Salesforce.com: Weathering the CRM Storm

In the past year, the CRM market has been tumultuous for major and minor players alike as PeopleSoft acquired J.D. Edwards and Oracle (Nasdaq: ORCL), in turn, attempted to buy PeopleSoft. In addition, Microsoft (Nasdaq: MSFT) made its first forays into the CRM realm, focusing on the mid-market, where many small and mid-size vendors have established footholds.

After all of this scuffling for the CRM crown, at least one company is standing tall as the dust settles: Salesforce.com (NYSE: CRM). The subscription service firm recently announced a profitable second quarter on the heels of a highly successful first quarter. With new strategies in place for 2004, the company looks like the one to beat.

Will Salesforce.com survive the CRM shakeout -- or perhaps even benefit from it?

Think Different

Salesforce.com is no stranger to shake-ups. The CRM business model was fairly standard before Salesforce.com arrived on the scene, despite a wealth of players competing in the space.

"Salesforce.com was the first disruptive innovation in software," Aberdeen Group analyst Denis Pombriant told CRM Buyer. "They introduced a product that was an order of magnitude less expensive, was easy to implement and use, and took a great deal of risk out of what was a risky proposition."

Pombriant added that by introducing a subscription model into the CRM world, Salesforce.com became successful because it was in the right place at the right time. CIOs needed to cut costs, and the company's model allowed them to do so. The result was slow and steady growth for the firm.

"Like every overnight success , this one has been building for four years," he said.

Sincerest Form of Flattery

At this point, of course, Salesforce.com's profitability has caught the attention of larger players in the market. In fact, giant companies like Siebel and PeopleSoft have started offering subscription services themselves.

"There's no greater testament to the success of Salesforce.com than the fact that a number of very large enterprise software companies are imitating their model," Pombriant said.

This shift toward the subscription model could mean better days ahead for the CRM industry in general, not just Salesforce.com. Sheryl Kingstone, a program manager at the Yankee Group, told CRM Buyer that despite a rosier future for the tech and business sectors, budgets still are tight.

Also, companies that previously have completed large-scale implementations now must choose whether to upgrade what they have or abandon it in favor of a subscription service.

"A lot of companies don't want to spend the money to upgrade their systems," Kingstone said. "So, at this point, it might make sense to look at Salesforce.com, because their usability statistics are very high. They're more integrated with e-mail applications and have more of a simple interface, so it's an attractive choice for companies looking to switch from what they're using."

Toil and Trouble

With its increasingly popular business model, Salesforce.com has done more than sidestep the turbulence of the past year. It has taken advantage of it.

"We've tried to use the turmoil, and in some cases I think we've even been the cause of it," Salesforce.com chief strategy officer Cary Fulbright told CRM Buyer.

He noted that the total cost of ownership (TCO) of his company's software opened the eyes of CIOs who were spending millions of dollars on CRM solutions from other vendors. By revealing that it could provide CRM for a fraction of the cost, Salesforce.com caused some serious ripples in the pond.

"There was a lot of frustration and many horror stories," Fulbright said. "That's really burst out in the past year."

Kingstone agreed that Salesforce.com was well placed for a shakeout. "Not only has the glamour worn off for the industry, but architectures changed," she said. "First it was toward Web technology, and now toward a subscription model."

Using the Force

In the coming year, Salesforce.com anticipates its offerings will be even more compelling for companies seeking to boost their CRM efforts without breaking the bank.

The company's hopes are pinned on sforce 2.0, an on-demand application server that is a platform for creating, hosting and executing client and service applications. Sforce lets developers customize, integrate and extend the subscription service's user interface, business logic and data model to support their own specific business requirements.

"Sforce has the potential to be an even greater disruption than the subscription model," Pombriant said.

The application server could be the first of more innovations from the company -- and if it continues to stay ahead of competitors in the next year, Salesforce.com could rise from the current CRM turmoil like a phoenix from the flames.

"I think you'll be seeing new applications, and Salesforce.com taking on other issues," Pombriant said. "They'll continue to upgrade and enhance, and companies will be watching to see what they do next."