The CRM Market: Buy, Sell or Hold?
Despite difficulties in the market, the outlook for the CRM sector is not entirely bleak. In fact, most analysts remain optimistic about the coming year, which will be characterized by consolidation of the market and solid, though more modest growth.
But since March 2000, when CRM stocks peaked, the sector has plunged into a financial swan dive. The stockpoint CRM Index shows that CRM securities have under-performed the S&P index by approximately 70 percent since that time, having fallen more than 90 percent. Investors, awakening from a heady debauch of technology stock purchases, are shedding their shares, deflating valuations at a rapid clip: BroadVision, for example, dropped from its 52 week high of $93.28 in 2000 to $7.19 by the end of February of this year; Primus went from a high of $137.25 to $4.24 during the same period.
"Certainly there are companies that have had execution missteps and other problems," says Alex Baluta, managing director, senior analyst of E-Commerce Infrastructure and the Internet at BancAmerica Robertson Stephens & Company. "But a lot of [stock price weakness] is not management failure or execution, but the fact that 300 companies cannot be supported by what is currently a $4 to $6 billion market. There's no such market in the world like that--whether it's in technology or in foods. As these markets mature, there is a natural weeding out of a lot of companies."
The cause of the market's weakness appears to be the very factor responsible for its growth. The unprecedented injection of venture capital into development has resulted in a capital over-capacity problem, leading to a glut of products competing for the same prized IT dollars. Developing a product is one thing; succeeding in the marketplace is another. "This is an environment where many companies have overextended themselves in an attempt to prove themselves the market leader, trying to grow their revenues at 40 percent every quarter, quarter over quarter," observes Mark Gomes, director of Investment Research at AMR Research. "It's like a high-stakes game of chicken, and most companies hit the wall."
"The market is going to have strong double-digit growth--whether that's 20 or 30 or 40 or 50 percent, it's going to be a good market," confirms Baluta. "It's also going to be one of the best markets from the standpoint of IT budget priority perspective. But I think this year we'll see a very small moderation in the growth rate relative to what it was last year."
AMR Research's Joannie Rufo research director of the CMS Group, agrees. "I think that we are still seeing adoption of CRM in the end-user market. AMR just conducted a survey of 100 executives regarding the economic downturn and whether or not that would have an impact on IT spending. In terms of customer management, 87 percent of our respondents said they would either sustain or increase their budget initiatives for customer management, given the importance it has to the organization. So I think we're still going to see a lot of really heavy growth. We've got the market projected to hit $15 billion in the year 2001."
The VC Challenge
Newer vendors looking for second, third or fourth rounds of funding will find the venture capitalists (VC) less promiscuous, more discriminating and less abundant. Many of the VCs who last year pumped vast quantities of capital into the CRM market in search of huge returns have suffered serious financial setbacks or gone belly up. The more established firms, such as GE Capital Services and Insight Capital Partners, are less interested in startups with slick new technologies than in companies with proven track records that can execute on their promises and deliver value over the long term.
Andrew Savitz, research analyst at BancAmerica Robertson Stephens, points out that this does not mean that younger companies are not getting funding. "There's always room for funding if the company can tell the VC a compelling story," he says. "It's a matter of being able to land those great customers and having a relatively developed product."
For instance, Savitz notes the recent round of funding MarketSoft, the multichannel e-marketing services company, received from Putnam Investments, American Express Financial and J&W Seligman, among others. Although the company sought only $25 million in funding, it landed $45 million in this latest round and, according to the company's CEO, Greg Erman, received offers for up to $77 million.
The CRM Shuffle
While MarketSoft will use its investors' funds to expand into European and Asian markets, other vendors' funds may end up serving as R&D investment for the larger CRM players, according to AMR's Gomes. While many companies have developed strong product, they can't survive on their own, he says. "All of that VC investment almost ends up being like an outsourced R&D function for the larger vendors out there. These companies can now go and pick and choose among the applications that they want--and get them for probably a cheaper price than it would have cost them to develop themselves."
Onyx Software's acquisition of RevenueLabs, for instance, positions the company to increase its presence in the large enterprise market. In acquiring Software Spectrum, Pivotal Software expands its multichannel communications capabilities. Microsoft's $1.1 billion purchase of Great Plains Software accelerated the company's entry into the ERP (enterprise research planning) market. And Siebel Systems, which over the course of the past year acquired numerous smaller companies of varying expertise, bought Janna Systems to strengthen its foothold in the financial services industry.
"I would say at a broad level, the move to suites is unstoppable," observes BancAmerica Robertson Stephens' Baluta. "There are companies out there that we've talked to that have 50 different data sources within their company that will have customer related information. Unifying that information to create a multichannel approach is critical."
Point solution companies, faced with the challenges of finding investment capital, are actively courting the larger players building end-to-end platform solutions. Those who are not acquired, partner. "Eighty percent of the calls that I have with my vendor clients today have to do with whom they should partner with," says AMR Research's Rufo. "They know very clearly that they are going to have a very difficult time walking into a company and trying to sell just a point product. If they don't have pre-built connectors to some of the larger applications out there, they're shooting themselves in the foot."
The Middle Market
One of the factors driving growth in the CRM industry over the coming year will be the middle market: those midsize businesses that fall somewhere between the Global 2000 and the small businesses with under 100 employees. "Business is very, very healthy in the mid-market," says Rod Johnson, service director at AMR Research. "But the difference between these smaller companies and the larger companies who are the traditional end-users of CRM is that they can successfully implement a solution better. These companies are not built on a bunch of divisions or on disparate functional areas. They're more cohesive and better able to live up to the true vision of CRM, which is getting out a common database for managing all customer interactions."
Only as recently as a year and a half ago, four vendors--Onyx, Pivotal, Interact Commerce (formerly SalesLogix) and FrontRange (formerly GoldMine)--divided among themselves the spoils of the mid-market. But this disposition has shifted. Both Onyx and Pivotal have begun to fill the void that the struggles of under-performing up-market players like Vantive have opened at the enterprise end of the market, investing strategically in partnerships that will permit them to establish territories there.
At the same time, Siebel has cast an avid eye down-market at the midsize companies "If we look at the ERP space, SAP, Oracle, PeopleSoft--all of them tried to move down-market, and not one of them was successful," reflects AMR's Johnson. "Siebel is successful because they learned from the mistakes of the ERP vendors and understand that it's all about distribution, having local vendors for your product. It's about scaling and volume sales."
Who Will Lead?
Others besides Siebel have been successful in the mid-market. Interact Commerce has experienced impressive growth, and Oracle has announced Oracle Sales Online and Oracle Support Online, both focused on mid-market buyers of an online CRM solution. PeopleSoft has announced its Accelerated CRM--a program whose lower price includes the cost of the software and the implementation.
Yet as important as this mid-market may be in fueling the industry, the key differentiator for the CRM market remains true personalization, the prime directive for client companies' considerable investments. These companies seek to extract the value from the electronic data contained in their ERP, supply chains, sales automation and customer interfacing systems. This synthesis requires a potent analytics capability, an area of CRM on which many vendors are concentrating their efforts. San Mateo, Calif.-based E.piphany is one vendor in particular that stands out in this specialized field of CRM.
"E.piphany is a company that has a market capitalization of less than $2 billion," notes AMR's Gomes, "and yet has $400 million in cash and is seen as a leader in its space. They're projected to do approximately $300 million in revenue this year. As far as leaders go, they're extremely cheap. I'm not going to say we recommend the stock; but for a [category] leader, it's almost unheard of to see these kinds of valuations."
With respect to the larger suite vendors, Rufo believes that interesting developments may come this year from PeopleSoft. According to Rufo, PeopleSoft's CEO, Craig Conway, will place renewed emphasis on CRM. He has actually taken his top 100 developers off PeopleSoft 8, which was delivered in 2000, and onto the company's CRM initiative. Nevertheless, the obvious choice for broad platform leader remains Siebel. "Siebel really offers an incredible broad-platform product," says BancAmerica Robertson Stephens' Savitz. "The whole platform buzz is significant for companies focused on CRM. If they want to make CRM a true priority, it's tough to beat the product they're going to get from a company like Siebel."
More important than specific opinions on which companies will grab and hold market share in CRM is the question of what qualities define leadership in this market. A short list will likely include a proven ability to execute on business strategy, strong customer relationships, established market presence and positioning, effective channels, and of course strategic partnerships with other vendors, as well as with systems integrators who support the product. Ultimately, it's a matter of good management.
"Who are the companies that are starting to mature their own business infrastructures?" asks Baluta. "Those are the companies that are more likely to be winners."