Mid-Market Mayhem

The research is in, and regardless of the variations in the figures and the myriad market definitions, it is clear the CRM mid-market is growing and there is a mad scramble to stake a claim. Enterprise players including Siebel Systems Inc. and PeopleSoft Inc. are coming downstream to dip their enterprise toes in the mid-market pool. Meanwhile such traditional mid-market mavens as Onyx Software Inc., Pivotal Corp., FrontRange Solutions Inc., Best Software Inc.'s CRM Division, and Salesforce.com are all jockeying for position. And don't forget Microsoft Corp. The software giant is slated to deliver its mid-market offering by the end of the year. Why everyone is eyeing the mid-market No matter how you slice the numbers, the news for the mid-market is positive. Market researcher Jupiter Media Metrix estimates that the 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. And while big businesses are still spending the most on customer management applications, small to midsize companies are rapidly adopting the technology. The SMB market grew 29 percent in 2001. Companies that make up the SMB market each have anywhere from 25 to 250 users, according to AMR's definition. And midsize enterprises (those with 500 to 5,000 employees) are significantly increasing their IT spending, according to Doug Lynn, a vice president of Meta Group's executive directions service. The opportunity is nearly unlimited. There are about six million companies needing CRM in the combined SMB and mid-market segments, according to Karen Smith, research director of CRM at market research firm Aberdeen Group. The consensus is that there are more than 45,000 companies and business units in the mid-market. Microsoft's senior product manager Holly Holt estimates that only about 10 percent of those have deployed a CRM application. However, Gartner research director Joe Outlaw puts that number closer to 20 percent. The sharpest increase in CRM deployments will occur in companies with revenue ranging from $500 million to $1 billion, according to Gartner Dataquest. Its research also shows that SMBs accounted for 41 percent of e-business purchasing in 2000; that is expected to grow to 57 percent in 2005. So Who's Poised to Make a Major Mid-market Mark? There are a variety of players that have already staked out their positions. Whether on the high end or low end of the mid-market space, the competition is heating up. Onyx, the biggest mid-market CRM vendor, is typically focused at the high end. The company showed revenue for fiscal 2001 of $97 million. But Onyx is struggling this year, as are most CRM vendors. For the most recent quarter, which ended June 30, the Bellevue, Wash.--based company lost $4.7 million, or 9 cents a share, on revenue of $18.5 million. This compares with a loss of $13.7 million, or 35 cents per share, on $29.8 million in revenue for the same quarter last year. Onyx's licensing revenue rose to $6.5 million from $3.1 million in the first quarter, but was down from $11.8 million for its second quarter of fiscal 2001. "The sequential improvements in our second quarter license revenue was largely driven by customers that broadened their Onyx deployments with add-on license purchases that were, in some cases, several times larger than their original investments," says Brent Frei, chief executive of Onyx. Of the 40 companies purchasing Onyx software licenses in the second quarter, 13 were new customers, compared to 16 in the first quarter of 2002. More than 120 customers engaged Onyx for professional services other than maintenance in the second quarter. Included in this number are engagements for Onyx Strategic Services, Onyx's in-house consultancy, which helps companies align business objectives with CRM technology to enhance their return on investment. Overall, Onyx has more than 800 customers. Nipping at Onyx's heels for the top spot in the mid-market is Best Software's CRM division, formerly Interact Commerce Corp., claiming $91 million in revenue for 2001. Its revenues are expected to grow to $94 million this year. More than a year ago U.K.--based Sage Group purchased Interact Commerce, maker of ACT! and SalesLogix. Sage, which also owns U.S.--based Best Software, recently absorbed Interact into Best. As a result Best Software's CRM Division was born. The division also includes the TeleMagic line of applications for sales automation, contact management, and business automation. The Scottsdale, Ariz., company claims it can now deliver a more compelling marketing message by delivering an integrated CRM solution that can also include Best Software's accounting software. However, the biggest challenge for the company is the pending entry of Microsoft into the CRM space. Both companies have similar offerings, as well as tout back- and front-office integration. Neck and neck with Best Software's CRM Division is FrontRange Solutions. Originally founded as GoldMine Software in 1989, FrontRange was formed by the merger of GoldMine and the Bendata subsidiary of South Africa--based FrontRange Limited, which owns about 85 percent of FrontRange. Best known for its GoldMine contact management application, the company has expanded its offerings to include software for automating sales processes, managing documents, and providing help-desk services. Although FrontRange is mostly aimed at small and midsize businesses, its customers include big names such as Toshiba, Lucent, and Coca-Cola. A recent Gartner report on IT Service Desks put FrontRange in the Challenger quadrant of its Magic Quadrants, which positions vendors based on specific criteria, including vision and ability to execute. AMR Research has FrontRange on track to record $92 million in sales this year--a 7 percent growth rate over 2001. Patrick Bultema, FrontRange president and chief executive, says he was pleased with the performance, especially in light of the tough IT spending market and economic issues. However, he admits that he does not expect any improvement in the economy until at least early next year. "We're also starting to feel the benefits of the restructuring begun more than a year ago, and this should stand us in good stead in the year ahead," Bultema says, noting that the company just released its first product based on Microsoft's .Net platform. The Rest of the Mid-market Pack While FrontRange targets the lower end of the midsize business market, Pivotal often faces off against Onyx, catering to the high end of the mid-market with sales, marketing, and service offerings. The publicly held, Vancouver, B.C., company reported revenue for fiscal year-end 2002, which ended June 30, of $69.6 million compared to $96.2 million for its year end 2001. But like its counterpart it, too, is in the red. Pivotal lost $21.4 million, or 89 cents per share for the year, compared to a loss of $5.8 million, or 25 per share for the year ended June 30, 2001. Pivotal Chief Executive Bo Manning says that 50 percent of the company's licensing revenue was from new accounts. "If you look at our pipeline you will continue to see strength there," Manning says. "We feel good about our ability grow and increase our market share despite the current economic conditions." New Pivotal customers include Pfizer Ilaclari A.S., Federal Home Loan Bank of Atlanta, and Xtra Corp. Sixty-nine existing customers made repeat purchases, including Industry New Zealand, The Warehouse Ltd., Principal Financial Services, Inc., Thomson Legal & Regulatory Limited, and Genesis Power Ltd. Other factors that bode well for Pivotal include increasing its average deal size by 13 percent and maintaining professional service margins of 47 percent, Manning says. Rounding Out the Top Five Salesforce.com skyrocketed into a position as one of the top players in the mid-market. The San Francisco-- based company, which is just barely three years old, has more than 5,000 customers and more than 70,000 seats. Built on a Web-services model, the company's software products offer sales force automation, customer service and support, and marketing automation to the mid-market, as well as some enterprise companies and even small businesses. Salesforce.com is on track for 30 percent growth in 2002, according to AMR Research. Founder, Chairman, and Chief Executive Marc Benioff says the privately held company is on pace to more than double its fiscal 2002 revenue of $23 million and to grow to $120 million by 2004. Benioff's goal to "destroy the enterprise software industry" has put himself and his company squarely in the limelight. "We want to be more like Amazon.com and less like Microsoft," he says. Room for Everyone Despite these big-name players, however, most analysts agree that it is not likely that one single company will dominate the mid-market. Gartner Group analyst Robert Anderson says there is room for all of these companies, and he expects that enterprise players will continue to move downstream, while small-business vendors scale up to the mid-market. Add to this Microsoft's grand entrance into the arena, and the current players will feel the pinch resulting in a plethora of CRM choices for medium-size businesses. CRM Mid-market Vendor to Watch: Microsoft All eyes are on Microsoft Corp. as the software behemoth prepares to deliver its customer relationship management offering by the end of the year. The Redmond, Wash.--based software giant ended months of speculation in February when it officially said it was getting into the CRM space with its MS CRM product aimed at small to medium-size businesses. Many feared that despite Microsoft's claims of staking out 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 which 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 was seen by some as validation, for others it was a wake up call that the potentially lucrative mid-market was about to get very competitive. Microsoft's vast resources, along with its reputation as a marketing juggernaut, sent many in the CRM space scrambling to clarify their positions and in some cases adjusting strategies to accommodate the 800-pound gorilla that had moved into their neighborhood. But 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 top of 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 rarely enters a market without dramatically shaking it up. Industry watchers, analysts, existing CRM vendors, and potential customers are all strapping in for the ride.