What’s likely to happen next in the CRM lifecycle?
Very soon, conventional CRM vendors will admit that their market shares are being eroded by new competition from hosted vendors or that they are unable to gain sufficient traction with the early majority buyers.
Each type of vendor
will sell its products in very similar ways, though each has specific advantages. For example, the conventional vendors will continue to sell the virtues of product robustness and the completeness of their offerings, as well as their greatly improved implementation times, greatly improved ease-of-use, and improved return on investment (ROI).
On the other hand, the hosted vendors will emphasize their reliability, even greater ease-of-use, lower costs, faster implementation, and faster ROI.
As Aberdeen has already seen, the Phase 3 customer wants convenience — defined as ease-of-use, reliability, low cost, and low cost of ownership — which the hosted vendors offer in abundance. Those demands will make it all the more difficult for conventional vendors to compete over time. But the momentum, at least initially, will not be totally with the hosted vendors.
Customers that need more than quick CRM — that is, functionality and robustness — will still gravitate to the conventional vendors. Therefore, established CRM vendors with large war chests can steal a march on the upstarts if they think and act strategically. Below are some strategies that each side must consider.
Strategies of the hosted vendor
The path starts to get steeper, and the going gets rougher from here on for hosted suppliers. Hosted vendors cannot compete with the larger and better funded establishment vendors in marketing or in the functionality of their offerings — yet — so it will be important for them to hug the inside lanes in niches where their relative lack of functionality and bare-bones approach are seen as assets.
This means selling to smaller companies with less well defined or totally absent formal business processes that require specific support.
Moreover, it means selling to executives whose bias for a quick solution makes them less willing to contemplate the big picture of CRM for their customers and their businesses. Such companies and executives tend to want CRM-lite — tactical automation of existing business processes with resulting productivity gains but little or no fundamental change to their businesses.
Thus, the strategy for hosted CRM vendors is to hammer away at their key strengths — especially low cost and fast ROI – and continue reinvesting in product elaboration and infrastructure, which will enable them to continue moving up market to bigger and more lucrative deals.
Strategies of the conventional vendor
The strategies for the established vendor are more controversial because they involve significant change. Many vendors will opt for no change, believing that they can handle the hosting challenge with their existing business models. These companies will be the first CRM vendors to exit the market, Aberdeen believes, because standing pat is not an option.
Many conventional CRM vendors will attempt to take on their hosted competitors by deploying their applications in a hosted model within their existing company structure, effectively setting up two companies or at least two different business models within the same physical entity.
This approach rarely works. Very often, companies think they can sell the two competing offerings side by side using the same sales force and marketing assets, deluding themselves into believing that they can represent each product line effectively to give the customer a “”choice.””
These companies will discover that there are simply too many cultural differences between the business model that is oriented toward selling big license deals, and then installing and supporting them, and another model that celebrates getting small deals that mature and generate continuous revenue over a long time horizon.
The alternative to setting up two business models inside of one physical entity is to set up two totally independent businesses. Although each entity can use the same applications, culturally they will be very different and, in business, they will find themselves competing.
Some managers will say that the hosted unit is simply stealing business that could otherwise be won by the conventional business unit and that the exercise is futile, but managers with this view miss the point.
Over time, as the hosted approach becomes even more mainstream, there will be fewer opportunities for the conventional license approach. One of the business units will fail, and experience shows that the conventional unit is the one most likely to succumb. At that time, a cutover to the new business model will be already complete and the company can move on, hardly skipping a beat.
The second business unit strategy is critical to effectively managing the radical change that is now taking place in the CRM industry.
Companies that execute it well will prosper and may find that, at the end of the process, they can capitalize on other, similar opportunities (e.g., in ERP, analytics or supply chain). This strategy is critical to the long-term success of some of the giants in the software industry; ostensibly, it will function more as a lifeboat for the intellectual property, employees, and the investors’ capital.
Vendors to watch
In Aberdeen’s opinion, three vendors are poised or, at least, are able to execute a strategy that launches a hosted application operation.
We believe that each will make its intentions known in the next 12 months. We expect that when one of them announces its plan, the other two will rush to announce their own plans in order not to appear to be lagging. These companies, in alphabetical order, are PeopleSoft, SAP, and Siebel.
* PeopleSoft — This company has a history of coming late to the party, only to snap up significant market share. Moreover, PeopleSoft has a history of integrating with other vendors’ applications to produce composite applications that support customers’ specific needs.
Over the last three years, the company has worked diligently to base its products on industry standards such as Java. In addition, PeopleSoft 8 has provided the company with the platform it needs to launch into a market that requires applications that are simple, that integrate well, and that are configurable.
* SAP — As with other vendors in this short list, SAP has worked hard to standardize its applications on modern architectures. It also has a great deal of experience in selling into the midmarket, the primary territory of Phase 3 customers, discussed earlier.
SAP’s large and maturing customer base has digested its investment in ERP and SCM technology, and it now actively sells its new CRM products into that base.
Also, SAP has built what could be considered a pilot hosted system infrastructure, which it has used for training and implementation of new customers to give them a jump-start while their infrastructure is built out. Do not look for SAP to be first out of the gate with a hosted offering, though. With the deep investment this company and its customers have in the licensed software model, it will take some persuasion by the market to awaken this sleeping giant.
* Siebel — All of the product enhancements of the last several years in which Siebel has invested can, in retrospect, be seen as pointing to the day when it would reenter the hosted CRM market. Siebel’s first foray into hosting, Sales.com, was a reflexive response to Salesforce.com — and Siebel was not alone. Oracle (whose chairman, Larry Ellison, also sat on salesforce.com’s board) was another early entrant and casualty.
Siebel’s client-server architecture proved to be inappropriate for hosting, but, since that experience, the company has aggressively rearchitected using both Java and Microsoft’s .Net paradigm to rebuild its suite. Even more important, Siebel’s Universal Application Network (UAN) is ideally crafted to integrate applications from myriad vendors, enabling Siebel applications to share not only data but also business process information across the enterprise. So why not share that information across the Internet?
The demands of the early majority and the success of companies such as Salesforce.com suggest that these three vendors will need to face the challenge of hosting in the next 12 months. Aberdeen research suggests that either PeopleSoft or Siebel will make a hosting announcement within the next six months.
