Salesforce Answers Microsoft Challenge

Salesforce.com CEO Marc Benioff fired off an internal email berating Microsoft's announcement this week that it plans to enter the CRM market. "Fundamentally, Microsoft and Salesforce.com offer two completely different value propositions," Benioff writes, adding that Microsoft CRM, which is being developed by its Great Plains unit, "will cause 'great pains' to the software CRM players who built their products in Microsoft's path."

For starters, Benioff believes his company's focus on hosting a CRM application and selling it as a low-cost "utility" is the winning formula against CRM software vendors, including Microsoft. License-driven software vendors represent a dying breed, he says.

Here's how Benioff separates the two models: Enterprise software vendors' strategy is to install and integrate software, and then extract as much revenue through selling of related products and charging maintenance fees. The hosting model, on the other hand, requires a very different set of strategic and technical disciplines, especially in the areas of security, reliability, integrity and distribution. "You cannot be a slave to two masters," Benioff says. "You must choose a path that will bring you to your final destination."

But Microsoft says customers can have Microsoft CRM both ways: Customers can buy a software license from Microsoft or subscribe to a hosted service from certain Microsoft partners. Moreover, Microsoft isn't alone in adopting both distribution channels. CRM rival PeopleSoft sells licenses and hosts software directly from its Pleasanton, Calif.-based facilities, which is full of redundant power supplies, back-up systems and other hosting safeguards.

Perhaps Benioff's claims of differentiating models carries some weight in the near-term, says Kelly Spang, senior analyst at Current Analysis. In the long run, though, it's likely wishful thinking. "Microsoft CRM could impact Salesforce.com, although they're not in the direct path because of the companies' different delivery models," she says. "More importantly, Salesforce.com wants to move up market and focus on companies with 500 employees," and thus move itself away from Microsoft CRM's target market of companies with 25 to a few hundred employees.

Relating to target-market discrepancies, Benioff scoffed at Microsoft's claims that it won't eventually move up market with its planned Microsoft CRM offering, and go head-to-head with strategic partner Siebel. He says Microsoft CRM, which will be tied to Microsoft Outlook, is well positioned to expand into a full range of basic CRM services.

"Microsoft will say they don't compete against their partners, such as Siebel, but history has shown otherwise," says Benioff. "Siebel should have known better, perhaps Microsoft too... I do not envy the position of the Microsoft-centric software CRM players." In fact, Benioff named Pivotal, Purple, Sales Logix and Onyx as CRM vendors that should be troubled by Microsoft's CRM plans. (Following the Microsoft news, Onyx issued a statement that it was not threatened by Microsoft; and Sales Logix said it's installed base gives it a huge first-mover advantage.)

Tom Kaneshige also writes for Line56.com