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Hosted versus licensed, or a little of both?

Hosted CRM providers made a big splash during the dotcom era and started to spring up like weeds until the market downturn decimated the entire space. One player, salesforce.com, did better than most on the market's way up and the way back down.

A rivalry ensued between the hosted model, led by salesforce.com, and Siebel's in house approach. In April 2001, Tom Siebel even predicted the demise of salesforce.com, stating that he believed the company would no longer exist in a year. Siebel's comments, while incorrect, made sense in a market that saw other ASPs closing their doors as fast as they had previously opened them.

Technology is ever-changing, and predicting market trends can sometimes be tricky. Hosted CRM is no exception and, in fact, Siebel recently introduced a hosted solution of their own, named CRM OnDemand. Additionally, Siebel purchased hosted CRM vendor UpShot Corp. In light of these recent events, I thought it wise to ask both CRM rivals some questions about the hosted model and how each company views the other.

First, I spoke with salesforce.com's chief strategy officer, Cary Fulbright.

RT: Siebel recently announced a hosted model. What is your opinion of this announcement?

Fulbright: Two weeks ago, Siebel announced Siebel OnDemand and said the company was "doubling down" on CRM. Presumably, this is an acknowledgment that the company's foray into employee relationship management has been a $1 billion waste of money, and they have finally woken up to the fact that their CRM software license revenues are half of what they were two years ago. We are 100 percent invested in on-demand CRM, and have been for four years. In that time, we've invested $100 million in development on 16 releases to produce a robust, world-class offering. We have a single integrated solution that meets the needs of our customers ... not an outdated client-server software app, an abandoned UpShot hosted app, or a yet-to-be-delivered first-generation Siebel OnDemand app. We are single-minded about the end of software. If Siebel really embraces this model, it will mean their software license revenues will take another 75 percent decline. Welcome to the new world.

RT: How will you differentiate yourself in light of this news?

Fulbright: We really believe in the end of the current enterprise software model and the triumph of software as service. We've doubled our subscribers and our customers in the past year and doubled our revenues year-over-year for the past three years. Siebel's belated efforts are just a marketing smokescreen to bait customers with Siebel OnDemand and then sell them the old Siebel 7.5 software to which they can't get their own installed base to upgrade. The most obvious sign of this is all the company's marketing about companies that can run both on demand and on-premise Siebel solutions. Why would anyone want to do this?

As of today, Siebel CRM OnDemand doesn't exist. The company announced one customer at its launch--Planitax--which is actually still using salesforce.com. Customers have a clear choice. They can choose Siebel, an unproven provider of CRM on-demand who three years ago killed their first foray into this market and this week killed the UpShot product in favor of their own non-existent in-house offering, or they can choose the global leader in ondemand solutions, salesforce.com. We have a mature Web-based CRM solution. It's available in 11 languages and 110 countries around the world. It has integration. It has customization. It has offline access. With sforce, it has code-level customization that has never before been seen in a software-as-service model. It is the best of both worlds.

Siebel touts the ability to have a blended in-house and hosted model as an advantage. Will you change your strategy to sell software as well so that you aren't seen as a more limited solution?

[ILLUSTRATION OMITTED]

To clarify, we now know that Siebel's ondemand offering is not a service at all. It is software being sold by and to IBM, Sun, HP and others as licensed technology. Customers will not know what version they are on, what the availability is, what security is being employed, etc. salesforce.com, on the other hand, is a services company whose job is to do one thing: make customers successful. We do it better than anyone. We have a winning strategy and do not plan on changing this simply to offer customers software they don't need or want.

RT: The hosted model is a fraction of the CRM market at the moment. If you had to look into your crystal ball, what percentage of the CRM market will be hosted in one, two and three years?

Fulbright: What is a meaningful "fraction"? Is 25 percent and growing meaningful? In the past four years, we have gone from zero to 8,000 customers, zero to 110,000 users, and zero to $100 million in revenue. During that period, the client-server CRM market has shrunk in half. Siebel just announced quarterly SW license revenue of $110 million, some of which is not CRM at all. Part of that is due to the flaws in the software that's being sold. A great part of it, however, is due to customers choosing us as an alternative to that model. SAP's ERP license revenues aren't down 50 percent. Only CRM license revenue has dropped so dramatically, which is exactly the market we've entered.

Siebel itself quotes the Aberdeen Group as saying the hosted CRM solution market will be a $2.7 billion market by 2006. That would be three times the size of the current client-server CRM market today. We are clearly the leader in this market. UpShot just admitted they had only 1,000 customers and 8,000 subscribers. That is one-fourteenth of our subscriber base and presumably one fourteenth or less of our revenues. To the extent Siebel embraces this model, it will only accelerate the demise of the client-server CRM software model and its replacement with software-as-service. Keep in mind that these multimillion dollar software systems are not even in the ball park for the 99 percent of companies that are 1,000 employees or less, and this is where the action is. Large enterprises spending $50 million on a Siebel implementation is not a growth market. In the next three years, there is the potential for software-as-service to be the dominant part of the CRM application market.

RT: Is the hosted approach right for all organizations or are there some instances where a company is better off within-house software? Please elaborate, giving examples of companies that might be better off with either approach or both.

Fulbright: We believe that just as companies have outsourced their water, electricity, heating and telecommunications to utilities, they will outsource their information applications to utilities, because these are not their core competencies. Why should companies take four times as much time and spend five to ten times as much to build a solution in-house, only to have it rejected by users and suffer from lower quality and lower reliability, when they can subscribe to a software-as-service solution that better meets their needs at a fraction of the cost? How many companies are doing their own payroll in-house? With the combination of the salesforce.com application and the sforce platform, we are proving that companies of all sizes can now get everything they need from this model.

I also approached Siebel Systems, which declined to answer our questions directly related to Siebel's stance on its new hosted venture vis-a-vis salesforce.com, but instead elected to provide some answers from the perspective of its recent acquisition, UpShot Corp.

CIS spoke with Julie Choi, vice president of product marketing for UpShot.

CIS: How will the hosted CRM landscape change with Siebel's acquisition of UpShot?

Choi: The partnership with IBM, introduction of CRM OnDemand and acquisition of UpShot all signal a coming of age for the hosted segment of CRM. The landscape will change profoundly. The dividing line between hosted and on-premise delivery will become an obsolete notion. There is a simple elegance in telling customers they no longer have to choose between models and providers. Hybrid delivery--combining hosted and on-premise--to suit customer need will become a "must have" to compete effectively in this arena.

CIS: How did your customers react to the news of the acquisition?

Choi: Our decision to merge with Siebel has been reinforced by the enthusiasm we're seeing from new and existing customers. Siebel's strong financial standing and its commitment to support UpShot's customers indefinitely are viewed as positives across-the-board. At some point in the future, a natural migration will occur as we upgrade the two products--Siebel CRM OnDemand and UpShot--and they will ultimately converge into a single offering. As the products converge, UpShot customers, in addition to Siebel CRM OnDemand customers, will clearly benefit from solutions that combine Siebel's world-class CRM expertise with UpShot's hosted CRM innovations, resulting in functionally superior products that are easy, fast and affordable. This, coupled with seamless integration with or migration to an on-premises deployment of Siebel, will provide customers with the choice to select the CRM solution and delivery method that best suits their needs. At the end of the day, customers want to know that their CRM initiatives will be successful. UpShot's relationship with Siebel ensures that long-term success as their business needs change.

CIS: The noisiest hosted CRM provider has been salesforce.com. Now that Siebel is introducing its OnDemand CRM, and is also working with UpShot, what's in the cards for salesforce.com?

Choi: Siebel's new business approach is CRM for everyone. This means that Siebel's strategy is to provide industry-leading CRM solutions to any type of user, any size company, in any industry, in any way users prefer. Siebel is now uniquely positioned to deliver on that strategy because of their market leadership, CRM expertise, extensive partner network including IBM, depth of resources and the addition of UpShot's history of innovations and years of expertise in hosted CRM. What this means for niche hosted players is really anyone's guess.

CIS: Will UpShot stop innovating its products?

Choi: No. In fact, exactly the opposite. The rate of innovation will accelerate as we combine UpShot's hosted CRM expertise with Siebel's CRM expertise and significant resources. Next month, we will be announcing a major product release which further demonstrates our commitment to deliver world-class CRM functionality. Future releases, as we converge the two products will add greater depth and breadth of functionality, industry-leading analytics and vertical industry-specific functionally. Customers can and should count on continued innovations. This is only the beginning.

Sincerely,

For information and subscriptions, visit www.TMCnet.com or call 203-852-6800.

By: Rich Tehrani,

Group Editor-in-Chief,

Technology Marketing Corporation

Rich Tehrani

Group Publisher,

Group Editor-in-Chief

rtehrani@tmcnet.com
COPYRIGHT 2003 Technology Marketing Corporation
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Title Annotation:High Priority!
Author:Tehrani, Rich
Publication:Customer Interaction Solutions
Date:Nov 1, 2003
Words:1790
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