Announcements may be playing the role usually reserved for M&A activity in the CRM world right now. Generally a company purchases another when it wants to capture the benefits of another business’ R&D or established market base. But at the moment it appears that the desirable partners are too big to swallow and the result is more partnering between the big guys and the really big guys. Salesforce has been pursuing this strategy for most of the last year with Amazon, Google, and IBM. This says a lot about the state of the marketplace on several fronts.
First Salesforce and Amazon announced a partnership in which Amazon and its AWS infrastructure service would become Salesforce’s strategic infrastructure partner when Salesforce absolutely had to deploy a data center in a foreign land.
This makes perfect sense. As I have often said, it makes no business sense to build (in this case a datacenter) when you can purchase the solution at a reasonable price on the open market. As a competitive issue, Salesforce’s choice of Amazon is a direct challenge to Oracle because it offers a safe haven enabling Salesforce to diversify its partner portfolio while keeping Oracle and Microsoft at arms length. Given the rumors of salesforce being acquired by a big tech firm over the last few years, this seems a good way to help preserve its independence.
Much the same can be said of the alliance with Google. This is primarily a play for more SMB business and it’s a good one. Salesforce and Google announced their partnership around G Suite, Google’s free office apps. A while ago Salesforce and Microsoft created an integration with Outlook effectively making Outlook another UI for Salesforce. This parallels Microsoft’s own integration with its CRM and Outlook. So this partly neutralizes Outlook as a differentiator in any CRM decision.
Google integration gives Salesforce access to all those G Suite users who need CRM, especially in the SMB space. It also gives Salesforce another way to compete against Microsoft CRM. But, of course, they didn’t stop there. Salesforce also now has an integration with Google Hangouts too, an effective counter to Skype which is now owned by Microsoft.
Away from the SMB space in the Enterprise market Salesforce also forged a relationship with Google Analytics. Not that they need more analytics but the two partners have developed plausible processes that use Google Analytics to surface macro trends and Salesforce Einstein to go the last mile, a model that works with IBM too.
Last week Salesforce and IBM got closer with Salesforce naming IBM a preferred cloud services provider and IBM calling Salesforce its preferred customer engagement platform for sales and service. The agreement leverages IBM’s Watson analytics and its cloud as well as Salesforce Quip (more office software) and Service Cloud Einstein.
In all of this we can see that Salesforce is working to maintain its independence by linking with anything that can enhance its CRM and make it less desirable as an acquisition target. But of greater importance, it’s these relationships and others like them that will help Salesforce reach its goal of $20 billion in revenues in a few years. When your revenue needs are this big, you need to leverage the market penetration of similar companies. And while all of the companies named are bigger than Salesforce, they each need the bragging rights of working with the most popular CRM in the world.
Another question in all this is what’s happening with M&A activity, which seems to lull while partnerships blossom. The merger market is notorious for running hot and cold and right now it seems tepid, like there’s more opportunity for large companies like Salesforce crafting relationships with bigger partners. It’s not clear if this means there are few attractive acquisitions out there or simply that the times require different approaches to the market.
More than once in talks since Dreamforce in November Marc Benioff has used the logic, my enemy’s enemy is my friend. This logic is being played out in the partnerships his company is spawning. On one level it’s just smart business but in the back of my mind, I see the information utility of the 21st century forming. It will resemble the current electric utility in that no single provider will dominate and a high degree of interoperability will be needed. Standards like 120 volt and 60 Hertz electricity are what give us the impression of a continental electric utility grid but in reality, the grid is made up of smaller vendors adhering to the standards.
Likewise there’s no single vendor capable of dominating the information utility market and standards will be vital. That’s why it’s so important when a company like Salesforce announces partnerships. These incremental agreements have more significance that the press releases might allude to. They are steps on the road to something bigger.
Sage took a major step in clarifying its position in the market when it hosted an analyst day in Boston last week. The company has been around for a long time and has been one of the higher revenue generators for many years thanks to an assortment of products that span the front and back offices of SMB companies. But the company grew through aggressive acquisition and that left it with a hodgepodge of products and a weakly defined strategy.
A few years ago Sage had multiple overlapping accounting and CRM systems with weak integration and the product-line suffered in comparison to newer, cloud computing offerings from upstart competitors. The company still has challenges ahead of it but in the last few years — a period that overlaps nicely with the leadership of North America CEO, Sue Swensen — the company has begun to put its house in order.
Analysts had been treated to glimpses of a product strategy turnaround before, but last week’s meeting in Boston was by far the most cohesive delivery of Sage’s core strategy yet. The company must have thought so too because in attendance were three high ranking executives including Guy Berruyer, Sage Group CEO, Swensen, CEO North America and her designated successor Pascal Houillon who will officially take over stewardship of the North American operation later this year when Swensen retires.
Sage still has a plethora of products and even now speaks of returning to an acquisitions strategy when the time is right. But the company is coming to terms with a need to refresh an aging product line and embracing cloud computing on terms that will cause minimal disturbance for its only channel to the marketplace — resellers.
The last point is not made lightly. Resellers are generally small companies that add value through consulting, customization and building long-term relationships that drip revenue into the bucket rather than pouring it. Sage’s partners are not all technical vendors. Accountants, auditors, bookkeepers and others who advise small businesses recommend many Sage products around the world.
So there is little surprise that Sage’s strategy retains a three-tier character — cloud computing for the smallest, most cost conscious, new arrivals, a hybrid approach for the broad middle and updated traditional products for established businesses that want continuity and few surprises. This is progress and it mirrors what many other vendors with large user populations — Microsoft and Oracle for example — have done. There is no use in thinking about converting every conventional customer to the cloud in a short time and these vendors have done their best to support and, where possible, future-proof their customers.
In line with all this, Sage added better definition to its customer for life strategy. Accounting and CRM are more sticky than either alone according to the company’s experience so, logically, one part of its strategy is to grow accounts. But that requires multiple talents in its partner base or the alternative, cooperation between partners.
Beyond delivery modes, Sage has a three part strategy to address the market. Two parts of the approach should not surprise anyone. Improve existing products in functionality and user experience and grow the Sage footprint within each account. Implicit is this approach is a prime directive to improve the customer experience wherever possible. So far all of this would be standard for almost any business software vendor.
The third leg of the stool demands closer examination. Sage began selling what it calls connected services a while ago and those services are the nucleus of a potential new vendor model that connects partners and customers as well as offering potential new profitability.
Connected services can be anything and generally, these services constitute either things that Sage can do in bulk that its end customers spend disproportionate amounts of time getting right or highly specialized services that require outside expertise. Some of the offerings include employee benefit services, legal assistance and tax compliance as well as more quotidian things like shopping cart, payment and backup services. These go beyond software and make the whole offering stickier. Other vendors should consider this approach.
The thing about connected services is that Sage need not be the only vendor in the mix and an ecosystem is growing up around the model. This ecosystem provides a way for non-technical business services vendors to access a big market and for Sage, or any vendor, to add value. The model can and should provide a tollgate for vendors too presumably because they provide the service of vetting the third party’s work quality.
This ecosystem most closely approximates the AppExchange form Salesforce but unlike the AppExchange, the Sage ecosystem is open to non-technical service providers. A further advantage of this model for Sage is that it opens up a line of communication between it and the end customer that may not always be filtered through the partner. While this can be a delicate matter, as long as the services provided are not competitive there should be no objection.
However, the open line of communication provides Sage with the ability to know and communicate with its customers better than in a model that requires all communication to be filtered through a partner.
In the era ahead, increasing profitability in business software companies will depend on increasing the vendor’s footprint. But there is a practical limit on how much software a customer might buy or lease and this is especially true in the SMB market where the number of users per customer entity is low. Connected business services is more of a green field and offers greater growth prospects.
Finally, connected services is a smart way to educate customers — even reluctant ones — about the realities and benefits of cloud computing so that at some point in the future a move to the cloud might seem less daunting.
In many ways Sage has not changed much. It still has roughly the same constellation of products but it has come to terms with the cloud and put together a future direction for its partners and customers that was hard to see before.
The company will return to its acquisitions model because that is in its DNA. But future acquisitions will probably have a cloud flavor and they will likely further drive Sage in the general direction of the cloud. Very little, if any, of this approach was envisioned in “The Innovator’s Dilemma,” but if Clay Christenson writes a new edition I could see this as a chapter.