings, whether business-to-consumer (B2C) or business-to-business (B2B) focused, should not be considered extraordinary. Many traditional vendors will have already seen the "writing on the wall" that this new market will usher in a new era of change, while the more astute ones will recognize this as an opportunity rather than a threat.

More Examples of the SaaS Business Model

This possible win-win combination has already attracted a few vendors to the pure SaaS business model. At this time, and after reading this exhaustive discussion, one might be wondering which enterprise applications would be perfect candidates for this model. Generally speaking, any application that provides the functionality required for a business to run is suitable, and these requirements may not be that different from one company to the next. Further, while some cosmetic customization is allowed without touching source code, the SaaS model prevents users from doing too much reinvention, which saves money and the anguish of implementation, and promotes best practices. Also, the SaaS solution typically brings together information from several sources and presents it to the user via a friendly, Web-based interface.

When it comes to thought-leaders in this area, the vendor that most likely comes to mind is Salesforce.com. Vocal marketing (causing some laggard competitors to point out that it spends more money evangelizing SaaS than on research and development), and a successful stock market offering in 2004 has made Salesforce.com unavoidable in any SaaS-related conversation (see Comparing On-demand CRM Service Alternatives). In fact, Salesforce.com is regarded as the technology champion and market leader in on-demand CRM applications.

Salesforce.com recently announced the general availability of both AppExchange, the on-demand platform and directory (i.e., enterprise applications bazaar), and Winter '06, the nineteenth generation of its family of on-demand CRM solutions. With these announcements, the vendor continues with its goal of "unleashing the power of the on-demand community, and ushering in a new era of innovation, collaboration and freedom for on-demand business on the Web".

With the AppExchange development platform, users can invoke a third party partner application (that has been certified by Salesforce.com) through a uniform resource locator (URL). APIs provide the user's context to the new application and let the user invoke, for example, the contact list from the original Salesforce.com application. The new application also uses style sheets provided by Salesforce.com, which makes the interface look-and-feel consistent.

As an on-demand application sharing service, AppExchange provides an environment that enables developers and partners anywhere in the world to develop, publish, market, and distribute their products to a global audience and instantly engage with Salesforce.com's 18,700 customers and 351,000 subscribers. Applications built for the AppExchange run entirely on demand, eliminating the need for developers or partners to create and manage their own data centers or infrastructures.

The vendor expects these AppExchange applications to not only dramatically extend its on-demand CRM application portfolio, but also to include diverse new areas such as finance, electronic signatures, document management, project management, credit and collections, mobile workforce management, data cleansing, professional services management, human resources (HR) and many, many others. There is no charge for trying applications or using the AppExchange. Applications from partners will typically require a fee, although those authored by Salesforce.com are currently offered free of charge. Salesforce.com does not take a commission on the sale of applications from partners.

The Salesforce.com AppExchange now reportedly offers more than 150 on-demand business application listings created by Salesforce.com, its customers, developers, and partners, including new applications from high-profile vendors such as Adobe, Business Objects and Skype. Additionally, new on-demand applications are available from Ascendus, Big Machines, CastIron, ClairMail, Comergent, D2Aligned, DreamFactory, Eloqua, Factiva, Forcelogix, GOT Corporation, Harte-Hanks Trillium Software, iAnywhere, InsideScoop, Intacct, Logotec Engineering, MarketSync, Message Secure, NetSales, NextMark, ObjectPublisher, OpenAir, Payment Processing Inc., the Payroll Company, Pervasive Software, Remend, Rigpa Technology, SalesCentrix, Select Selling, Sendia, ShareMethods, Skype, Spoke, SuccessFactors, studentforce, Talisma, USA.NET, Vertical Response, Visual Mining, and many others. More than 75,000 test drives of AppExchange applications took place while the solution was in preview mode, and in its first week of availability to existing Salesforce.com customers, 1,500 installations were completed.

Trailblazing CRM On-demand Functionality

Though somewhat overshadowed by the AppExchange announcement, Winter '06 is also available to all Salesforce.com customers and subscribers. Salesforce.com's on-demand model automatically delivers the new benefits and features of Winter '06 to the entire Salesforce.com customer base at no additional cost, permitting existing customizations and integrations to seamlessly migrate to the new release. Winter '06 is available in Personal, Team, Professional, and Enterprise Editions, allowing customers to select the best product for their size of implementation and enterprise.

In terms of the new features, the new UI is cleaner and more intuitive, allowing subscribers more time to focus on their customers or their on-demand business information. Nonetheless, Salesforce.com will also continue to offer its current classic UI for customers that are not ready to make the switch. Other new features include a rules-based assignment engine, which allows territory management to align sales and support teams for key markets and opportunities. Further, an integrated campaign builder streamlines the campaign creation process, with an integrated segmentation wizard delivering improved marketing campaigns. Customizable forecasting was designed to enable creation of reports by quantities, representatives, time frames, and other metrics, all of which are easily tailored to specific customer needs. For better decisions with speed and confidence, new analytics enhancements include report search, new views, and customizations. The new Outlook Edition 2.0 includes integrated synchronization for improved user productivity, an enhanced UI, improved navigation, and stronger administration control and options. Last but not least, Offline Edition 2.0 features completely re-engineered architecture with unlimited data volumes, field-level conflict resolution, and leads and custom related lists.

Along with the release of Winter 06, Salesforce.com announced the availability of Salesforce Sandbox, which provides "one-click" access to create a fully replicated and scalable on-demand customer replica environment for customization, integration, testing, development, and training purposes. Salesforce Sandbox is available as an additional option for Winter '06 Enterprise Edition customers for $25 (USD) per month per existing Enterprise Edition user. Customers also have the option of purchasing the configuration-only version of Salesforce Sandbox, without data, for $18 (USD) per month per existing Enterprise Edition user.

Another Salesforce.com offering, Salesforce Service & Support 2.0 is an integrated multichannel service solution with built-in integration, which contains more than fifty new features that should improve agent efficiency, ease of use, and functional completeness. Some of these new features include the following.

• Agent Console, which provides a consolidated interface developed with AJAX for a faster and easier agent experience.
• For improving agent productivity and reducing calls, Suggested Solutions automatically finds and presents the best solution to cases. It includes self-learning technology to improve accuracy with use over time.
• Open Computer Telephony Integration (CTI) integration with leading telephony vendors.

Rounding out the list of Salesforce.com's recent innovations is The Business Web. Having seen the success of consumer Web platforms like Google, Yahoo, iTunes, eBay, and Amazon.com, the vendor has devised the idea of The Business Web. The Business Web is an applications universe that is a stark contrast to the traditional software model, which relies on monolithic providers controlling the pace of innovation, and has customers waiting impatiently for new features and upgrades and responsible for their own integration and implementation. The Business Web is comprised of a network of on-demand applications, services, components, and development efforts that should enable customers to run their entire business on demand. It builds on the ideas of easy, consumer e-software applications that involve buying, exchanging, sharing, searching, etc. ( la eBay or iTunes stores). This new software universe is made possible by SaaS, new Internet and technology standards, and design principles that foster innovation, collaboration, and democracy. These innovations allow developers and vendors to more rapidly deliver new features and components that can be mashed together, integrated, and constantly evolved by other developers, users, customers and partners—and that can also be deployed quickly and easily on demand.

However, to provide the security, availability, reliability, and scalability necessary for ubiquitous use and adoption, The Business Web requires its operational core competencies to be delivered by a new platform. This guarantees that businesses can run more effectively through the Web than by using traditional software. There is also a strong need for a single data model, extensive security, scalability, resilience, open API, and open development environment, if Salesforce.com's AppExchange, IBM's SaaS Partner Council, and NetSuite's NetFlex are to become on-demand platforms through which users can take full advantage of the new ever-growing universe. After all, there is a great deal of metadata management involved in creating and maintaining these platforms owing to the many abstraction layers (e.g., workflow for custom objects, record types for custom objects, lookup fields, workflow triggering, audit trail, custom formulas, etc.) that should enable this decoupled development of custom applications.

This concludes Part Three of the four-part Software as a Service Is Gaining Ground series. Part One detailed the emergence of SaaS, while Part Two examined its key features. Part Four will look some more SaaS vendors and provide user recommendations.