• June 1, 2002

Up Close: Craig Conway

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PeopleSoft Inc. is one of the clear leaders in the CRM space. The company is solidly profitable at a time when many high-tech heavyweights are still struggling, its PeopleSoft 8 CRM product suite is gaining steam in the enterprise, and it has big plans to move downstream to tap the mid-market. However, challenges abound. The company's licensing revenue is not ramping up as quickly as some analysts had expected, its stock recently lost a third of its value in one day, and Microsoft Corp. is about ready to dive headlong into the CRM waters. PeopleSoft Chief Executive and President Craig Conway recently spoke about these issues with CRM magazine Editor-in-Chief Elliot Markowitz. CRM: There have been many reports from various researchers and consultants talking about the slowing growth of the CRM industry, and specifically criticizing CRM vendors for poor customer satisfaction and failed implementations. Is CRM getting a bad rap? If so, what changes need to occur to alter that perception? Craig Conway: No, I don't think CRM is getting an unfair or bad rap. It has been a category that had some disappointment associated with it. I think part of the disappointment is overpromising and underdelivering as suppliers. And part of the problem was customers who really didn't fully appreciate the level of commitment they would need to devote to customer relationship management. The result was a higher-than-normal level of failed implementations. It is a combination of a couple of factors. The vendors, the early vendors--one in particular--have been both so provocative and chest-thumping about customer relationship management that it set an expectation; I think that there is no possibility of living up to that expectation, certainly not without an equally strong commitment on the customer's part. The combination of those two things did have a higher rate of failure than other categories did. CRM: The CRM landscape is becoming even more crowded, with big-name companies like Microsoft and Baan, as well as start-ups like TightLink, entering the fray. Is the CRM space big enough for more competition or are there too many players already, and consolidation will continue?
Conway: It's an enormous market with a tremendous amount of growth. Research still points to the vast majority of companies having never licensed any customer management applications. And I believe that is the case. Most companies still run home-grown, internally developed customer management software of one kind or another. Having said that, I believe it is enormously unlikely that the market will support small players. Customer management systems are so integrated with the fulfillment and the revenue management processes that companies cannot afford to try to mix and match 20 vendors into that mix. When customer management is something you run your company on 24 hours a day, seven days a week, all around the world, it becomes a real-time system. And real-time systems are never owned by a combination of 12 or 15 suppliers. There are normally two or three or four major providers that can deliver a robust, bulletproof, real-time system. It would be almost unthinkable for me to be trying to compete in the CRM space as a start-up anymore. Now, does Microsoft, SAP, or Oracle, or PeopleSoft, or Siebel have a reasonable chance of owning large parts of the landscape? Absolutely, because all of the companies I mentioned already own large parts of the landscape for real-time type products. Unless you are doing something so unique, why would a company try and blend that into a real-time process that will feed into the supply chain and the financial management and the human resource sides of its business? CRM: So then what companies keep you up at night? Is it the Baans or Microsofts coming into the market? Conway: When Microsoft leaves port, they are loaded with weaponry. They can cause some serious damage. We have seen Microsoft do that [in other areas]. I do not expect the same thing to happen with Baan. Baan is a name that even in Europe is thought to be so associated with failure that I don't think that they are much of threat. If you draw a pie chart and put 2004, I think the major players are going to be PeopleSoft, SAP, and Oracle. And Siebel, quite frankly, will be the only sole solution provider on the pie chart. But it's hard to believe why a company that is going to integrate CRM so deeply to run its company on it would not be buying that from PeopleSoft, SAP, or Oracle. When little companies come into the market and try to distinguish themselves on a certain capability that companies don't have, or along a vertical, I think that if I were a start-up I would sure as heck not be too excited about trying to prove I can do something that PeopleSoft couldn't do. I do think there is a possibility of doing that on a vertical basis. If you came into a market and said, "We have a customer management system that is for hospitals," because Siebel doesn't have a vertical for hospitals, PeopleSoft doesn't have a vertical for hospitals, you can probably build a $25 million business on that. I can't imagine doing that in the banking industry because SAP, PeopleSoft, and Oracle have verticals for that. CRM: But there are still many organizations that roll out CRM systems department by department. Conway: I am not dismissing in totality the entire existence of small companies coming into the category, but if you draw a pie chart of what is essential to the core, the major pieces of the multibillion-dollar pie are probably going to go to four or five major providers. The software industry has turned into the drug industry. In the drug industry you have a lot of research and development on drugs done by little companies, but then Bayer comes in and buys them. There are very few drugs sold by little companies. I think the software industry has swung in that direction. CRM: Long term, do you believe Microsoft will be satisfied as a mid-market play or will it start snailing its way into Fortune 1,000 accounts bit by bit? Conway: First, I don't count them out for anything if they set their minds to it. But it is also a matter of what do they have a taste for. The businesses that they have been enormously successful in have been high-transaction, low-dollars, third-party sales, and third-party support businesses. And you saw with the X-box a perfect example of plugging into an industry that is a high-transaction, low-dollar, third-party sales, and third-party support business. The reason Microsoft is such a threat in the mid-market is it's a low-dollar, high-transaction market and it doesn't mind being serviced by third parties. But you start talking about selling Sears or Ford or General Motors, there is an entire business model based on a low number of transactions, high dollar value, direct sales, and direct support. And I just don't believe that is Microsoft's business model. Now if you told me you just spoke with Steve Ballmer and he is changing his business model and he is taking 2,000 salespeople and putting them all on corporate accounts worldwide and they're going to sell $10 million deals, I would start to worry. Here is my prediction: It is far less likely that Microsoft will staff to gear up to sell large enterprises than it is that PeopleSoft and SAP will go after the mid-market. I think they will see us in their traditional space before we see them in ours. CRM: Overall, then, is Microsoft's move good for the CRM industry or do you think it will be harmful in a way that could hinder some technology development? Conway: I am not fearful. I don't know what their motivation was, but I think people's assumption is they studied the market and realized the enormous amount of money to be made in it, and they acquired and developed some software to go after it. Another explanation is they are out there selling Great Plains, it has HR and financial applications, and customers started to ask, "What should I buy for CRM?" So it comes down to how serious they are about the category. They may raise the visibility and validity of the category. CRM: CRM is becoming more integrated as a broader enterprise solution. What is PeopleSoft's strategy to address the entire enterprise? Conway: My vision is that CRM will not exist as a separate category, much the same way nobody buys accounts receivable products because it is so integrated with the rest of the management system. CRM is so systemic to the entire fulfillment process that I believe it will represent some component of the business-fulfillment process. Two years ago Tom Siebel said order-entry is a back-office function, I don't want to get into it. Fast forward two years and he's got order-entry and intends it is an absolutely mandatory part of CRM. So was he right two years ago and wrong now? Or was he right then and right now? Or was he wrong then and right now? I think he was wrong then and right now. All of these business processes that connect with CRM, including supply chain, including revenue management stuff, are so closely a part of the customer management process and system that it is hard to say where is the border. CRM: How would you draw the borderlines? Conway: There are three borders in my view. One of them is fulfillment business process. The second category is revenue-management processes. And the third one is human capital. Even those three overlap. So in terms of fulfillment process, you start out with contact management stuff, marketing automation stuff, email response system. These are all in the cultivation of the sale. But then you move into order-entry, which is kind of a foreign thing in the CRM space, but belongs in that process. Then inventory, shipping, and configuration. And then you move into customer service. It's all part of the fulfillment business process. The second category I mentioned is revenue management. And this is billing, invoicing, accounts receivable, accounts payable, distribution. These are the ways of counting the revenue, where it goes and how do you generate it. Then the third category is human capital management, which can be everything from the transactional stuff like payroll and benefits through things like management systems, performance evaluation systems, and compensations systems. These applications were born around divisions of companies, but the world has gone beyond just divisions of companies. Customer management goes across all three of these areas. What I always find amusing is Tom Siebel always defines CRM exactly according to the products that he has. The fact is that the more of these pieces that can be integrated seamlessly into a total business process is better, whether Tom Siebel has them or not. CRM: You have said in the past that SAP poses the biggest competitive challenge to PeopleSoft. Why is that? Why not Siebel or Oracle or one of the smaller vendors? Conway: Because if you agree with this imagery of business processes and not individual pillars of applications, and you believe these business processes operate real time, and you believe that there are a lot of pieces that come together to manage the entire customer management operation of company, then who has the most pieces? Siebel is a sole provider of traditional CRM. SAP has a live inventory of business-process software. So if you line up all my competitors, I worry about SAP, because they have these things I mentioned. Siebel you worry about in the short term, because historically they executed the name recognition with the category. You have to be concerned with Siebel, because they can promote their position based on their historical significance. CRM: PeopleSoft has traditionally had an up-and-down relationship with system integrators. However, today integrators are playing a greater role in implementing CRM solutions, specifically in the mid-market. What is your relationship with integrators and consultants? Conway: There are a couple of different categories of partners and the channel that we have to be clear about. PwC, KPMG, Deloitte, Cap Gemini, IBM, we have very deep relations with. These are the big consulting firms. To the reseller channel, we are neophytes. We are as out of touch with how to do that as Microsoft is on how to call on a CIO to talk about a $20 million, long-term commitment. We don't have great reseller agreements. The closest we come is very close to consulting and systems integration businesses where we are their preferred partner and we just back away and let them sell. The traditional reseller that is taking a Sun server, configuring some Cisco routers and CheckPoint firewalls and implementing a piece of software, we do not have [relationships with]. CRM: But if you plan on attacking the midrange, you need relationships with some more traditional channel partners. Conway: Well, I think you're right. We have to be prepared to deal with that, because that is maybe the best way to get to those companies. I have an initiative in 2002, as do the other CRM vendors, to try and crack that market, and the reality of doing that is you have to have some resellers. So we will have to figure out how to do all that. CRM: It appears the wireless CRM market is in somewhat of a holding pattern, with many customers still in pilot phase. That said, PeopleSoft recently unveiled a pure Internet CRM solution for the communications industry. The company also delivered the next generation of mobile synchronization technology. Does this mean you are looking at the mobile and wireless area as the next hot bed for CRM? Conway: We continue to believe that wireless customer relationship management is a huge opportunity. Companies are studying hard how to enable their nomadic workers to stay synchronized with customers and corporate data. We believe that part of the reason that has not taken off more quickly is the reality of the technology is it's too cumbersome. When you have wireless devices that have to be fixed like a PC, it's a burden. It's a burden on your IT department, it's a burden on the user. So we came out in June last year when we launched our CRM 8 product saying we took the approach of a very, very light client, which generates HTML so that all you have to do is get to the Web. Get to the Web and all synchronization and all of the heavy lifting is done on the server side. Siebel's approach is basically to have your entire client reside on the PC and have all the synchronization work initiated by the PC. The problem with that is it becomes an IT nightmare and a user nightmare. So contrast the two approaches. Siebel has a 100 megabyte wireless client. We have a one megabyte wireless client. CRM: What percent of PeopleSoft's overall business is related to CRM? And how is that mix changing? Conway: It is definitely going up. We are not only gaining market share in the market, but within our own product line. Currently about 25 percent of our licensed revenue is probably customer relationship management, and I suspect it will go to one third in 2002. CRM: What will 2002 hold for the CRM industry and what about 2003? Conway: First of all, I think despite the bad press the industry got last year, CRM will continue to be a high-growth category in 2002. High growth doesn't mean the 80 or 90 percent growth levels of the past, but I still think it could grow at a fast pace. It's the law of large numbers. As the total market goes up, growing that quickly is harder. But I still think 25 or 30 percent growth as an overall industry is very rapid growth. Most mature industries grow at four or five or six percent a year. I think customers fully appreciate the benefit of customer management, whether it's the selling process or the support process. I think they are anxious to try and realize some of those benefits, but I think they are probably more cautious than they used to be, and rightfully so. And there is more history to illustrate what to do and what not to do. So the combination of those will make it still a very good area. Certainly, we are excited about our success. --CRM
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