Salesforce.com--a primer on cracking the Japanese CRM market: while the CRM majors see their market share declining, a once ignored ASP service is winning customers at an unprecedented pace.

Salesforce.com started its Japan operation in April 2000, amidst predictions from the experts that Japanese Small and Medium Enterprises (SMEs) would never use a third-party ASP to automate their sales forces. While the experts were right about the reluctance of SMEs to automate, that has not stopped Salesforce.com from carving out a whole new business with the CRM sector, in the area of Sales Force Automation (SFA), and setting the back office applications market alight again.

Today, Salesforce.com has 40 employees across Japan and has more than 625 customers--including some household names--using the product in surprising ways. While the software started out as a CRM solution, it is now also being used as a general user front-end tool to tie together other more complex systems. This has meant that Salesforce.com has become a standard with the nation's major SI companies--who both love and hate it. They love its simplicity, but hate that an implementation costs just 20% of a conventional software product implementation, and thus hurts profit margins.

Ivan Rubio talked to former CEO Akira Kitamura, who joined Salesforce.com in 2000, and who has been able to build his Japanese business into the company's second major source of revenue, behind the USA and ahead of the UK market. Kitamura's background was in Hitachi, then IBM, Oracle, and lastly e-system, a former services vendor to Siebel Systems in Japan.

Q: CRM has been getting some bad publicity recently, hasn't it?

Kitamura: Major packages such as Siebel, Oracle, and SAP are expensive and complex. While they are suitable for major enterprises who have devoted the proper amount of time and energy to build a business around such advanced functionality, the fact is that most Japanese companies, even large ones, are unable to use most of what they are buying.

Furthermore, more and more companies are reluctant to place their futures in the hands of a product which requires the support of a full-blown SI team. Those that do are typically already deeply involved with a systems integrator such as IBM, NEC, or Fujitsu, and are likely to have an inventory control system, accounting, and other financial applications from the same company.

Next, there is the fact that most CRM packages take a long time to install and configure. A CRM system can take up to a year to put in, and even then there is no guarantee that it will be successful.

Lastly, in SMEs in particular, people are reluctant to change their ways and use tools such as CRM properly.

Q: Why don't the SMEs try a bit harder to get user adoption?

It's partly a cultural thing. Japanese sales people are not used to inputting their sales data into a system, especially guys in their 40's and 50's. We often hear that sales people are worried that if they give all the details of their sales accounts, they may be poached or misused by someone else in the organization.

Then, of course, with no real business education in Japan, most Japanese companies like to think their organizations have unique work/business know-how. Therefore, customizability of the product is a key consideration in a sale. Currently most companies have a very low budget to accomplish IT implementation, and because of this, they are starting to accept standard products, which are quick and cheap to implement.

Q: By the time Salesforce.com had a Japanese product, the dotcom bust was upon us. How did you cope with that?

In 2001, we faced two challenges. The first was how to launch an Internet-based business when others in the industry were meeting with spectacular failure. The second challenge was to attract customers, or to re-attract those who had been burned already with larger brand name CRM implementations.

Our solution was to create two main strategies: one was the ASP-model, an incomparably cheap alternative for the consumer. Each user was to pay a price ranging from 5,000-7,000 yen and upwards per month.

The other strategy was to build an open, web-based system. With broad-band freely available, the market is now moving to web-based systems. Salesforce.com started its open systems strategy in 2000, fulfilling the needs and requests of a broad base of customers.

What we found, however, was that it was not only very difficult to get customers to commit to a purchase, but that you also have to sell a lot of 5,000-yen licenses to reach the same level of turnover [in the range of 1,000,000 yen] as one Siebel license. In fact, it was quite frustrating, because our value proposition was great. We were much cheaper, lighter, and did not require any hardware investment. But still we did not succeed.

We now think that the main reason for lack of take-up by potential clients was that at the time there was no business culture to use Salesforce.com type SFA products. We even helped some companies who were planning to downsize from Siebel or a similar mainstream system to migrate to Salesforce.com. But in the end, the unwillingness of their companies' employees to use the tool effectively made it very difficult for us to produce a payoff for their investment in our technology.

It was while we were struggling with the business model that we decided to set up a consulting and customization service. Also, from the very beginning, we committed to producing a series of templates specific for each industry.

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Q: Templates ... you mean Micro verticals?

Yes, Micro verticals, such as wholesalers, medical equipment vendors, etc. We developed 25 different templates in Japan, all business specific. Salesforce.com decided to do the customization in Japan, because in the US, SFA CRM products are well understood and accepted and have been selling well. Today we have around 45 templates.

Q: In which sub-industries did Salesforce.com generate most interest?

The purpose of making the templates was to create samples that customer could see and try out for them selves. Of course, this approach needs to be different in each industry. We started out with real estate agents, producing an application to help control building maintenance and the work process for building sales The sub-industry where the product was most quickly accepted was in special products which had special premium value. These products were different from standard products in supply, logistics and manufacture. It turned out that we filled a product gap for daily logistics planning.

Q: But that type of application sounds lightweight ...

We have been accepted by some relatively large companies with complex supply chains. An example is the food manufacturer Nisshin Foods. In almost all Japanese companies of this size, over 50 percent of their products are marketed via campaigns, most of which run for just one week. Thus, in a single week you have to deliver the product, specifically produced for this campaign, on time, to the supermarkets. If you fail in achieving on-time delivery, for instance, if a shipment of Christmas beer arrives late, it becomes unsaleable. So careful production planning and product supply-chain planning is important.

Q: Can you actually control such complex supply chains with Salesforce.com?

Yes. Many of our clients' sales people have to negotiate with the shop floor managers directly whenever they go to Ito Yokado [a leading supermarket chain], 7-Eleven (convenience stores), or Daiei [a department store]. Salesforce.com lets them gain access to all the relevant information for that account from a central database.

Q: If you are integrating closely with client needs, then you are not really selling a software package, but instead a systems integration solution, right?

Yes, the main difference compared with system integration is that in the traditional implementation process the development portion takes the most time. In our case, however, the development portion is almost zero.

Q: Are you planning to provide an API to allow e-commerce companies such as Rakuten and Yahoo become natural partners?

Yes, we have an API already. Our targets are most often portals--although likely to be smaller than Rakuten and others.

Q: And can the systems operated by these portals be interconnected with your product?

Yes they can. Although in practice, most of our business is more in enterprise solutions and large companies' interconnection of a number of back-office applications.

Q: With 40 people, how do you handle the integration and implementation work?

The consulting services are subcontracted. In the future we may align ourselves with a system integrator. However, right now we're more interested in working with the overall market and becoming a de facto standard. We believe that SI partnerships will be in our future; otherwise we will not be able to compete with large applications vendors such as SAP.

Q: I believe that you have a new development platform, called Sforce.com.

Yes, Yamaha is already using it. However, we are still in the process of creating a commercialized version for SI's.

Q: Is your main focus the automation of sales forces?

We don't limit ourselves to sales force automation, but also work in coordination of service-related people.

Q: By linking to other systems through XML?

Yes. For example, in the case of a language school, each branch is linked to Salesforce.com and all sales and customer data is centralized.

Another customer is the Westin Hotel, where we created a system that lets customers reserve hotel rooms. In the future, this application will also include input from the front desk. Before we were implemented, when a web customer submitted a reservation, your e-mail would travel to a group of three to six people who would manually manage the booking. This was a system fraught with potential for mistakes. Once our tool is fully implemented, all of the processes will be automatic.

Q: Is this one of the templates?

Yes it is. The project was delivered by NEC, which is strong in hotel systems and services. We've been able to close four deals with them.

Q: So far we've been talking about large companies. How about the SMEs?

Salesforce.com was originally designed as an inexpensive and easy-to-use ASP. But in actual fact, Japanese SMEs are difficult to sell to.

Q: Why?

The purpose of Salesforce.com is to help change the organization and transform its management style. It is cheap and easy to use, but SME customers still don't use it. The reason is that it requires discipline by the users and conformance to certain business workflows. Time to implement also puts some companies off.

Therefore, starting from 2003 we decided to shift our emphasis from the SME market to large enterprises. It is amongst these enterprise-level companies that you find the real need for implementing this type of solution.

Q: Common wisdom has it that the CIO is the one deciding which technology is suitable for the company. But because Salesforce.com is rather low cost, who is the decision maker? A bucho-class business manager?

No, surprisingly, even with modest purchases like Salesforce.com, we still have to approach presidents or CEOs directly. They introduce us to their BPR team, a group of strategically gathered managers who are building the company's business and sales plans. IT departments are usually below that layer. What we normally find is that the IT bucho usually wants to develop a homemade system. Since our ASP business model has remote operational and maintenance functions, the IT Department will inevitably lose part of their power base and see us as a threat. Therefore they tend to have an allergy towards our products. However we do think it is important that once a business manager commits to our solutions, the IT manager gets on board as well--since they will have to participate in the integration with their ERP and web systems.

Q: What is the difference in terms of cost of implementation between Siebel and Salesforce.com?

Siebel, a large company, costs several hundred million yen, while Salesforce.com costs usually tens of million of yen, in other words, approximately 10 percent of the cost of a Siebel implementation.

Q: And which parties do your customers choose to do the integration? SI companies or consulting companies?

Mainly SIers. In Japan the consulting companies such as Accenture, ABEAM, and Price Waterhouse Coopers usually have more expertise in accounting packages, not in CRM.

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Q: I imagine that since most of your implementations are done quickly, the large SI companies can't earn enough profit to consider building a business around the product ...

It is true that we're not seeing much interest from this channel yet.

Q: But maybe going to the second tier SI, companies such as Fujitsu Software or Hitachi Soft, will create possibilities?

In Japan there are more than 1,000 large system integrators, almost all of them are focused on SAP, and they have plenty of work and engineers--although this seems to be tailing off somewhat. In order to maintain their operations, they have to target large deals and projects. Still, as I mentioned, the large SAP customers are pretty much done and the market is getting saturated, so the projects look like they will start drying up. Most new projects these days are less than one million dollars in size. Previously they were three to ten times larger. Therefore we believe that all these system integrators will start changing their business models to more of a consulting approach if they want to survive. We think we will see a lot more opportunities when this happens.

Q: It has typically been difficult in Japan for a new company to reach the top. And usually substantial marketing is necessary. Siebel sells on a one-to-one basis, while Salesforce.com has a mass-marketing, mass sales model. How do you reach and educate such a dispersed market with a small budget?

First of all, we really work the print and online media with press releases. Every two weeks we send an e-mail, which includes customer references and best practices, to a database of about 20,000 people.

Secondly, the product tends to sell itself. The 25 sector templates are creating word-of-mouth sales for us. Upon discovering that we already have templates for their industry, most customers are delighted and are very interested to see the product.

In actual fact, although the templates look like individual applications, they all have the same basic structure. This lets us tell our customers that they can come back to us with logic adjustments and other customizations and we can implement the requests quickly. Gradually we have built up a database of cases, and our templates become more useful as each implementation is done.