Forget Benioff's Hype: Five Problems Will Thwart Salesforce.com's Rise in On-Demand CRM

In enterprise software, the latest innovation is not about the software but how it's delivered—via the Internet. Salesforce.com has earned a reputation as an innovator and market leader in on-demand CRM, but getting on top and staying there are two different things.

In my view, the real on-demand CRM market leader will emerge in the next two years, and it won't be salesforce.com. Why? The company offers a limited solution sold under the wrong brand, by an increasingly arrogant organization. Furthermore, a high-churn business model won't improve by going up-market, until salesforce.com gets more in touch with the needs of larger enterprises.

Hosting software is not exactly a new idea. The industry went through a short-lived infatuation with so-called Application Service Providers (ASPs) that started in the late 1990s, then flamed out when it became clear that most were based on poor business (too costly) and technology (single tenant architecture) models.

True believers in hosted solutions kept plugging away, although "on-demand" is now the preferred term. Clearly, on-demand IT solutions are moving into the mainstream. IDC estimates that "software as a service" spending will double in the next five years to $10.7 billion in 2009 (See IDC No. 33120: Worldwide and U.S. Software as a Service 2005-2009 Forecast and Analysis: Adoption for the Alternative Delivery Model Continues, May 2005). That's serious coin; certain to catch the attention of major IT players. In the CRM industry, rising from the smoldering ashes of the ill-conceived ASP market, NetSuite, RightNow, salesforce.com and UpShot have emerged as Leaders of the On-Demand CRM Revolution. UpShot was acquired by Siebel and Siebel, if all goes as planned, will become part of Oracle in early 2006.

Salesforce.com has captured the on-demand CRM market share lead (around 50 percent, some analysts say) focusing on sales force automation (SFA), served up with extra portions of marketing hype from extroverted founder/CEO Marc Benioff. But I believe that salesforce.com's strategy of "nothing succeeds like excess" will end much the same way Tom Siebel's did. In 1999, as Siebel's revenues were soaring to new records, I wrote that the company was "celebrating at half time." Six years later, the pattern repeats, except now we're just in the first quarter of the on-demand CRM game.

I see five key problems that, over the next year or two, will thwart salesforce.com's rise to the true leadership position in multi-function CRM, delivered on-demand.

Problem No. 1: Confusing SFA with CRM
As the saying goes, "If all you know how to use is a hammer, everything looks like a nail." Salesforce.com's heritage leads it to see CRM as primarily a sales problem. The first time I met with Benioff, he told me he wanted to build a sales automation tool that he would like and actually use. As a master salesman himself (selling ice to Eskimos comes to mind), he made that the guiding force for the salesforce.com solution, which does indeed do a great job automating sales processes, according to a recent CRMGuru industry study. Unfortunately, the "corporate DNA" is around selling, and salesforce.com defines success as adopting SFA technology. That's fine if you're selling SFA tools—and a welcome change from SFA shelf-ware foisted on the market by others. But there's more to CRM technology than SFA and more to CRM than technology.

AppExchange, which salesforce.com calls an "on-demand application sharing service," is not the answer to its core application shortcomings. All customers, and especially large enterprises, are looking for trusted suppliers, not an "eBay for software applications." Not that AppExchange is a bad idea, as far as it goes. It should 1) marginally increase the value of the salesforce.com solution, thus increasing "stickiness" with customers and 2) mark time until salesforce.com can develop robust marketing and customer service solutions on a par with those already available from RightNow and Siebel. Incidentally, this put some AppExchange partners in the same precarious position as Microsoft add-on developers, when the core product is upgraded to add a new feature. RIP.

Problem No. 2: An arrogant culture
There's a fine line between confidence and arrogance, and I think Benioff crossed it when salesforce.com went public. A few million dollars can change anyone, I suppose. Salesforce.com now posts recruiting ads in the newspaper looking for candidates who want to "change the world." SFA on the Net will create world peace? Marketing messages proclaim salesforce.com "the market and technology leader in on-demand customer relationship management." Says who? The company is the revenue leader for SFA only; analysts rank RightNow and Siebel CRM OnDemand as offering more robust multi-function CRM solutions currently.

Benioff packages his arrogance in a friendlier persona than Larry Ellison or Tom Siebel. Still, they share a common tactic of belittling competitors and those who don't "get it." When I invited Benioff to participate in an interview with executives from NetSuite, RightNow and Siebel Systems, he declined, writing in his email message, "We refuse to validate them with our high quality brand, nor do they deserve it as on demand followers and wannabes." And then Benioff went on to compare these accomplished executives to "WebVan's truck drivers." As I've interviewed other salesforce.com managers and employees, they disparage competitors and prospects who don't get "this thing called the Internet." The not so subtle message: "If you don't jump on our on-demand bandwagon, you're a dinosaur or just plain stupid." If you don't think a culture of arrogance can cause problems, read the Siebel case study one more time.

Problem No. 3: The wrong brand for the long term
Strong brands are hard to establish or change. Salesforce.com is a wonderful brand to focus on the point of the company—sales automation, and the delivery method—dot com. But the brand doesn't support a broader CRM strategy. Benioff will find that "sales" and "force" are golden handcuffs in his quest to be known as a multi-function CRM provider.

In the on-demand world, NetSuite, Oracle and RightNow have brands with flexibility. In a broader sense, Microsoft, Sage and SAP stand for far more than sales automation. Benioff's infatuation with SFA has helped the company grow fast, but gaining credibility as a full CRM solution provider will be very difficult under the current branding scheme. Recall that IBM, now known as much for services as technology, was founded as Computing Tabulating and Recording (CTR). Later it became International Business Machines, and then just IBM. Imagine the fate of IBM if it had stuck with CTR.

Problem No. 4: Churn, baby, churn
Each year, 30 percent or more of email accounts and cell phone contracts "churn"—or turn over—as people switch to another service. It's easy to get a new account and easy to cancel. Salesforce.com's subscription service fits this model all too well. Although the company has not publicly disclosed its churn rate, my guess is that it averages 2 percent per month. To stay on an aggressive growth track, salesforce.com would have to replace about 6,000 subscribers each month just to maintain its current 300,000 subscriber base. Net growth requires more than that, of course. As markets mature, churn rates have a nasty habit of staying constant, or even increasing, while acquisition rates decline.

Other factors remaining the same, salesforce.com faces the same problems as email service providers like AOL and Hotmail, which grew rapidly for several years but slowed down or declined as better alternatives appeared (Gmail and Yahoo!). Salesforce.com can address this by wooing less volatile large enterprises (but see problem No. 5) and striking more long-term contracts with customers. The lock-in strategy, however, is what got software companies in trouble to begin with. Other on-demand providers have less risk of churn after implementation. NetSuite's full enterprise solution is harder to sell but harder to switch after it's operating. RightNow's focus on more complex customer service processes makes the application more ingrained in its customers' operation.

Problem No. 5: A large-enterprise strategy that doesn't click
Yes, some large enterprises will buy thousands of seats of sales automation, as press releases are sure to proclaim. Sales executives are notoriously impatient, and traditional CRM software companies like Oracle, SAP and Siebel have not served them well. Our recent study found that 76 percent of salesforce.com's projects were "successful" in the eyes of their customers (naturally, the company quotes a much higher figure in marketing material), while large enterprise software competitors had only a 55 percent success rate and a shockingly high 21 percent failure rate, for SFA-focused projects.

After this vein of gold is mined, then what? Large enterprises are buying into the on-demand revolution, but they're not revolutionaries. When the scope expands beyond SFA, thorny integration issues and multi-function requirements will come to the forefront. CIOs also like to control how and when new releases are rolled out, which places upgrade-on-our-schedule salesforce.com at a disadvantage with RightNow, for example, which supports customer-scheduled upgrades. Furthermore, these same battle-scarred CIOs like to protect themselves with at least the option to buy a software license, and Benioff has said he has no intention to ever do that. (RightNow and Siebel offer this option; NetSuite doesn't, but it doesn't sell to large enterprises.)

Although Benioff talks of "changing the world" and creating a new on-demand industry platform, the company's current strategy screams of short-term thinking designed to pump up market share and stock value. Now he's got a high-profile company with more than 300,000 subscribers, and he touts his industry-leader status based on subscribers and revenue. This is straight out of the Siebel Systems playbook.

Maybe selling out is the whole point. Salesforce.com is a great target for a bigger firm seeking a quick route to market share "leadership." My bet is on Oracle. In one fell swoop, Ellison can take out a thorn in his side—and offer Siebel's richer on-demand solution over salesforce.com's infrastructure. Other possibilities: Microsoft, RightNow and SAP. And who knows? Maybe this is an opening for Google or Yahoo! to get into business solutions.

Salesforce.com is flying high now, but so was Icarus of Greek mythology. Exhilarated by the thrill of flying with wings of feathers held together with wax, Icarus got careless and flew too close to the sun god Helios. You know what happened next.

Bob Thompson is CEO of CustomerThink Corp., an independent research and publishing firm focused on customer-centric business management, and founder of CustomerThink.com. Thompson is a popular keynote speaker, blogger and author of numerous reports, articles and papers, including Five Warning Signs for Danger Ahead on Your Customer-Centric Journey. Follow Bob on Twitter.