Salesforce Announces PRM, NetSuite Goes Retail

Two things hit the wires this week relative to CRM that I think are interesting events and in some ways they go beyond the on-demand space.  Salesforce.com announced its partner relationship management (PRM) solution and NetSuite said it will sell its product in a retail configuration.  Let’s go back to front.

At first NetSuite’s announcement of a partnership with CompUSA seems counter-intuitive—ok, it won’t be next to the Wheaties in the supermarket, but it’s retail nonetheless.  Perhaps many people first thought, Holy cow! They’re going to sell NetSuite in a brick and mortar retail store: how twentieth century!  Don’t they already have a corner on the biggest marketplace in the history of retail called the Internet?  Why would they go retro? 

Well, I thought so too, but rather than making me question CEO Zack Nelson’s sanity, I like to believe this is a shrewd move.  Why?  Because, as many of us are figuring out, these days no matter what you call it, it’s becoming much less a sales process and much more a buying process.  In many situations today good sales people enable the purchase; they don’t make the sale, so the decision to use a regular retail channel to sell CRM makes a bit of sense. 

After all CompUSA prides itself on having a knowledgeable sales staff capable of intelligently discussing the ins and outs of products with customers.  SMBs, the kinds of companies that NetSuite targets, buy other supplies at CompUSA including software like QuickBooks, so why not also offer software that is delivered on-demand instead of on-CD?  What could be more natural?

NetSuite’s move into retail distribution is really one symptom of a major change taking place in the high tech market as a whole and Salesforce.com’s announcement of a partner relationship management offering is really another facet of the same object.

Like NetSuite, Salesforce.com is simply finding another way to service one of its core customer constituencies, in this case with PRM.  Salesforce.com is a phenomenon that started at the grass roots, in small companies, just the place you would expect a disruptive innovation to get going.  Since then, Salesforce has done a great job of moving up market but its customer base still looks like a pyramid with a large base of small companies.  Pretty much every customer base looks the same, by the way, since there are more small companies than large ones. 

Many of Salesforce.com’s core customers, in addition to being small, are also resellers in one indirect sales channel or another, so it makes double good sense for Salesforce to go after that installed customer base with a new product.  PRM is the kind of product that will bring larger OEM companies into the mix because, regardless of what a larger company might think of on-demand computing, the savvy ones, at least, will use this PRM product because their channels have already settled on a big part of the solution as a standard.

Taken together both of these events reinforce the point made here last week about secular change.  We might not be interested in ever setting the time on our VCR units, but that’s not because the technology is too tough to master; it more reflects our interest or lack thereof in having a clock embedded in every appliance we own.  Want to know the definition of insanity?  Try resetting all the clocks in your kitchen after a power failure.

If something that was once as complex and expensive as CRM can be sold in a retail store, then it really points to the fact that high-tech is moving (has moved?) to Main Street in a big way.  Ditto the indirect channel.  This is a big change and it happened very quickly. 

Moreover, going after the reseller market by Salesforce.com shows that at multiple levels, vendors are seeking alternative and less expensive sales channels through which they can deliver their products. 

We tend to look at the call center as an almost separate and distinct part of CRM and in many ways it is.  Interestingly, the call center went through the same kind of change earlier and I for one did not see it as a game changing event though in retrospect it was. 

The event in question was the advent of the on-demand call center.  All of a sudden you could provision a call center seat—not simply an SFA seat, but a call center seat with access to all kinds of exotic equipment like automatic dialers (ok, I’m an SFA kid, I admit it)—on-demand across the Internet.  That was a game changing event and one that commoditized an industry.

So, where to from here?  Well if I could place a bet (and what the heck we’re dealing with Monopoly money here) it would be that the entrepreneurship opportunity in CRM will increasingly be found in the services we add to these and other core services that improve in reliability daily and on which we increasingly depend.

Onyx and Change in CRM

Onyx got bought last week, in an all cash deal valued at $92 million, subject to the usual regulatory rubber stamping.  This was a semi-significant move in the continuing consolidation of the CRM industry but let’s not get maudlin about the roll up of another CRM pioneer. The world is not ending simply because one of the early market makers is being acquired and ninety-two megabucks is a tidy sum that could fuel more than a couple of long weekends in Vegas.

M2M Holdings, Inc. a holding company jointly owned by Battery Ventures VI, LP and Thoma Cressey Equity Partners decided to buy the CRM pioneer for about $4.80 per share, a tidy markup to the recent market price according to CEO Janice P. Anderson.   M2M Holdings also owns Made2Manage Systems, Inc and is probably strategizing a synergistic pairing of the two application suites to deliver integrated front and back office applications to the market.

That’s about as far as I can take this.  I am not a finance guy and truth be told I don’t have a lot of use for the machinations of finance.  Nevertheless, from an economic perspective I find this move potentially fascinating.  A public company agreed to be acquired — that happens all the time, but the opportunity the acquisition gives to Onyx is bigger than the news suggests.

Like every other public company Onyx was locked onto a treadmill marching to a quarterly number that is becoming harder and harder to make given the age of the market and the level of competition.  Onyx was not the largest competitor and they tried to compensate by carefully selecting niches where they could exploit innate strengths even to the point of down playing their CRM roots.  As part of a private company — owned by an investment partnership, the company, or more correctly, the new owners, have an opportunity to change the company’s business model and perhaps launch a new IPO on another day.

To be sure, the private investors will be as results driven as the public market, but the thing that privacy provides is a longer time horizon in which to affect some necessary changes.  Privacy provides patience. 

So, what changes are we talking about?  The business model. Changing the business model is something that an increasing number of companies will need to contemplate over the next few years and acquisitions of the Onyx variety might become commonplace for a while as droves of software companies attempt to change their business models.

Specifically, if I had ninety-two megabucks and therefore a say in what happens next at Onyx (which I don’t or I would be in Vagas) it would go something like this.  Onyx was a competent provider of front office software via a complex solutions model.  Say what you want about streamlining, configuration, and powerful new tools, if you delivered software on a CD or a DVD and sent in a small army of people to make it work for the customer, you were living in a complex systems world.  There’s nothing wrong with that, but the era of complex systems in the software industry is over.

What’s interesting about Onyx is that they were also one of the earliest companies to dive into what was then called the ASP market, so the company has a good deal of relevant experience in the new fangled world of software as a service (SaaS) and that is where the future lies.  SaaS is not simply an alternative way of delivering software.  Those who think otherwise probably still believe the automobile is simply an unreliable alternative to a horse.

SaaS is really the manifestation of the change from complex systems to volume operations and that is what the business model change is all about.  According to Geoffrey Moore’s new book, “Dealing with Darwin,” volume operations is what happens when everybody sort of “gets it”.  In the CRM case, the core business processes have been figured out and rather than demanding customization, may users are opting for standardization which facilitates things like fast implementation, easier maintenance, and, most importantly, ROI.

As you know, in a SaaS model you make money via the monthly subscription drip as opposed to the tsunami of a license agreement.  If you try to make that transition as a public company you get clobbered: Wall Street will not let you bring in drips when it has been conditioned to tsunamis, however erratic their arrivals may be.  So the option is to go private, to go through an exercise that in some regards looks like the reorganization of a bankruptcy.  However, instead of restructuring the debt, the company gets to tune up the recipe for the secret sauce, how they make money.

A couple of years ago I floated the idea that in this column that Siebel should buy itself back from the public market.  To me the idea made a lot of sense.  The company was sitting on about two billion dollars in cash, the investors were screaming about returns and dilution, and the founders were sitting on even more cash.  If the will had been there the deal could have been done.  Instead, Oracle bought Siebel and the companies are working to rationalize a warehouse full of software that includes redundant systems from Peoplesoft (and its several acquisitions) and Oracle’s home made CRM as well as other products.

Will that acquisition be valuable?  Perhaps.  Oracle has lots of money and smart people to braid everything together, but the jewel in the crown is Siebel On-Demand and Oracle does not look like a company transitioning to SaaS in any meaningful way.  There are some who tell a story about hybrid solutions, and alternative delivery models.  If you want to know what I think of that idea, go back four paragraphs.

New Garage explained

Last time I mentioned a white paper I wrote a couple of years ago that addresses some of the changes we can expect to come from the on demand development and deployment paradigm and I thought it would be interesting to examine some of the main points here.

The title of the piece is “The New Garage” for a very specific reason. I believe that on demand development and deployment will significantly reduce the investment required to build a software product and the company around it. With the capital requirements greatly reduced we won’t likely again see a situation like the one that existed in 2001 where venture capital firms were pouring money into businesses that were at best questionable.

The garage is where many entrepreneurs have historically gotten their ideas off the ground and with on demand tools and infrastructures, we could again see developers developing software in their garages or spare rooms without all the trappings and pressure of 1999. That was the idea behind the title and the paper. While I don’t see The New Garage as a zero sum game in which for every winner there is a loser, I do believe that it has the potential to shake everything up and in the process leave us with a very different paradigm for the business software industry. There are many different players who will be affected in this scenario some for the better, some not. Here’s my run down of some of the more obvious groups.

Developers and publishers

First off, I believe we will see two types of software houses emerge and I call them developers and publishers. Developers will retain many of the functions of traditional software companies but they will standardize on a small number of platforms to deliver their wares on. For my purposes a platform will include a typical stack of services and tools such as operating system, database, middleware, development tools, etc. Developers will use these stacks or platforms and be more or less committed to working with the stack owner which I call the publisher.

Publishers will not only own the stack and the on demand delivery system, they will also be the primary face to the end customer. They will own the delivery mechanism and will sell and market software titles in their inventories. This represents a much lower cost sales and marketing model. Since the publisher will also understand aggregate use patterns it will be also consolidate demand and be in a great position to know what customers will want in the way of enhancements or whole new products.

Developers will want to work with more than one publisher for the simple reason that with multiple outlets to the market it will be hard for a publisher to set prices to the detriment of the developer.

Like the publishing industry

I use the word ‘publisher’ in the same sense that I think about book publishers. Publishing houses own a distribution channel and that’s what authors look for when trying to sell a book. Publishers look for salability of an idea and a good acquisitions editor knows what subjects are timely in the industry and what subjects to stay away from.

Let us then suppose that the software industry evolves that way – publishers with platforms and developers using on demand tools and infrastructure to make new applications – who benefits and who stands to lose out?

If the industry does indeed go in that direction, any vendor caught in the old licensing paradigm will find it hard to make a living if only because over time the new paradigm will disrupt the old pricing model by one or two orders of magnitude. I believe there is an inherent economic bias which will help the new model to succeed. This won’t happen over night, but just as there are almost no new applications for mainframes today, the market for traditional applications will dry up.

Already there are very few new software companies operating within the old licensing paradigm, virtually every new company I see is building itself around the hosted delivery model, the primary difference is that I see these emerging companies beginning to cluster around platform providers.

Venture capital

If there are more companies forming around the new paradigm, the individual needs for capital might also be greatly reduced. This idea is based on the implicit assumption that publishers will take new products to market which will obviate most of the need to build large sales forces and generate massive marketing campaigns. The publisher will, by definition, have a more direct and lower cost route to the customer.

With lower capital requirements in the emerging companies, venture capital will have less leverage meaning that entrepreneurs may in some cases avoid VC money entirely, preferring to self-fund and retain all voting interests in the future direction of the company. I have seen companies taking this route already and the trend should accelerate. Venture capital will not go away but it will most likely look for bigger opportunities in bio-tech and alternative energy sectors.

Systems integrators

By definition, SIs live for complexity. Their world is the complex systems model, they take big undifferentiated systems and customize them for the unique business processes of large corporations for which they are paid handsomely. That world is ending at least in part due to the success of the on demand model but also because there are very few green fields left to exploit. In its place a model based on volume operations is growing and this model is what the New Garage is all about.

Like VC’s, integrators face some tough decisions. While there might still be work for integrators as the volume operations model takes hold it will be vital to their survival for SI’s to identify potential products within their intellectual property. The most successful integrators will transition to become publishers in their own rights or they will team up with a few significant independent publishers. Regardless of the path each chooses, it is likely they will have lower labor requirements.

Customers

There has never been a better time to be a software customer and that situation should only improve. Today there are on demand versions of word processors, spreadsheets, contact managers, e-mail and more available for free so there is little reason to buy shrink wrapped versions. The big fly in the ointment is how all this software gets paid for. Right now, many software companies are using an advertising model and that might work, but the danger is that the customer gets fed up dealing with the ads and reverts to a license. The key for both vendors and customers will be creativity in ad development and deployment. Then too, most of the ads are not aimed at people like me, they are targeting the iPod generation and they don’t know any better.

We’ll see.