War of the (CRM) worlds.

On June 21, 2005, I posted the following e-mail I received from Bruce Cleveland, SVP and GM of Siebel, to my blog at Tehrani.com.

Dear Friends and Colleagues,

As many of you know, last week we announced the next version of our hosted CRM offering, Siebel CRM OnDemand Release 8. This marked the fifth upgrade to Siebel CRM OnDemand in the past 12 months. The result of this ongoing innovation and dedication to success is a win rate of more than 56 percent in head-to-head deals against Salesforce.com.

One of the primary reasons Siebel has been able to deliver innovative technology so rapidly is that we invested approximately $299 million in R & D last year--22 percent of our total revenues. During the same period, Salesforce.com invested around $9.8 million--only 6 percent of their total revenues.

You've also probably seen the many new CRM OnDemand customers Siebel Systems has announced over the past couple of months. They chose Siebel CRM OnDemand for a variety of reasons, but they all have one thing in common--they chose to buy a CRM solution rather than a CRM software development toolkit. They have told us that they want the onus of development to rest on their CRM provider, not on their shoulders--while Siebel makes heavy investments in R & D, our primary hosted CRM competitor has outsourced its R & D to its customers and partners so they can invest in more important areas such as PR and advertising.

Analysts, including Gartner, are cautioning customers that complex Salesforce.com deployments can be costly (see http://www.gartner.com/DisplayDocument?doc_cd=127182). Here is what our customers are saying, in their own words:

"We wanted a single view of the customer across multiple touch points. With its ease of use, the Siebel CRM OnDemand Life Sciences edition gave us out-of-the-box support for the complex relationships between doctors, hospitals, practices, clinicians and insurance companies that is simply not available with other hosted solutions, or would have required costly customization and time to address through workarounds. We chose Siebel Systems because of its superior reputation, rapid deployment capabilities, limited upfront capital investment and overall reliability."

--Scott Coleridge, Executive Vice President of Sales, FEI Women's Health 

"As the premier data center provider for managed dedicated server hosting in the Rocky Mountains, we are looking to expand beyond our local region. This kind of growth could not be handled effectively without the comprehensive customer relationship management capabilities that Siebel CRM OnDemand provided. Salesforce.com didn't offer us the real-time analytics capabilities that have given us 24/7 visibility across our entire systems. With Siebel CRM OnDemand, we can tightly manage all areas of our company, regardless of location or time of day, something that is essential to our competitive value proposition of providing superior application support."

--Daniel Milburn, Director, Sales and Operations, Consonus

As I've said before, if you're interested in talking with me about Siebel CRM OnDemand or new developments in the hosted CRM market, please reply to this e-mail. If you would like to be removed from this list, please let me know at any point in time. Otherwise, I look forward to keeping in touch.

Best regards,

Bruce Cleveland

SVP and GM, OnDemand and SMB 

Siebel Systems

www.crmondemand.com

In my blog, I requested comment from Salesforce.com. A short while later, I received an e-mail from representatives of Salesforce.com, who suggested a conference call with the company's Vice President of Worldwide Marketing, Phill Robinson. I spoke at length with Mr. Robinson about the Siebel letter, which I considered to be quite impressive in its ability to play up Siebel's strengths.

Before I break into the details of my discussion with Salesforce.com, I must say that the CRM wars have been heating up recently, as Siebel has replaced two CEOs in the last year and has also announced poor sales numbers. If you recall, these wars were started when Tom Siebel predicted the demise of Salesforce.com around the time of the dotcom bust. Since then, Salesforce.com, the long shot, bucked every trend and not only grew but had a successful IPO.

Salesforce.com's success was encouraged by the level of complexity involved in rolling out Siebel in an enterprise. Stories of wasted money and unsuccessful deployments made it even easier for Salesforce.com to grow, as the investment cost was lower for this hosted solution, and subsequently so was the perceived risk.

In recent years, it has been Salesforce.com's Marc Benioff who has been quite adversarial in the media. In fact, in a recent interview with Benioff regarding the changing of the guard at Siebel, he said: "I don't think there is a more difficult job in this industry right now than making that company [Siebel] a success." On the other hand, until recently, Siebel has been taking the high road. Some suspect this road was chosen because the company didn't want to give any more legitimacy to their competition, while others think it's because things are not going well for Siebel.

This recent letter marks a new era in the battle between the two titans and, as promised above, I present the comments from Salesforce.com's Robinson, who calls the letter from Siebel disappointing, and goes on to say the 22 percent number invested in Siebel R & D is inflated, as revenues came up far shorter than expected. "Since Siebel is not making any money, they should be restructuring their cost base against revenue reality," he stated. I mentioned that the sheer size of the R & D investment by Siebel is staggering: 30 times greater than the amount invested by Salesforce.com.

Robinson explained that Siebel sells hundreds of products and, certainly, most of this spending is not focused on the on-demand product. He invites Siebel to break out their on-demand R & D investment from investment in other product lines. The argument goes something like this: As Siebel has so many products and so many platforms to support, such as Linux, Windows, Unix and other variants, many of the R & D dollars are going to support not only the various flavors of products, but various versions of various flavors of various products on various platforms. In other words, the dollars are being spent all over, including connectivity to a plethora of databases such as Oracle and DB2. Robinson also went on to state that on top of all the above versions, there are then specific products targeted at vertical markets such as financial, technology and others. Of course, there are then various languages that need to be supported for many of the above products and variants. (You get the idea.) Robinson explained that this is the death matrix of application development, and these sorts of investments keep Siebel from investing in the core product.

It was at this point that Robinson began to dissect the customer numbers from both companies, focusing on his company's total on-demand customers, which consists of more than 267,000 subscribers, against Siebel's 33,000 subscribers. He pointed out that a recent deal Salesforce.com struck with Merrill Lynch was, in fact, bigger than Siebel's entire on-demand sales in the quarter.

To be fair to Siebel, the company has been at this on-demand game for a shorter amount of time, and they sell lots of products besides on-demand software. The other issue worth mentioning is that Siebel traditionally sells software to larger companies, but the on-demand offering is targeted at the smaller players. This means that Salesforce.com, which is deploying larger and larger installations, may always have an advantage in their number of on-demand customers.

There is no denying that Seibel needs to hurry to crank up the licensed and on-demand sales. At the same time, the media spotlight is on them, and the pressure of Wall Street is growing. There are some investors in the company growing ever-more impatient at the company's recent trip-ups, and these investors have hinted they may consider taking drastic action if things don't dramatically improve in the next year.

According to published reports, Siebel's comeback strategy is two-fold, starting with a new product launch, which will happen around the time you receive this magazine. Nexus, as this product is called, breaks core CRM components into LEGO-like pieces that can run on Microsoft and IBM platforms. This new technology will allow the company to focus on business that is not easily solved with current products on the market. The second part of the strategy is to tell customers they can provide any sort of solution they want, from hosted to software to a component-oriented solution.

For their part, Salesforce.com's management is confident they have the advantage in this competition. They point to the fact that hosted software vendors recognize revenue over a longer period of time and, as such, have an incentive to ensure customers are happy every day. This is in contrast to Siebel's model of selling primarily software. Not only does the hosted model ensure Salesforce.com focuses on customer satisfaction, they recognize revenue over years instead of all at once. Robinson states that Siebel's shareholders won't be happy with a revenue shift from upfront license to monthly recurring. Our discussion then proceeded into the cultural issues a company selling competing software and services has to deal with. "Which do you sell?" Robinson asked. While Siebel sees giving customers a choice as a positive point, Salesforce.com views it as a limitation. Salesforce.com sees the world going to the hosted model; and just as most mainframe software companies could not make the successful transition to the client-server world, Salesforce.com believes today's software companies won't make it in a hosted world.

Time will tell if this thinking is correct, but for now, Salesforce.com has put significant investment into making all software available as a service through the company's recent Multiforce announcement. Multiforce allows users to build hosted applications with tools provided by Salesforce.com. Companies then pay for the hosting of solutions. Salesforce.com has coined a few buzzwords for Multiforce, including "hosted OS" to "delivery platform for on-demand computing."

I asked if this expansion into new types of software needs to be accompanied by a name change, to which Robinson replied, "Names don't need to mean what you do as long as people are familiar with what you do and who you are."

Robinson mentioned to me, during the course of the interview, that Siebel refuses to allow its hosted service to be compared head-to-head by testing labs. I have not verified this claim, but invite both companies to contact me directly to arrange a head-to-head review by TMC Labs. The floor is open to Siebel at any time if they would like to respond to the above discussion.

If I had to pick a winner in this battle, I would have to say that it's the customer. For the first time, the competition is getting so intense that market share is something for which both companies are going to be striving. The question is, how far is Siebel going to lower its prices to gain share and, furthermore, will Siebel damage its brand by pricing too low? Will investors stand for lower margins in return for market share? Siebel seems to be in a tough spot, because if they don't grow their on-demand business fast enough, they get trounced by Salesforce.com, and if they grow at the expense of profit, they get slammed by Wall Street.

Watch this space for future developments.

Sincerely yours,

Rich Tehrani, Group Publisher, Group

Editor-in-Chief, [e-mail]

By: Rich Tehrani, Group Publisher, Group Editor-in-Chief, Technology Marketing Corporation

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