Channels -> ISV
By: Albert Pang, President, APPS RUN THE WORLD
Published: 5th September 2011
Copyright APPS RUN THE WORLD © 2011
With growing signs of leading one of the most important segments of the enterprise applications market, Salesforce.com embodies the disruptive power of Cloud-based delivery of sales, marketing and customer service software.
At the same time, Salesforce.com is increasingly using its scalable platform to reach beyond its core competency of selling customer relationship management (CRM) applications by unleashing a floodgate of applications developed by its ISV partners to help customers build the next-generation Social Enterprise, a movement that is designed to engage more users, allow for easy and real-time collaboration across different roles, and ultimately yield tangible results to their bottom line.
Social Enterprise Soars Into Space
The power of Salesforce.com was evident at the Dreamforce event where it is pushing into new Social Enterprise frontiers in a series of announcements including an equity investment in ERP vendor Infor in order to help drive back-office data to the new era of real-time collaboration among salespeople, customers as well as those involved in non-sales functions like finance, production and supply chain management.
Similarly Salesforce.com has invested in startup Kenandy, a Cloud-based ERP vendor founded by Sandra Kurtzig, a guru in manufacturing applications who is expected to be instrumental in helping Salesforce.com reach not just regular salespeople, but also production supervisors and quality managers of asset-intensive companies from Siemens to Toyota.
In addition to the investments, Salesforce.com introduced a new portfolio of Social Media-infused tools and services including Chatter Now for instant messaging, Chatter Service for self-service knowledge gathering and Data.com for enhanced crowd-sourcing with Dun & Bradstreet’s proprietary business data. All these new offerings will start leveraging HTML5 to bedazzle users with an attractive frontend ideal for mobile device viewing.
During the week-long Dreamforce, the common catch-all phrase from Salesforce.com executives was that Social Enterprise has become the rocket ship "that will propel the business of anyone associated with the vendor’s platform and applications strategies to stratospheric levels". However the sunny outlook is clouded by a host of issues that Salesforce.com needs to address in order to fulfill its vision of taking its stakeholders along for the rocket ship journey.
There lies the paradox of one of the most successful software companies that has transformed the CRM applications market for more than a decade. Yet it has failed to make a profit consistently, while its recurring revenues from its existing customers appear to have stalled.
Salesforce.com Dethrones Siebel
During that period, Salesforce.com dethroned the former champion of CRM software, Siebel, by reinventing the market segment with the innovative use of the on-demand delivery model, or for that matter redefining how customers should be served in the new era.
For its part, Siebel scored a series of home runs with its integrated sales force, marketing and customer service automation applications until it was weakened by tumbling sales following the Dot Com bust. Finally Oracle acquired Siebel in a $5.8 billion deal in 2005. Unmistakably Salesforce.com is in a stronger position than Siebel at any point in its history. When Siebel was acquired by Oracle, it only had fewer than 5,000 customers. Today Salesforce.com has more than 100,400 customers. And there are thousands more from its recent acquisitions of Heroku and Radian6 that have shored up its capabilities in Web development in multiple programming languages and social media applications.
As the following table shows, Salesforce.com was the No. 1 CRM applications vendor worldwide in 2010, edging past Oracle and SAP and others still reeling from the last recession. Salesforce.com, which led the $15.8 billion market with nearly 10% share last year, never skipped a beat even in the depth of the recession by picking up more customers and recurring revenues than its competitors.
In a survey of more than 1,000 IT managers, executives and CIOs conducted by APPS RUN THE WORLD this summer, Salesforce.com was found to be the primary Sales Force Automation system at more than 12% of the surveyed companies—consisting of mostly enterprises with more than $500 million in revenues. In many cases these companies have positioned their Salesforce.com system as the primary CRM engine, displacing Siebel that has laid dormant after years of under-utilization or failed implementations. For example, Salesforce.com stands side by side with Siebel at a 6000-person media company acting as a customer-facing engine that sits between its ad servers and the back-end Oracle ERP to support its online advertising business.
Additionally Salesfore.com is on a $2.2 billion annual revenue run rate after posting a 38% jump in sales to $546 million in its latest quarter. During that period, Salesforce.com signed more than 60 deals with each yielding at least $1 million in subscription revenues over the length of the contract. It also signed three $10 million+ deals, plus another $10 million+ transaction following the end of the quarter.
Salesforce.com Faces Considerable Challenges
However, such success stories mask a host of problems with Salesforce.com. By one measure, Salesforce.com gets less subscription revenue per customer than some of Social CRM applications vendors as if they were beating Salesforce.com at its own game because the pervasive nature of their Cloud-based services has translated into bigger subscription sales.
As the following chart shows, Salesforce.com received $1,631 in average monthly subscription revenue per customer in its latest quarter. By comparison, Eloqua, which sells Cloud-based marketing automation applications and is also an ISV partner of Salesforce.com, saw its monthly subscription revenues from its more than 1,000 customers reaching $4,966 in the second quarter of 2011, according to its S1 filing in advance of its initial public offering.
Social business applications vendor Jive, which is also planning its own IPO, did even better with monthly subscription revenues averaging $7,874 from its 635 customers during the same period, according to its S1 filing. Despite a steep rise in its early years, Salesforce.com’s monthly subscription revenue per customer has been stuck at $1,400 level over the past few years.
What that suggests is that Salesforce.com’s continuous growth in subscriber base has not translated into bigger wallet share among its customers. The lingering recession could have played a role behind some companies reducing their Salesforce.com expenditures as part of their overall cost-cutting moves. In addition, new services like Chatter have been bundled into its CRM sales without incurring additional revenues. Another reason is that the new wave of social CRM apps vendors are beginning to undermine Salesforce.com’s mind share and market positioning because the newcomers are considered easier and more affordable to use on a large scale.
Jive, for one, is said to have more than 15 million users running its products. Cloud-based vendors from Cornerstone OnDemand to SuccessFactors are touting six million and 15 million subscribers, respectively. Salesforce.com, which has not publicly revealed the number of users in recent years, is estimated to have fewer than three million users.
Salesforce.com will face stiffer challenges than ever in getting its products into the hands of potential users. In the same survey that we conducted this summer, one of the biggest electronics makers has decided to adopt Eloqua as its primary marketing automation system, despite the fact that it also uses Salesforce.com, Microsoft Dynamics CRM and Siebel to automate its sales function in different parts of the organization.
To boost utilization of its software throughout an organization, Salesforce.com introduced a new social enterprise license agreement that allows every employee within its customers to have unrestricted use of its products.
It is not clear whether such a program would help address another big problem, which has to do with the inability of Salesforce.com to make a decent profit even though its products have been on the market for more than 10 years.
The cumulative earnings (net income after tax) for Salesforce.com since its founding in 1999 amounted to $173.4 million, or 2.7% of its aggregated subscription revenues of $6.4 billion. In the first half of its fiscal 2012, it lost $3.7 million following a series of acquisitions. By comparison Oracle posted $3.2 billion in earnings, or 30% of $10.7 billion in total revenues in its last quarter of fiscal 2011. SAP posted $851 million in profit after tax, or 23% of its product sales of $3.7 billion in the second quarter of 2011.
One of the reasons behind Salesforce.com’s spotty earnings track record has to do with its heavy sales and marketing spending, which represented half of its revenues in its latest quarter. Oracle spends 20% of its revenues on sales and marketing. Intuit, which sells both packaged and on-demand ERP and business management applications and is twice the size of Salesforce.com, spends only 29% on sales and marketing in its latest fiscal year. There are signs that Salesforce.com is making an effort to address its high sales and marketing expense ratio by working closely with its ISV, reseller and systems integration partners.
At last week’s event, Salesforce.com announced a $50 million fund to help its consulting partners expand their capacity, thereby lowering the costs for the vendor to sell and service its customers. However these new programs will take time before they can have a positive impact on its financial results.
Salesforce.com To Shift Strategies
In the meantime, there are near-term measures that it can do to remedy the situation, while positioning itself to become one of the biggest beneficiaries of the Social Enterprise movement. For one thing, sales force automation has become a losing proposition when much of the selling is done over online commerce and end-to-end order management.
The rise of social media points to the fact that its future is tied not to salespeople using Salesforce.com to better connect with their customers, but rather harnessing the collaborative power of all employees (sales, marketing, R&D and support), partners and even customers themselves working with tools like Chatter Now to address specific customer requirements.
That’s why Oracle has spent $1 billion on its recent acquisition of ATG as well as additional resources to promote the Distributed Order Orchestration strategy that is at the heart of its Fusion Applications. While Oracle may have lost many Sales Force Automation deals to Salesforce.com in the past, the real value of the Siebel assets lies in hard-to-replicate expertise in such verticals as pharmaceuticals, financial services and communications. Again Salesforce.com is acknowledging that its future will be based on how relevant its solutions will be in the eyes of these vertical industry users and it’s working closely with its channel to address that.
The last thing, or perhaps the most important move, is for Salesforce.com to turn Chatter into a full-blown open social network, broadly expanding its reach to tens of millions of users. Currently Chatter, which is being run as a private social network for businesses, has been adopted by 100,000 organizations. However it is not clear how defensible is the positioning of Chatter when formidable players from FaceBook to Google allow segments of their hundreds of millions users to create business-class private social networks.
If it fails to thwart such threats, Salesforce.com may need to consider the unthinkable by buying a complementary social network like LinkedIn. At a market cap of more than $8 billion, it would be an expensive purchase.
Still the window of opportunity is narrowing and Salesforce.com may need every rocket ship component that it can find in order to sustain its leadership in the CRM applications market and become the biggest Cloud service provider behind the making of the new Social Enterprise.
Let us help you better understand the positioning and market shares of CRM and Social Enterprise vendors like Salesforce.com by emailing us at firstname.lastname@example.org.
Posted: 5th September 2011 | By Bill Lennon :
Some great research data points in your article. One could argue the Jive & Eloqua market opportunity will increase SFDC's revenues per client as it gets traction in newly acquired businesses. Any thesis on the reason salesforce will stop reporting the number of customers in the future?
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