CRM Hosting to Grow

The industry is also poised for consolidation

IE Index Computer Associates CA's future looks promising. Bold restructuring, oversight changes, and a new sales model have increased favorable opinions as the stock value has rebounded. Look for the technology currently code-named Sonar to be greeted warmly by IT managers hungry for ways to better utilize existing computing assets. SAP SAP deserves credit for its adaptability. The enterprise software behemoth that once demanded to be the standard is now taking great pains to be interoperable. It now even markets its BI capabilities to companies that don't use its ERP software. Siebel Beset by long-standing problems, CRM bellwether Siebel has bled both prospect and investor confidence. Problems include eight consecutive quarters of revenue decline, leaked internally collected customer-dissatisfaction data, and a reputation for software that is difficult to implement, use, and derive value from. INDEX LEGEND HOT — On the upswing NOT — Possible trouble ahead STATUS QUO — No change

CRM is no place for the faint of heart. The market took a fiscal beating in 2002 and analysts now predict a wave of mergers and acquisitions as it consolidates. Vendors can take some comfort in analyst assessments that the downturn has finally hit bottom. But, even there, the numbers reveal a somewhat ambiguous story.

According to reports from Giga Information Group and Aberdeen, straight license revenues will continue to shrink, although somewhat more slowly, in the near term. However, subscription fee revenues from host-based CRM will grow, becoming 10 to 20 percent of CRM software-generated revenue by 2005. Is it the dawn of the age of the application service provider (ASP) model for enterprise software?

Probably not. Top-tier vendors such as Oracle and PeopleSoft are quick to downplay the trend. "I don't think large enterprises will ever want to do host-based CRM," says Brad Wilson, vice president of marketing for PeopleSoft CRM. Robb Eklund, vice president of CRM marketing for Oracle, says much the same. Both cite the fact that hosted applications tend to be more generic. They also note security concerns about exposing customer data to an application outside the firewall. However, both companies do offer CRM in hosted form, and predict steady growth in subscription revenues.

But, to put all this in perspective, analyst Hugh Bishop of Aberdeen says, "The shift to host-based revenues is primarily in sales to small and medium-sized businesses."

Then there's consolidation. Whatever happens between Oracle and PeopleSoft, most analysts expect a reduction in the number of top-tier CRM players.

Siebel seems vulnerable in this consolidation era, with license revenues that could fall by as much as 40 percent this year. Erin Kinikin, analyst with Giga, attributes Siebel's position to a lack of focus. "Siebel has neglected its core strength, namely selling strategic, next-generation CRM," she says. "The company has become distracted, trying to beat the commodity ERP vendors at their own game."

So why didn't Oracle make a play for Siebel? Larry Ellison has historically shown a preference, when he thinks he's winning, of watching his rivals die a slow death. Or it could be pride. "I think the main reason Oracle won't make a play for Siebel is that Larry would be admitting that he spent over three years and 900 developers on the wrong CRM strategy," says Kinikin.

— Mark Leon

Mark Leon [mrleon@usfca.edu] has been reporting on business and technology for the last seven years.

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