365 Days of CRM
Looking back on the past year in the CRM industry, the overarching theme was the economy. Vendors, integrators, and consultants felt the impact of slashed IT budgets. CRM failure rates dominated the mainstream press and made buyers take a step back and a second look before rushing into implementation. And industry leaders' earnings were lackluster at best.
But through it all CRM continued to mature, vendors shook up the market, and many companies garnered their share of ROI. What follows is a look at the highlights--and low lights--of the year in CRM.
Microsoft Corp. ended months of speculation in February when the company announced it would be entering the CRM space with MS CRM by the end of the year. The product is aimed at small to medium-size businesses, which Microsoft defines as companies with 50 to 500 workers and about 15 to 150 CRM seats. Many vendors feared that despite Microsoft's claims of staking out only the mid-market, the company really had its eyes on the enterprise space, which to date has yielded the biggest gains for CRM players--many of whom are Microsoft's partners. However, Microsoft vehemently denies that its grand plan includes an enterprise play. The company insists it is squarely focused on the SMB space. And while Microsoft's entry into the SMB market struck fear into some mid-market vendors, many actually embraced it as validation of CRM, and expect the Microsoft brand name to help lift the market.
MS CRM is not only the company's entry into CRM, but it also has the distinction of being Microsoft's first product to be built on its own .NET architecture, which is a major thrust for the company. Microsoft has spent the past two years pushing .NET to its partners and third-party developers as an architecture that would simplify the interaction and integration of applications and Web services.
Microsoft is not the only company that sees huge potential in the mid-market. Enterprise stalwarts like Siebel Systems Inc., Oracle Corp., SAP AG, and PeopleSoft Inc. are coming downstream. Meanwhile, traditional mid-market companies like Onyx Software Inc., Pivotal Corp., FrontRange Solutions Inc., Best Software Inc.'s CRM Division, Salesforce.com, and UpShot Corp. are all jockeying for position--and with good reason. Market researcher Jupiter Media Metrix, for one, estimates purchases of CRM, e-commerce, and financial management applications by small to medium-size businesses in North America will grow to $3.4 billion in 2006, up from $971 million in 2001. AMR Research says the SMB market, combined with divisions of enterprises, is a $44.1 billion CRM opportunity over the next 10 years.
In fact, the SMB market grew 29 percent in 2001. Gartner Dataquest research shows that SMBs accounted for 41 percent of e-business purchasing in 2000, and projects that to grow to 57 percent in 2005. There are about 6 million companies needing CRM in the combined SMB and mid-market segment, according to research firm Aberdeen Group.
The consensus is, there are more than 45,000 companies and business units in the mid-market. Gartner research director Joe Outlaw estimates that only 20 percent of those have deployed a CRM application. Most analysts agree that this emerging market has room for lots of vendors, which gives medium-size businesses a plethora of choices.
Tight IT budgets, the demand for rapid deployment, and the desire for a quick return on investment are fueling customers' desires for CRM solutions that are tailored for their specific industry. And CRM vendors are pleased to oblige. Automotive, manufacturing, government, insurance, retail banking, energy, healthcare, travel, financial services, and high-tech--name the industry and there is likely a CRM package aimed at that sector. These verticals have become big business.
Siebel has the most vertical solutions, with about 20 different offerings. That accounts for nearly 80 percent of the company's $2.05 billion annual business, according to Forrester Research. Other enterprise CRM players, including PeopleSoft, Oracle, and SAP, have a wide range of vertical solutions. Mid-market vendors like Pivotal also offer vertical solutions.
In April PeopleSoft launched verticals for government, high-tech, insurance, and energy. PeopleSoft executives say more are on the way. Still, the top verticals--manufacturing, the services industry, government, and the public sector--seem to be the focus of most of the bigger CRM players.
Analytics tools help unearth customer secrets buried in CRM-acquired data. And these secrets can be rolled into new sales opportunities and better customer satisfaction rates. So it's no wonder CRM analytics is a high-growth market, even in today's difficult economy. To qualify as a CRM analytic application, software products must demonstrate business process support, the separation of function, use time-oriented features, and integrate data from multiple sources, according to IDC. The key to analytics is injecting real-time features into the analytics process and ultimately, a customer's online experience. CRM analytics is a bright spot in the otherwise gloomy market outlook. Aberdeen Group has also recognized the drive toward the analytical side of CRM, and as a result started tracking the analytics market last year. In 2001 corporations worldwide spent more than $4 billion on analytical CRM, which includes infrastructure, tools, and applications, according to Aberdeen. It expects that number to grow to nearly $11 billion by 2005.
Organizations can save $20 to $25 per call by using Web self-help, according to Yankee Group in Boston. Web self-service refers to online applications that let customers solve problems or answer questions by navigating to the right solutions on the Web site, whether it be through a frequently asked questions page, email inquiries, or online chat with customer service representatives.
According to Forrester Research, the cost of the average Web self-service session is $1, compared to $10 for an email response and $33 for a telephone call. Another enterprise benefit of self-service is the ability it affords companies to gather personal information about visitors. Users may be asked to enter identifying information to process their requests.
The number of customer service contacts, including through the Web, emails, and phone calls, will increase to 30 billion per year in North America, according to the Purdue Center for Customer-Driven Quality. Still, self-service programs can be expensive and have hidden costs. In fact, such options can increase the cost of customer service if they engage additional enterprise resources to resolve customer queries--or if customers turn to a competitor because they become frustrated.
Focus on Integration
Many CRM leaders--SAP, Siebel, PeopleSoft, Oracle, Chordiant Software Inc., and Amdocs among them--have all been focusing on integration. Analysts say that in 2002 features and functionality took a back seat to integration. One of the thorniest problems end users often face is the time and costs associated with integration. Disparate solutions that do not talk to each other force companies to spend time and money creating patches to get them to communicate. Problems constantly surface with this type of patchwork, which tends to make the process more cumbersome.
ERP vendors claim their history in back-office applications makes them a logical choice, as their CRM solutions will naturally fit well with their back-office applications. Siebel developed what it calls its Universal Application Network (UAN), a connecting module that integrates disparate back-office applications to Siebel solutions for less money and effort than previous Siebel methods. SAP has mySAP, a portal that was widely praised for its integration capabilities.
One caveat: As CRM functionality expands out to partners, integration will get more complicated and costly.
The Return of the ASP
Salesforce.com raised some eyebrows with its early success in online CRM hosting services, but the successes of NetLedger, Salesnet, and UpShot are proving that hosting is a viable and vibrant business. Although Salesforce.com touts the hosted model as the "the end of software," there is still skepticism in trusting mission-critical data and operations to a third-party hosted service.
Some industry watchers and users feel that certain areas of CRM, such as sales force automation, are more suited to hosting than others. For users of SFA applications it is compelling to manage a single instance of customer data that is accessible via a standard browser interface. But the downside comes when that sales agent needs to access data offline. To that end, some ASPs have introduced versions of their service that enable reps to take pieces of the data offline and then synchronize the data to the centralized service when they reconnect.
The hosted model also appeals to customers concerned with cost and maintenance. Customers pay an upfront implementation fee and a monthly subscription fee; the major expenditures--namely, hardware and integration--needed to support the implementation are nonexistent or minimal. The hosting partner maintains the application, which reduces the burden on the IT staff. Product updates can be easily deployed. So, although the to-host-or-not debate is likely to continue, many users are finding it meets their needs.
The global enterprise investment in mobile field service solutions will total $220 million by the end of the year, largely supported by investments in mobile CRM solutions, according to a Datamonitor report. The researcher says the financial services market, particularly investment banking, is the largest sector of adoption. In the United States, for example, applications like access to real-time equity information for traders on the floor are driving mobile middleware vendors' sales.
Meanwhile, manufacturing companies are deploying mobile solutions to integrate their supply chains, reduce cycle times, and lower costs. Professional services companies are deploying applications like mobile email and personal information management (PIM) functions. Leading the adoption-rate charge are remote sales professionals, the report states.
Mergers and acquisitions are shrinking users' choices and may in some cases leave them with lame duck software that is no longer supported. A few of the corporate marriages from the past year include IBM's purchase of PwC Consulting in a cash-heavy deal worth $3.5 billion. The deal is expected to bolster IBM's CRM consulting presence, which along with supply chain and ERP, have been underrepresented in Big Blue's product portfolio. Other deals include mid-market CRM vendor Pivotal's acquisition of MarkFirst, a marketing automation company; LivePerson, a New York--based provider of hosted Web chat services, acquired the assets of Silicon Valley's NewChannel, a rival ASP serving up related customer-acquisition technology. Blue Martini Software, a B-to-B and B-to-C marketing and sales application vendor, acquired Cybrant Corp., which makes complex configuration and selling applications mainly for high-tech industries. S1 Corp., a provider of enterprise CRM solutions to banks, credit unions, insurance providers, and investment firms, moved to strengthen its enterprise family of offerings by acquiring Point Information Systems, a privately held CRM firm in Dublin. The PSI acquisition was S1's third in the past 18 months. Pegasystems, a software developer of process automation for CRM, bought 1mind Corp., a privately held provider of CRM and e-business solutions for healthcare payer and insurance companies.
Taking steps to further extend its e-commerce outsourcing model to the small-to-midsize enterprise market, commerce-service provider Digital River Inc. acquired the customer assets of technology infrastructure company FreeMerchant.com from Network Commerce Inc. Microsoft's $1.3 billion buy out of Danish ERP vendor Navision was a way to strengthen its global position in mid-market business. Israel-based Nice Systems, maker of multimedia recording solutions for businesses, bought Thales Contract Solutions, a developer of customer facing technology for public safety, wholesale trading, and call centers.
IT Spending Downturn
Analysts say technology vendors are not really making any significant sales. They add that companies are not spending, the deals are smaller, decision processes are longer, forecast and deals continue to be pushed back, and customers are consistently deferring capital expenditures to conserve cash. And while IT spending has perked up a bit, it wasn't a pretty picture in 2002. A Forrester Research survey projected that companies will spend 2.3 percent more on IT in 2002 than in 2001; 63 percent of companies stuck to existing budgets for the second half of 2002, with another 19 percent raising budgets; and only 12 percent of companies cutting budgets, while the remaining 6 percent weren't sure. On the CRM front, the report points out that among some companies considering buying e-business applications, vendors aren't necessarily a part of the picture. For example, 11 percent of companies planned to build their own application in the second half of 2002.
Bellwethers' Lackluster Earnings
Siebel, PeopleSoft, SAP, and other CRM heavyweights announced quarterly earnings this year that fell far short of analysts' expectations. Siebel was also forced to slash more than 1,100 jobs and close facilities, bringing its headcount down from 7,164 to 6,000 employees in the third quarter. The layoffs bring the employee headcount back down to Siebel's mid-2000 level. SAP reported weaker second quarter sales in key segments and a decline in the United States revenue. The company stunned financial analysts by slashing its 2002 sales forecast. That warning came after posting preliminary second-quarter results well short of analyst forecasts. Despite the slowdown, SAP has not announced job cuts and instead is working on an internal reorganization, has put in place a hiring freeze, and has implemented tighter cost controls. CRM software providers cited tightened IT budgets as the most common cause of bad earnings across the board.
The findings of well-respected research firms like Gartner Inc. and Meta Group Inc. reported that anywhere from 50 percent to 80 percent of CRM implementations fail. That figure was repeated, inflated, and repeated. It was a black eye for the marketplace and sparked a CRM backlash. The statistics scared some top-level executives to the point of either abandoning existing CRM implementations or halting plans to begin them.
But CRM consultants say that although the analysts' research was not flawed, it failed to clearly define failure. Gartner research director Scott Nelson says, "We wouldn't label it a failure unless one aspect was so overwhelming, such as a drop in customer satisfaction, shopping cart abandonment rates go up, or sales decrease."
Nelson concedes that measuring CRM failure is often difficult. The most common problem is that many companies implementing CRM "don't apply good project management skills" and do not set metrics that can help them define success or failure. The upside is that customers are more clearly defining objectives, setting up ways to measure success and return on investment, and asking tougher questions of the vendors before buying solutions.