A Very Good Year

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Over the course of the year 2000, Siebel Systems acquired Paragren Technologies, a marketing automation software company; OpenSite Technologies, a Web-based e-commerce solution provider; MOHR Development, the maker of a financial sales training solution; Janna Systems, a provider of eBusiness solutions for the financial services industry; and OnLink Technologies, the designer of e-commerce guidance and recommendation solutions.

These acquisitions, when added to the already labyrinthine map of new and established Siebel alliances and partnerships, evidence two important points about the current status of the undisputed leader of the CRM industry: 1) Siebel Systems is vulnerable in certain areas and feels the need to enhance its product offerings by acquiring new technologies; and 2) Siebel Systems has the money to do it.

In the rapidly evolving CRM industry, these points, however, are not unique to Siebel. During the past year, the entire CRM industry mimicked Siebel's evolution, as vendors large and small acquired, sold, aligned with or sued at a dizzying pace. At the end of the first year of the new millennium, the CRM industry as a whole has never been more successful or more uncertain about what exactly the future holds. As revenues and stock values soar, the rules that define and govern the relationship between e-business and CRM change daily, forcing vendors large and small to adapt almost instantaneously, or die.

"CRM is a very hot space right now," says Pat Sullivan, CEO of Interact.com, the newest incarnation of a CRM stalwart that now includes SalesLogix and ACT! "You see a lot of alliances and acquisitions in this market because the definition of CRM has greatly expanded to mean anything you want it to mean. If I wake up one morning and the definition has expanded and I don't have that thing, then I've got to get it."

Just Get It

The process of "getting it" is just another way of describing the shakeout that gripped the CRM industry throughout the year, one that shows no signs of slowing anytime soon. In any industry, only the strong survive, but in the CRM industry, that Darwinian struggle is complicated by several factors, all of which became abundantly clear this year.

First and foremost, e-business, with its reliance upon CRM tools and techniques, came into its own. "The biggest story this year," says Bob Chatham, an analyst for Forrester Research, "was the realization that this is not about e-business any longer, it's about getting back to business as usual."

In other words, enormous amounts of business activity shifted to the Web over the past 12 months as it became clear to even the most hesitant companies that in the future, this would be the most efficient way to work. The Internet became just another business tool, like the telephone or the laptop. But with this universal embrace of e-business came the realization that relationships established through traditional sales modes could not survive in an impersonal cyber world without the CRM tools that enable businesses to "touch" their customers. Consequently, more than ever, CRM--specifically Internet-centric CRM--is in demand.

According to Richard Brock, president and CEO of Atlanta's Firstwave Technologies (see sidebar, "Oh, Pioneer," this article), the triumph of e-business this year and the ascendance of CRM only accelerated the shakeout in the CRM industry. "There's going to be a washout of the non-Internet-centric players because people are realizing very quickly that the Internet is not a magic potion," he says. "It's a displacement of local area networks and wide area networks. The Internet is the communication vehicle that changes everything about how we communicate with our customers. The focus of our company now is enabling customers to better communicate with their employees, customers and business partners. You can't do that with a CRM system unless you have Internet technology. What I'm saying is that there's going to be a washout real fast. CRM is shifting from record keeping to a communication vehicle. Those that don't get it won't be here long."

"This mirrors the shakeout we saw in the '90s in ERP," says Lisa Arthur, vice president of e-Business Suite Marketing at Oracle. "Ultimately, you are going to have four or five players. Everybody else will either be bought or will go out of business."

The Players

Throughout the past year, CRM vendors trying desperately to establish their products were only too aware of the ERP shakeout to which Arthur refers. Among the biggest industry stories this year are the gasping demise of once-proud Baan, and the continuing struggle of PeopleSoft and Vantive to retool for the new world.

Baan, as you may recall, attempted to diversify its ERP offerings a few years back by acquiring CRM vendor Aurum. At the time Baan foresaw a solid future built upon an integrated front/back office application that would revolutionize the enterprise software industry. This year, after reporting seven consecutive quarterly losses, the Netherlands-based vendor gasped and died as an independent company.

"Baan is disastrous," says Sullivan. "Baan buying Aurum was a prime example of the weak acquiring the weak. When Baan bought Aurum, it became the crown jewel of the whole company. As it turned out, they got their heads handed to them on a platter by Siebel."

"Oh, the pain," says AMR Research Director Peggy Menconi of Baan's decline. "In terms of management and strategic choices, they had a difficult time. Aurum was never fully integrated into Baan as promised and now the whole company is in the position of imploding."

In August of this year, Baan dodged the implosion bullet. British automation and controls vendor Invensys acquired what was left of Baan for $708 million, promising to turn the company around in two years. Though some suspect that Invensys just wants to pick Baan's beleaguered bones for customers and specific technologies, in late August the company named Robert Karulf, former CEO of Colorado's Interactive Software Systems, to head its CRM division.

Aurum lives on. Stay tuned.

Last year, another ERP giant found itself in a situation similar to Baan's. The bloom was off the ERP rose and it became clear that the real action was occurring in CRM. So once-mighty PeopleSoft acquired once-mighty CRM vendor Vantive to create--depending on whom you are talking to--either a troubled marriage or well-positioned software giant with front and back office expertise.

The year 2000 was an unusually silent year for the two partners in this union with lackluster sales all around. However, analysts agree that PeopleSoft/Vantive shows promise. "Vantive is continuing to lose market share, but technically they are offering some pretty good integration," says Chris Fletcher, vice president and managing director of the Aberdeen Group.

"It took PeopleSoft and Vantive a long time to figure out what they wanted to do," says Menconi. "You didn't see much while they dealt with the merger, but now they are investing in resources. I feel better now about Vantive than I did a few months ago."

Pax Siebel

The year 2000 was marked by far more successes than failures, however. Ruling comfortably at the other end of the spectrum from Baan, PeopleSoft and Vantive is Siebel, which continued its reign over the CRM world. "Siebel is blowing the doors off of the competition," says Menconi. "The Vantive and Clarify mergers actually give them a boost. I'm projecting $1.5 billion in license revenues and I think they have already exceeded that."

Check out these numbers. Siebel's second quarter revenues were $387 million, up from $176 million for the same period in 1999, an increase of 119 percent. By September 1, its stock closed at 203.3333 a share, up from 31.8125 a share on the same day last year, and then split two for one on September 8. At the end of 2000, Siebel Systems, with its $40.8 billion market capitalization, rules supreme. "A lot of people have been waiting for them to stumble, and year after year, it hasn't happened," says Fletcher.

But, as Tom Siebel undoubtedly knows, Huns sacked Rome and the sun did finally set on the British Empire. Hence, the aforementioned strategic acquisitions of various companies and technologies and the ongoing effort to lead the industry, not follow it. Despite Siebel's exemplary numbers, the company is, in fact, vulnerable to the vagaries of the still unfolding e-business market, and, even more so, to emerging competition.

That competition comes principally from Oracle, the moneyed behemoth that released its long-awaited e-business platform, Oracle 11i, in May. "The real threat to Siebel happened with the 11i release," says Menconi. "Before that, Oracle only had individual products they had pasted together. 11i are real products, and they tie into the back end really well. Siebel doesn't have that. They are working on it, but they don't have it."

During the development of 11i, critics--most notably Tom Siebel--were quick to point out that Oracle's much ballyhooed CRM offering was beset by delays, suggesting that Oracle, which has to date specialized in databases and back office systems, was out of its league. Oracle disputes this.

"There is a misunderstanding in the market and our competitors like to blur that," says Oracle's Lisa Arthur. "This was our fifth release, not our entry by far." Over the last two to three years we have filled out the suite." She adds, "We have been the quiet player."

Selling high-flying Oracle CEO Larry Ellison as a "quiet player" will no doubt be much harder than selling the company as a serious CRM player, and the numbers prove this. "Oracle increased it market share by 2 percent in 1998, and 4 percent in 1999," observes Fletcher. "As a company its revenues have increased dramatically."

Another threat to Siebel comes from Baan's European archrival, SAP, which recently released its mySAP enterprise business platform to general praise. "SAP now has a real product," says Menconi. "It is not as slick as the best-of-breeds, but it is functional."

SAP's business strategy includes an interesting partnership with Nortel's new acquisition, Clarify, to provide high-end call center functionality. Such a partnership is a real shift in the high-end market, says Menconi, as Siebel's high-market competitors join forces against the king of the hill. The jury is still out on the success of Oracle, SAP and other high-end Siebel competitors, but all agree, they are real competitors. "At an enterprise level, Siebel is the clear winner," says Sullivan. "But with SAP and Oracle in the market, they have significant competitors. We are seeing a real threat to Siebel's dominance."

Children of a Lesser Market

Throughout the year there was lots of talk about the middle and small markets. While most of this talk was self-serving and came from vendors operating in these areas, there was considerable activity to justify the discussion. In the middle market, CRM Pioneer Pat Sullivan surprised the industry by buying the ever-popular contact manager ACT! back from Symantec. "We were doing a lot of work on our vision of the Web and how it was going to impact sales people," says Sullivan. "We came to the conclusion that the best way to bring that vision about was to own one of the low-end products."

The low-end product he bought, ACT!, is the original contact manager and has, since Sullivan launched it years ago, basically defined the low-end market. Though it has lost some of its uniqueness in the face of stiff competition and an ever-evolving market, ACT! retains an incredibly loyal user base of 3 to 5 million people worldwide. "It's still a great product," says Sullivan, "but at Symantec over the past few years, its market growth had flattened out. They lost the vision."

Sullivan's vision is to tie both ACT! and his solid midmarket CRM offerings at SalesLogix to the Web through Interact.com, which provides Web-based content and services. "We are trying to dominate the low-end and the midmarket," he says.

But in both of these spaces, Sullivan will continue to face stiff competition. While ACT! is still a major player in the low-end market, other companies have established strong presences there. "People are suddenly trying to pay attention to the small market," says Fletcher. "ACT! was one of the first sales automation products and what you find is that salespeople in the field like its simplicity. But Goldmine [now FrontRange] has been extremely successful there, too. They have a huge number of installed users and salespeople really like its functionality."

still further competition in the low end comes from application service providers (ASPs). As the year began, companies like UpShot and salesforce.com, which actually host CRM applications for minimal fees, were trumpeted as the revolutionaries of the low end. However, as the year progressed the hype surrounding ASPs cooled due to the limitations of their business models and nagging questions about security. "The downside to ASPs is that there must always be an Internet connection to run your application," observes Fletcher.

Competition grew fierce in the lucrative middle market this year as the big three--Pivotal, SalesLogix and Onyx--slugged it out for dominance. All three companies enjoyed record revenues as middle market companies shifted their business processes to the Web. Threats of competition from high-end players--particularly Siebel--failed to materialize, leaving the middle market, at least for now, to middle market vendors. "Siebel made a few attempts at the midmarket, but we have seen no evidence at all of increased competition in this space," says Sullivan. "It is difficult for an enterprise company to move down market."

Room to Grow

The shakeout that all agree is taking place will probably unfold more quickly in the high end where established players control, or will soon control, big chunks of the market. The middle and small markets offer a different scenario. For all the talk about potential, the rules for these markets have yet to be written. "I'm not sure we have hit the model that will allow the CRM industry into the middle and lower markets," says Fletcher.

Furthermore, when one considers that the catalyst behind much of CRM's growth--e-business--is itself still evolving, there are few sure bets in the CRM industry, as the events of this fiscal year evidence. CRM remains an attractive investment to the all-valuable VCs that fuel new growth and innovation, a fact that in itself may postpone any final shakeout of players. With growth rates in double and triple digits, and the industry expected to reach the $19 billion mark by 2002, there is, for the time being, enough growth to support present and future players and their technological innovations.

"Some of these vendors have annual growth rates of 100 percent; others have 50 percent quarterly growth rates," says Menconi. "Some crashed in April, but are now coming back. I see a number of these companies coming on with good numbers, not all of them, but they are improving."

She adds, "It won't last forever, but right now there is room in the marketplace to support dozens more."

Oh, Pioneer

The elder statesman of CRM sizes up the state of the industry and makes predictions for what the future holds.

Before there was Siebel, or Ellison or even Sullivan, there was Richard Brock, considered by many to be the original pioneer of the technologies that are now known as CRM. Brock, president and CEO of middle market CRM vendor Firstwave, recently spoke with Executive Editor Douglas McWhirter about the year in CRM, the competition and what's in store for the industry he pioneered and has been working in since 1984.

Q: Overall, has the year 2000 been a good one for the CRM industry?

A: The answer is definitely yes. I think we can say it is going to be for the next couple of years.

Probably one of the big factors driving the increased demand for CRM products is completion of the Y2K efforts. But there is a broader trend happening as well. Companies are realizing how valuable their customers are. The Internet is making it more crucial, with your competition only a click away, to do a better job maintaining those relationships with customers. We didn't have the technology until recently to properly use CRM. What I'm referring to is that the Internet is basically a worldwide LAN that you share with your partners. Basically, the service that you can provide has been dramatically increased. All these factors work synergistically to create a growing market.

Q: You read about so many failed implementations where the reality of CRM doesn't live up to the promise. Are companies using CRM actually making those connections with customers?

A: Part of the problem you have is that CRM has so many definitions. Sometimes it's installed as a system for big brother to watch what the sales reps are doing. That's a massive problem. You need to have better relationships with your customers and you need to assist your sales reps in being more productive. However, no one translates that to the sales reps on how this is going to improve their effectiveness. Many of these systems are solely geared toward improving their efficiency.

So we don't have a technology barrier anymore. But we have an organizational change barrier that's the cause of failure. It's not about just installing the technology. It's about helping people make the change to adopt the new technology and working with the end user on soft issues to make him adopt it.

Q: There were several high-profile mergers over the past year or so. What's driving this activity?

A: M&A activity is more interesting in the CRM space than in other spaces. I would say we have not seen the peak of this type of activity because the forces that are driving it have yet to really surface at the beach.

In the CRM industry, there are companies that desperately need to acquire the technology. In our case, we spent three plus years doing it. If you are late to the party and the party is almost over, the customers are getting real smart. Those who are late to the party will have to acquire the technology.

On the other end of the spectrum, other companies won't be big enough or have the financial resources to acquire the technology or effectively compete anymore. They will become acquirees. So when you look at all the mergers and acquisitions going on, you have to ask yourself to what extent did the acquirer need the technology. You will also see that the acquired company was no longer a viable entity.

Q: At the beginning of this year, there was a lot of talk about how ASPs would revolutionize the low-end market. Did that happen?

A: That's interesting. Sometimes owners of small businesses don't have good business acumen. They will take a solution that may be appropriate because it's all they think they need right now, but it's not going to work. It's going to keep them small. That's why they are small companies. These companies are attracted to the connect-mode-only ASPs like UpShot and Salesforce.com.

But the low-end market is going to change. We saw an early gold rush with ASPs--much like dot coms--where they had to rush to get something out there. I think many of these vendors' business models are flawed because they have been forced to give away things. When you are basically giving away thousands of seats, there's never going to be any good news. Now you are seeing ASPs charge for reasonable value. So, the little companies that went for the freebies are going to stick to the freebies. The others that are paying more are going to realize that these are great training wheels, but they need one that is more fully functional.

Q: So what is the future of ASPs?

A: ASPs suffer today because the high-end players who have the market share want the ASP model about as badly as H&R Block wants the flat tax. The high-end vendors are going to fight as long as they can against it because they don't want to rent, rather than license, their software.

The ASP model is misunderstood today at the low end because users are not provided with enough and not allowed to customize. Vendors in this market are not charging anything. They are only offering one simple model and that is not enough for the middle-market company. However, I predict that in the coming year, people will realize that they don't have to own an entire system to support software. They can rent it instead.

Q: What happened in the middle- and high-end markets this year?

A: In the high-end market, you are seeing some of the players modeling themselves after the ERM model. The SAPs and Baans of this world came out with these huge, complicated systems. They paid integrators and installers millions of dollars, but the ROIs just weren't there. A lot of these systems are disasters. The high-end is going to struggle. People are going to say "those complicated systems are not working for the companies that have bought them, and they are not going to work here. This is going to be challenging for high-end vendors.

I think it is all going to evolve in the middle market. There's nothing "middle market" about the technologies involved: they do a few things very well, as opposed to being a jack of all trades. Middle market companies are going to be the big winners because a) there's more money in the middle market; b) there's very little money in the small-end market; and c) the high-end market is rebelling against the huge cost of implementation we've seen to date.

Q: Is the middle market where Firstwave will focus its efforts?

A: We've been around forever, and prior to our IPO we did focus on the middle market and were very successful. We've had the benefit of already making the mistakes that others will make. Companies grow, they get into different spectrums, different management changes, and they make mistakes. We've made our mistakes and we've learned the hard way. We will focus on the middle market, but we might also pursue a few large opportunities. We currently have the technology to meet the needs, but we don't have the market momentum to earn the decision. We will be by invitation only at the large end and a very strong player in the middle market.

Q: Speaking as someone who has been in the CRM industry from the very beginning, what makes a company a winner?

A: The only way to succeed at any business is to grow and keep your customers. If you are going to be successful in the CRM industry, you are going to have to become your customer's partner. Cool technology will come and go; hot companies with momentum will come and go. But the long-term players are the ones that focus on customer satisfaction and core values.

Q: Is the market evolving in such a way that CRM vendors will face a new set of challenges to succeed, or does it all get back to those core values?

A: The Internet is going to cause the biggest transformation yet. Consultative selling in the CRM space is going to be very important because most sophisticated products are too complex to buy over the Internet. You want to know "How is this going to meet my needs" and you want to talk to several vendors. You don't want to do a technical evaluation from a company's online marketing materials. You don't care what a product does; you only care how a product meets your needs. It's not who has the most features; it's who has the best fit.

Q: Describe the CRM industry now and in five years.

A: We have an industry today where there are too many people trying to sell Swiss Army knives. It has become a feature war. I see this war rapidly evolving into a war fit for a particular purpose. One size does not fit all. Many of today's vendors have these huge applications, and customers are spending a fortune trying to customize them and it's not really working.

Over the next five years you are going to see a return to a best-of-breed scenario with emphasis on individual functions. What's going to make this possible to go back to best of breed? We went away from best of breed in the first place because the cost of integration was horrific and the results abysmal. But you take technologies such as XML, which is basically publishing your interfaces so that two totally different systems can seamlessly integrate the data as if it were written by the same person. This and other technologies now allow us to seamlessly integrate applications in a way that had never been possible. Now you get the seamless integration of a suite with the best-of-breed functionality or best fit. In five years, the mammoth systems will no longer be the norm.

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