Salesforce.com: enterprise-minded, but SMB at heart

A couple of analyst firms - Gartner and Nucleus Research - recently commented that Salesforce.com had a limited value proposition for the complex needs of large enterprises. They further added that over the long term, this limitation would lead to a higher cost of using salesforce.com compared to clients owning their own software infrastructure.

While I remain buoyant about salesforce.com in the SMB segment, as far as its current offering is concerned, the analysts have a valid point. And there's an analogy I like to cite from another old time on-demand market that substantiates the analyst's views.

Consider the Centrex market for hosted communication solutions. Centrex is essentially the name for hosted PBX technology, and has been around for around 25 years. Its a substitute for buying full featured PBX infrastructure, and offers a distinct value proposition, albeit a limited one, attractive to many small and midsize businesses (SMB's) and branch offices of larger companies. Instead of buying and setting up their own PBX infrastructure, Centrex phone line users can subscribe to Centrex services for a monthly fee. Centrex has a mature market, with a share of around 12% out of the total market for business phone lines, and this has been quite stable for several years.

What is important to note about Centrex services is that their user surveys reveal 2 key findings - a) Centrex users are just as likely as existing PBX users to evaluate the purchase of a PBX system, and b) 70-80% of Centrex users make the evaluation each year whether they should buy their own PBX infrastructure or continue to use the hosted Centrex service.

The Centrex market and its user behavior point to the challenges of churn and long term growth saturation that salesforce.com will probably have to address at some point of time in their core SMB market. But SMB's are a huge and underpenetrated segment - and the company can very credibly claim a lot more of that segment. Their model of software as a service is simple, powerful, 'platform' minded, scalable and affordable enough for them to serve SMB's on a global scale, and continue to fuel their growth for the next several years.

None of that still makes salesforce.com (atleast so far) the right fit for the complex, large scope, usually highly customized, long term needs of large enterprises. The Merill Lynch deal last week for a 5000 user subscription for salesforce.com does not make it any more so. Neither does Accenture's recent endorsement. And besides, there really are only a couple of thousand enterprises on the one hand that would classify as large, and millions of SMB's on the other hand that salesforce.com can effectively serve.

I could certainly guess the reasons why, even with the success they're having, they appear shy about their bread-and-butter market and more eager to embrace the large enterprise. Maybe I'd even cheer them more if they proved me wrong on that. But it's a hard one - would you rather be richer or happier?

R&D cost advantage of salesforce.com's on-demand model

This post was authored in Feb 2005
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There's an inherent cost and competitive advantage in an ASP business model such as salesforce.com (SFDC), and it gets less attention than it should. Its the efficiency of their software development and delivery process as compared to the process in a traditional license based software product development firm. That makes a newcomer like salesforce.com an even more potent competitive threat to incumbent vendors in the enterprise software space. Salesforce.com is simply able to add more functionality cheaper and faster because of the advantage their business model lends to their software process.

I notice this every few months, when I sign up for one of SFDC's trial accounts to get a quick status check on their functionality. Usually I'm pleasantly surprised with what I find in terms of functionality they've added. They're on their way to being not just a sales or CRM service, but a more complete business suite. Salesforce.com now includes modules for managing Documents, Contracts, Knowledge-base, Analytic dashboards. And as of Spring 2005, Order Management and Billing are coming soon. And as they expand the scope of what they offer, some of their earlier functionality in the Sales (SFA) area is now getting pretty mature after several rounds of releases. And increasing penetration among larger companies underscores the evolving maturity of their offering.

So what makes their software process efficient?...Basically, they need to produce, maintain and support just one version of their software, running on just one instance. No back porting and forward porting of fixes to multiple installed releases. No need to port to various operating systems. No need to be compatible with various databases. No need to produce a major release every 12-18 months to pull in the license revenue. Lower support costs because of the simplicity of their offering. Salesforce R&D teams can simply keep building small and large features in a continuous flow of development, and keep adding these features in smaller releases without having to wait for a major release to go to market.

A recent earnings call had analysts asking salesforce.com why their R&D was much lower than industry benchmarks, and whether that meant they were under-investing in R&D. Some industry analysts simply don't seem to get it, but salesforce.com's management did well to point out that its because of their particular business model.

The Economist on Salesforce.com

This blog was originally posted on 6/19/2004, just around the salesforce.com IPO.
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Economist.com | Salesforce.com

Salesforce.com gets it! Their new IPO stock is going to be worth the buy. They clearly have the most forward thinking execution of the ASP business model.

A fair question may be to check how big their addressable market is, and how fast can they grow. After all, how big a space can 'web-hosted SFA for small and midsized companies' be? Its what they're best known for, and that space may not have enough room for a company with their ambition and potential. They've proven leadership in serving this market segment with the ASP delivery model. They started fresh, with no baggage of a legacy product license based business model. Siebel has too much baggage to actively disrupt their license revenue streams. But salesforce.com's future growth really depends on how the scope of the adressable market is defined, and the product vision & execution to serve the larger scope.

Expansion into global markets (which they're actively doing anyway) probably expands the addressable market 3X or 4X. Point awarded. The Enterprise segment could possibly give another 3X or 4X, but neither the product, nor the ASP model, nor the market are ready for each other yet in any big way. CRM as a utility in the enterprise will be a slow evolution. And there are incumbents like SAP, Peoplesoft and Siebel entrenched in there as well with enough time to work out their ASP offerings. So no points there. A growth strategy oriented along industry verticals is nice to have, but not the most attractive growth bet for a company that has the drive to pull off a horizontal play.

But now watch where this company is going with its app dev toolkit for customization and integration, Sforce. Its truly promising. May sound a bit far-fetched right now, but Sforce contains the seeds of morphing saleforce.com into an application platform player in the web services arena. Its still a childlike newbie in the big-platform-boy's camp (read Microsoft, IBM). But if they play Sforce right, they'll be the first to distinguish themselves in building a business model around providing consumable web services to businesses. As a side effect, Sforce raises significant barriers for plain vanilla ASP followers. More importantly, it also adds the tech community as an independent customer segment for the company, in addition to the salesforce.com user communities for whom the current value proposition is fairly attractive in any case. Playing BOTH these segments is the key to a platform play. Its the edge that makes an app provider a serious alternative within a more sophisticated customer segment - the ones who are used to thinking about business & technology together, as part of a coherent strategy, not one without the other.

Part of the journey for salesforce.com is going to include getting away from the confines of a CRM and salesforce branding. The current mid-market position is actually a good place to grow up unfettered for a while. Big boys usually face struggles in serving this market well, and bungle up a lot even when they try to. A big part will have to be continued innovation in applying Service Oriented Architectures, offering consumable, customizable business objects and processes. Part will have to include broadening the scope of such processes and objects available. Part will have to involve being on top of the web services business model - high granularity in provisioning, pricing, usage metering and billing for consumed web services. Part ofcourse will have to include attracting a large tech and consulting community. Right now some members in that community are just about beginning to notice them.

But everything this company is already doing in each of the above areas shows a story unfolding that's visionary and being executed well. They have what it takes to be worth your money.

Outsourcing CRM functions

Originally posted in July 2002 on a discussion board in response to an article discussing the pros and cons of outsourcing CRM functions
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"It makes sense to look at the relevance of the ASP delivery model from the perspective of where a business using an ASP application is in its own life cycle. For ventures (and this includes divisions within companies) that are cash- and time-constrained in the short term (startups, or those anticipating near-term expansion), it makes a lot of sense to sign up with an ASP. As the business matures, the tradeoffs may change, and the same venture will evaluate bringing the application in-house.

Its the classic 'Rent vs. Buy' decision. In more mature phases, businesses are ready to explore more strategic ways in which they want to use their technology infrastructure . Or perhaps they anticipate that their application needs have stabilized, and they'd rather just buy a software once and run it in-house because the long-term cash outlay will be smaller.

Given such decision criteria, ASP vendors may be better off offering their customers a migration path towards a locally hosted, on-premise version of their application, to suit the needs of customers who want to make strategic use of their technology assets.

It also makes sense to look at the ASP delivery channel in terms of the maturity of a technology. If a technology is widely available, it is so mature that it has a commodity function, and there is little perceived strategic advantage in deploying it (e.g. payroll processing applications, telephone service), a business would rather have a service provider manage it for them. They would benefit from economies of scale of the service provider, and lose little in terms of strategic value by outsourcing it.

CRM apps that perform the very basic functions of customer database management and customer interaction may already be ripe to pass the commodity test and be delivered via ASP. But CRM is a pretty vast field, still young, and there are a lot of things innovative companies can do in this space.

By definition, those that want to pursue innovation in their use of CRM technology won't be able to do it through an ASP, or else there would be nothing innovative about it!

So, to really dig into the broad subject of 'CRM outsourcing,' it makes sense to look at sub-segments of the CRM market, where each is in its maturity, how companies use different types of CRM at different points of time in their life, and also other factors that drive their evaluation of 'Rent vs. Buy,' e.g., current recessionary business conditions make service providers more attractive than in-house."