The fight over CRM: on-demand services are providing a renaissance for a once-struggling technology

Chief Executive, The, Jan-Feb, 2006 by Cindy Waxer

Software giant Oracle has never been one to shy away from acquisition. In 2005 alone, the Redwood Shores, Calif.-based company gobbled no less than nine competitors. When Oracle President Charles Phillips was asked at a press briefing whether its rival, Salesforce.com, was next on the company's shopping list, Phillips' appetite for acquisition turned to competitive aggression. "In this case, it may be more fun to crush them," he replied.

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If such rhetoric seems harsh, it's because Phillips is embroiled in one of Silicon Valley's hottest battles. From powerhouses such as Oracle and SAP to up-and-comers like Salesforce.com and RightNow Technologies, vendors are scrambling to corner the market on customer relationship management (CRM). It's easy to understand why. The global CRM applications market will reach $16 billion in revenue by 2009, up from around $11 billion in 2004, according to AMR Research.

Not bad for a technology that for a while looked as if it were about to fade into dot-bomb obscurity along with wearable computers and online pet food shopping. CRM software helps companies manage customer relationships in a variety of ways, from tracking customer preferences and buying habits, to automating service requests and customer complaints, to granting a company's marketing department access to information on competitors and industry trends. But early incarnations of CRM software were often difficult to implement and demanded a sizable IT investment. With only 16 percent of CRM initiatives demonstrating value, as estimated by AMR Research back in 2003, CRM quickly lost its acronym-du-jour appeal.

Making a Comeback

Today, CRM is not only making a comeback but is a battleground for some of the most successful software executives. Oracle, SAP, Salesforce.com, RightNow Technologies and NetSuite are only a few of the vendors clamoring for top billing as companies loosen their purse strings to establish stronger relations with their customers. Moreover, there's no limit to the measures vendors are taking to establish a foothold in this market. From Oracle's acquisition of San Mateo, Calif.-based Siebel Systems to Salesforce.com's unveiling of a new software platform, CRM is in the midst of a rebirth that is pitting software executives--many of whom are Oracle alumni--against one another as they struggle to redefine the old acronym.

Driving CRM's resurrection is the concept of on-demand services. On-demand is the delivery of application software over the Internet on a paid-subscription basis. A company simply signs up for a subscription. The vendor then enables access without the need to install software. It's a hassle-free alternative to the old licensed CRM software model that required companies to invest heavily in IT infrastructure and professional expertise. "People have been burned by the idea of making an up-front, five-year commitment of tens of millions of dollars on software," says Phill Robinson, vice president of marketing at Salesforce.com in San Francisco. By providing a low-cost, user-friendly solution that can be up and running in three months, on-demand CRM can improve customer satisfaction and increase profitability, Robinson says.

The market does seem headed that way. According to AMR Research, sales of hosted CRM grew a whopping 105 percent in 2004. And while the CRM kingdom is still ruled by installed-application vendors such as Oracle and SAP, on-demand CRM market leaders RightNow Technologies and Salesforce.com enjoyed 97 percent and 83 percent growth rates, respectively. In fact, 47 percent of large enterprises, or companies with more than $1 billion in revenue, are going to look at hosting, reports AMR. "I get a lot of calls from venture capitalists looking to put money into anybody that puts 'on-demand' next to their name, and that's because of Salesforce," adds Rob Desisto, a vice president at Gartner Research.

Ironically, it was Larry Ellison, CEO of Oracle, who opted to put his dollars--$2 million, to be exact--into Salesforce.com. In 1999, Marc Benioff left his position at Oracle to launch the start-up. Colleagues and investors scoffed at the notion of charging companies a monthly fee to access software over the Internet rather than pay for on-site installation. But Benioff's persistence paid off. Today, less than two years after going public, Sales-force.com boasts more than 300,000 subscribers and a profit of $4.4 million for the first quarter of fiscal year 2006.

Salesforce.com may have put on-demand on the map, but companies such as Bozeman, Mont.-based RightNow Technologies are paving their own paths to CRM success. Although RightNow also offers its applications on premise, more than 90 percent of its customers are now on-demand. And more than half of the company's revenue comes from large government institutions and businesses with $1 billion in revenue.

Germany's SAP also is exploring the on-demand model, despite making gains with the old system. A 2005 AMR Research report states that SAP's CRM revenue grew 30 percent, unseating Siebel as the revenue market share leader. "We are working on bringing a new offering to the market that's going to address the needs of a fast deployment, but we haven't released any specific information," says Ralf Von Sosen, SAP's vice president of CRM marketing.