It's Not Business As Usual

A good CRM strategy includes predictive analysis--and we predict that CRM in 2005 calls for growth and change that will affect everything from marketing accountability to vendor contracts. Incumbents may shift the landscape with mergers even as a band of scrappy startups presents new ideas, and on-demand solutions will complete their transition from novelty to mainstay. As the market evolves some industry watchers murmur that the term CRM has lost some of its punch. Yet by any name the concepts and goals behind it remain extremely relevant to the business community. "You talk to these enterprises and they say, 'Oh, we don't do CRM. We focus on our customers, maximize our marketing opportunities, provide better customer service and support,'" says Sheryl Kingstone, CRM program manager at The Yankee Group. "Gee, that sounds familiar!" Sounds like CRM--and like CRM is evolving. Here are seven trends driving that transformation. Wall Street Renaissance Buoyed by interest in and uptake among companies looking to adopt on-demand CRM, Salesforce.com and RightNow Technologies breathed new life into the investment community's interest in CRM technology. Even before Salesforce.com's delayed IPO closed, peers were lining up to proclaim they would be next. "I think Salesforce.com really sent a message to enterprise vendors: It doesn't have to be complex and hard to use to be valuable," says Erin Kinikin, Forrester Research vice president. Salesnet executives have publicly mused about a 2005 offering, and FrontRange Solutions, already listed on the South African stock exchange, says it is planning a lucrative U.S. placement of its stock. Investors hate a missed opportunity, so expect interest to be strong on both sides of the table, particularly among startups that may wish to accelerate their growth by capturing a wave of dollars waiting to be capitalized. According to Wendy Close, research director for Gartner, leaders of such companies as Airframe, Entellium, and Intellibank may say, "'Let's get some more funding from the investment community, and try to make a business out of this.'" Narrowing the Delivery Gap Traditional software vendors no longer scoff at on-demand providers--they have simply lost too much business to them on entry-level opportunities in recent years. "Next year everybody and his brother is going to come out with an ASP, multitenant solution for CRM," Close says. But not every company will buy one. "I don't think hosted is going to take over the world--there's not just one way to do CRM," Kinikin says. "But what the hosted players have done better than anyone else is provide a system anyone can walk up to and use, and there is no CRM without user adoption." In response to the growth of on-demand CRM, on-premise vendors have quickly blown the dust off of hosting plans most had shelved around the time of the dot-com crash. Companies like Soffront actively look to seed customers with hosted deployments to capture quick adoption and acceptance, then transition customers to a traditional on-premise, licensed service and support product. "You are going to see hosted CRM companies grow... the challenge is going to be for these folks to effectively integrate their solutions with all of the different [enterprise software] pieces out there," says Rebecca Wettemann, vice president of research for Nucleus Research. Some say they have cleared that hurdle already. Now the hosted and on-demand services are promising an expanded range of functionality that knocks on the door of the classical strength of the on-premise CRM software--the ability to integrate with other enterprise software systems. According to Salesforce.com, in autumn 2004 roughly one eighth of its user traffic came not through the conventional sales screens, but through its sforce software extensions to other enterprise applications. "We're just at the tip of the iceberg," says Tien Tzuo, chief marketing officer of Salesforce.com. They're not alone: Conventional software suppliers will continue to look for ways to deliver as much of the convenience and attractive buy-in price of on-demand as possible--without giving up their core business of ongoing maintenance licenses. Onyx Senior Vice President Ben Kiker says to watch for "the emergence of hybrid models, where we have a blend of hosted CRM and on-premise deployed CRM, which is going to happen in larger organizations where they want to do 'serious' CRM, and another division or group where they really just want to offer 'casual' CRM." This is far from an implication that the on-demand players have rocketed past a flat-footed pack. Although some are profitable, the model is too new to show the effects of long-term customers growing tired of continual monthly fees--in effect, no one knows what happens when on-demand clients decide they are tired of renting and want to buy a house in the suburbs. "I think we all hyped up the [total cost of ownership] for an ASP--it does have a solid return, but you have to look at each individual hosted application, and each company has to evaluate their own strategy" for choosing the right licensing model, Kingstone says. The Midmarket Never Sleeps Forrester Research expects that the strong growth from Salesforce.com and midmarket specialists like Microsoft and Best will continue to draw CRM providers to the midmarket. "The midmarket will always be a huge opportunity by the sheer number of companies in that space, and the lack of CRM in that space," Kingstone says. The result will be richer product offerings, as analytics developers and other add-on software vendors are lured to join forces with the midmarket CRM suite suppliers. "A lot of the midtier took on SFA and screamed that it was CRM," says Mike McLaughlin, consulting services manager at Exact Software. [But it is] starting to mature in that thinking, and... understands the things the enterprise customer has been seeing for years--[that] your customer relations isn't strictly a sales force opportunity." That means deeper deployments of service (both agent-assisted and automated), marketing, and analytical CRM capabilities among smaller companies. "Companies are pushing Microsoft CRM because it is an easy product to use and integrates with Outlook. Best Software [owners of SalesLogix], what they really need to do is be hosted and on-premise at the same time," Wettemann says. Best's CRM unit has already announced plans to slot ACCPAC CRM, a system designed for hosted and on-demand deployments, into the middle of its CRM tier and will relaunch a Web-friendly SalesLogix in 2005. New Conglomerates, New Faces The CRM market is in a transitional phase. Look in one direction and you see a time of maturation and consolidation. Look in another and a parade of startups comes into view. "There [are] going to be more mergers and acquisitions. Those without strong channels will go away," says Chris Selland, Aberdeen Group vice president of sell-side research. "We probably need three to five enterprise, high-end CRM vendors, total, a number providing specialty capabilities, and maybe three to five midtier platforms--and some may be the same platforms [as the enterprise]." Aside from the epic Oracle/PeopleSoft merger fight, consolidation is already well under way. "The consolidation trend is certainly one to watch," says Pivotal President and CEO Divesh Sisodraker. "Perpetual losses turn out to not be a strong business model." Pivotal has already been sold to a larger company, CDC Software, and Sisodraker predicts a number of his midmarket peers will follow suit. Still, new companies continue to arrive on the CRM scene. Some focus on the hot on-demand space, others promise low-cost, open source functionality, and still others are hoping to capitalize on growing interest in components and plug-ins to operate on the powerful enterprise platforms of incumbent CRM vendors. "The more open the monolithic applications become, the easier it is for other applications to integrate," Kingstone says. "It brings back the best-of-breed versus suite scenario all over again." Ed Thompson, a Gartner vice president, says incumbent CRM developers will quicken their development of packaged industry verticals to ward off the threat. "The commodity market in the center is being dominated by ASPs...so 65 percent [of research and development money] is going into industry-specific versions of products as a differentiator." Most vendors openly say they welcome the competition. "It would be a terrible thing for the industry if there weren't startups coming out and inventing new concepts, bringing new technologies to the market," says Steve Roop, vice president of product marketing for PeopleSoft's CRM unit. "It challenges all of us." Competitive realities cannot be denied, however, and the pressures to stay ahead of giant enterprise software ventures and fast-growing new arrivals will add a sense of urgency to CRM deals in 2005. "There is increased pressure on pricing...aggressive discounting by people who want to build up reference sites, combined with tightness in the IT community on spending," says Jon Van Duyne, senior vice president and general manager of Best Software's Mid-Market CRM division. Barton Goldenberg, president of ISM, says that these competitive pressures are forcing vendors to expand their own installation service offerings, while driving down the cost of implementation. "Expect to pay less," he says. "We're definitely below $1,000 per user" for implementation. As for services, those costs are falling as well: "In the old days the multiplier was 1.5 to 2.5 [times the software license cost]," Goldenberg says. "Now, one to one is the norm." Breaking Down the Silos...Again As companies dug in for the economic rough-going at the new millennium, CRM projects became more compartmentalized and tactical. "[People say they] want the benefits of the company synchronized around the customer, but then go out and buy departmentally. The processes are disconnected," Selland says. This will have to change in 2005 as cost-cutting reaches it limits and companies get serious once more about improving the entire scope of their customer relationships, not merely minimizing the expense of a tactical interaction (if for no other reason than to eliminate glaring inefficiencies in the customer care process). "It's not unusual for there to be two to ten back-office agents for every [contact center] agent," says Oscar Alban, global principal market consultant at Witness Systems. He foresees a growing drive to unify management and cut down on these inefficiencies. "Having the back office and call center reporting to the same vice president--that's a huge CRM trend." Gartner's Close says CRM technology suppliers have fallen victim to the same provincialism as CRM users, in part driven in that direction by buyers interested in quick results with limited scope. "I think the vendors today are mostly a one-trick pony, good at one component of CRM, and they're realizing that's not good enough." Customers are also thinking differently. "What we're seeing is that customers are looking for more and more integrated processes across a value chain of activities," says Bill McDermott, CEO and president of SAP America. Data Quality Becomes Religion As CRM adopters work to disentangle tactical, siloed initiatives, or simply go back to their customers to look for more value, they will have to address the fact that their plans can only go as far as their data can take them. Watch for a broadening consciousness of the value of data beyond obvious applications like reports of past activity. "CRM is more of a benefit when you do more things with [data]," says Barry Solomon, executive vice president of Interface Software. "In the past the focus has been on one dimension, but there is real power in social networking, [mapping] different people dealing with the same person in different ways." The motivation is simple: to genuinely understand the past, present, and future of customer relationships and how they flow not only within one organization but throughout a market, something that is next to impossible to do without a reliable library of information. "Every user company I talk to expresses disappointment with their own data integrity," says Elizabeth Roche, vice president and CRM practice lead at META Group. Data cleansing and organization is not a new concept, but Gartner's Thompson says the practice became distressing for a number of companies when the problem appeared to be too massive to contend with. "The 360-degree view of the customer was very in vogue--people tried to do it, got depressed, couldn't do it, and their funding got cut off." He foresees a renewed focus on capturing a complete and accurate picture of customer behavior and inclinations, coupled with a strong look at marketing accountability. Properly cleaned up, unified data will enable new and significant business improvements from CRM. "We're going to see a lot more customer profitability analysis," says Bob Blumstein, a research director at IDC. "We're going to see over time an end to marketing having its [separate] numbers and having an argument with finance at the end of the quarter." The alternative will be to continue to fumble the basic CRM concepts. "There's nothing worse than trying to cross-sell a product that a customer already owns," Kinikin says. "Clean customer data helps you know how to treat customers. It changes CRM from being reactive to being proactive." CRM Makes New Friends 2005 will mark a significant expansion for CRM in nontraditional organizations like governments and education. This year PeopleSoft scored the biggest single client engagement in its history with a CRM-heavy solution for Mexico's national tax service, and such opportunities will not go unnoticed by competitors. Goldenberg predicts as much as a 30 percent growth in governmental CRM spending in 2005. Due to the expansion of such systems as municipal 311, local governments are starting to think of themselves not as a loosely spun web of departments and services, but as widely vertical and horizontal corporations in need of dramatically simplified channels of communication with customers. Meanwhile, some of the thousands of colleges selling what are often six-figure educational packages will join the ranks of commercial enterprises graduating from manual, heavily paper-bound marketing campaigns to intelligent, rapidly adapting and highly organized profiling. "Higher education you don't tend to think of as a commercial enterprise, but it is a very competitive industry through the recruiting process," says John Wookey, senior vice president of applications development for Oracle. "[Universities] are implementing advanced analytics and call center products as a way to move from a paper-and-mail-driven system into very modern CRM practices to better identify the best students." CRM will build from the lessons of a slow economy and a renaissance fueled by on-demand successes to continue to bridge the gap between prospect, possibility, and profit. Few will simply hand a blank check to a big talker, however, as adopters have earned the leverage to keep their needs in the forefront and their technology suppliers on a short leash. Forrester's Kinikin says CRM is poised to deliver on its promises in 2005--but that nothing is guaranteed. "The next nine to twelve months are critical for the long-term health of CRM," she says. "I think we're getting one more chance as an industry." 2004's Big Splash What pivotal trend or event in 2004 will alter CRM in 2005?

Bob Blumstein, research director, IDC "The fact that the economy is not recovering in a rocketlike way. The vendors are going to have to adjust to that fact--there is strong pricing pressure; nobody has money to burn and they will not have it again."

Rebecca Wettemann, vice president of research, Nucleus Research "Tom Siebel stepping down."

Erin Kinikin, vice president, Forrester Research "Salesforce.com going public really shaped the year."

Richard Clarke, sales manager, Soffront "The move toward hosted and on-demand CRM. Hosted CRM has proven itself to be a viable alternative."

Sheryl Kingstone, CRM program manager, The Yankee Group "The trend toward more composite applications has been huge."

Oscar Alban, global principal market consultant, Witness Systems "Finally, the contact center is truly being viewed as a strategic entity within the corporate organization."

Chris Selland, vice president, sell-side research, Aberdeen Group "A gradual recognition that the customer data really belongs to the customer, resulting in giving the customer much more control, letting the customer manage the relationship."

Barry Solomon, executive vice president, Interface Software "The recognition that relationships really matter."

Elizabeth Roche, vice president and CRM practice lead, META Group "[The emergence of] composite applications, the whole application infrastructure stuff, NetWeaver and [Siebel's] UAN."

Ben Kiker, senior vice president, Onyx "A split in the [CRM] buying community into the casual buyer and the serious buyer."

Wendy Close, research director, Gartner "The validation of ASPs among midsize businesses is a big trend."

Ian Jacobs, CRM principal analyst, Current Analysis "Salesforce.com launching Supportforce. It's not going to have any near-term ability to shake up the market, but does show that the ASP group is getting serious about enterprise sales."

Darc Rasmussen, vice president of global CRM, SAP "2004 began to see a true return on investment from CRM.... The driver for that has been a more businesslike approach to CRM, with due diligence, real ROI tracking, and a recognition that CRM is not a siloed effort." --J.C. 2004: What We Predicted Last year, CRM magazine made four key predictions for the year ahead. Here's how we fared:

Enterprise CRM vendors would push farther into vertical deployments. CRM was on target here, as Siebel, Oracle, SAP, and PeopleSoft all expanded their range of vertical offerings this year. "Totally on," agrees Elizabeth Roche, CRM practice lead at META Group.

Growth of CRM ASPs. Salesforce.com and RightNow were strongly validated on Wall Street, and a host of startups and packaged software incumbents continue to push into this space.

A midmarket shakeup. Traditional mid-market big dogs Onyx Software and Pivotal found the competition cutthroat as on-demand and SMB specialists, including Microsoft, came up-market while enterprise vendors, particularly the PeopleSoft/J.D. Edwards combination, turned their attention to the large pool of midmarket companies.

Momentum for marketing applications. A great deal of talk swirled around taking marketing automation to new levels with the discipline of marketing performance management, but there is still room to grow. Much of that initial growth is coming from marketing vendors merging or partnering to fill out their suite of offerings. --J.C. CLICK HERE to view timeline. Contact Executive Editor Jason Compton at jcompton@destinationCRM.com