Vertically-focused vendors

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1 Decision Framework, E. Thompson, J. Outlaw Research Note 22 January 2003 Microsoft CRM: The Options for Competitors Microsoft's presence will accelerate the shakeout among CRM application vendors in the next five years. Most competitors will respond by teaming up with Microsoft or retreating to more industry-specific niches. Core Topic Customer Relationship Management: Creating Business Value for CRM Key Issue During the next five years, how will skills, architectures and technologies evolve to enable enterprises to develop moreprofitable customer relationships? Strategic Planning Assumptions More than half of SMB CRM vendors in 2003 will become Microsoft partners, providing templated, vertical-specific versions of MSCRM by 2007 (0.8 probability). By 2004, most successful CRM application suite providers that focus on SMBs will compete through knowledge of their vertical-specific industries (0.8 probability). By YE03, 90 percent of SMB-focused CRM applications will support Microsoft.NET architectures (0.8 probability). By YE04, 35 percent of today's SMBfocused CRM applications vendors will merge, be acquired, or cease operations (0.8 probability). Microsoft recently bought Great Plains Software and Navision (adding to established Microsoft businesses such as bcentral) to form Microsoft Business Solutions (MBS) and has become the fifth largest enterprise resource planning (ERP) application vendor (see "Prediction 2003: The ERP Market Readies for a Rebound," SOFT-WW-DP-0118). Microsoft's entry into customer relationship management (CRM) in January 2003 will accelerate the dramatic changes that have already begun to reshape the CRM application software market. These changes have meant a significant consolidation in the number of CRM application vendors for small-to-midsize businesses (SMBs) and an increase in verticalized applications. For SMBs, Microsoft is already a major force in CRM, because of its dominance in SMB infrastructure software (Windows, Outlook, and SQL Server). Microsoft will become a top 10 CRM application vendor by YE03 and a top five vendor by 2006 (see "Microsoft CRM: Impact on the Market," M ). Microsoft's entry into the CRM application software market will be felt by all competitors. The timing of the impact will vary because Microsoft's initial target customers will be SMBs and, in its first couple of releases, Microsoft's CRM product will provide only limited functionality compared to the competition (see "Microsoft CRM: The Product," DPRO ). Effects will be felt by: Competitors that supply CRM products to established ERP customers of Navision and Great Plains Suppliers of non-industry-specific CRM software to SMBs Vertically-focused vendors CRM vendors supplying the largest enterprises Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Microsoft's CRM venture will trigger an increase in demand for CRM applications among SMBs, and an increase in direct competition. The negative will outweigh the positive. The number of CRM vendors is already shrinking (from 500 to 250 in Europe over the past three years) and this will accelerate the decline. What Are Microsoft's Objectives? Microsoft generates less than 1 percent of its revenue from the MBS division. So why is Microsoft willing to upset its independent software vendor (ISV) partners? The Microsoft agenda has two aims: First, to generate momentum for the.net architecture and supporting products, rather than wait for partners to do the work. Second, to generate a multibillion-dollar revenue stream from enterprise applications starting with SMBs. The first objective will be more important for Microsoft through Therefore, Microsoft will take the long view and be extremely patient. Microsoft will seek to work with many ISVs either as resellers or as industry-specific development partners using MSCRM as a base platform. Who Will Suffer as a Consequence of Microsoft's Move? In 2003, Microsoft's direct impact will be mainly limited to contracts dealing with fewer than 50 seats (see "Predicts 2003: Sales Technology Goes Back to the Basics," COM ). However, competitors will find that deals are delayed as customers assess Microsoft. The recent poor results from some of the SMB-focused CRM applications vendors shows that the early publicity about MSCRM has already begun to freeze the market. By YE03, Microsoft will have started to generate considerable sales we estimate revenue of more than $40 million. Small, local CRM vendors will be hardest hit, as well as hosted or online CRM application services, such as Salesforce.com, Upshot.com, Salesnet.com and Oracle Small Business Suite. In 2004, the biggest impact will be felt on FrontRange Solutions (GoldMine FrontOffice), Best Software/Sage (SalesLogix), Maximizer Software formerly Multiactive Software (Maximizer Enterprise) Salesforce.com, UpShot.com and vendors in Europe such as Ascent, SalesManager, Software Innovation, SuperOffice and Team Brendel. From 2005, the impact will be felt on midsize and vertical CRM vendors, such as Applix, Epicor Software, Onyx Software, Pivotal, StayinFront, Saratoga Software and European vendors such as ACCPAC International (formerly eware), Invensys (formerly Baan), RegWare, Selligent, S1 (formerly Point 22 January

3 Information Systems) and Update Software. Although the largest CRM vendors such as Siebel Systems, SAP, Oracle, PeopleSoft, Amdocs, and J.D. Edwards will lose a few deals to Microsoft through 2005, direct competition from Microsoft will not begin until The key to Microsoft's competitiveness in 2006 will be how well it performs in 2004 and 2005, and how successfully it develops its new.net Web service structured applications platform for ERP and CRM. This is due to be delivered in 2005 or It will be much harder for Microsoft to overcome the challenges in entering the more lucrative, large-enterprise CRM market. The main hurdles will be: The scalability of MSCRM (to support thousands of users) The depth of functionality required by large enterprises The preference for non-microsoft platform technologies (WebSphere, Java, Oracle and IBM databases) The development of a direct sales force The development of an ESP partner network (such as Braxton, IBM and Accenture) How Will Competitors React? More than 80 percent of the smaller CRM vendors are built on a Microsoft architecture of some form (for example, COM, DCOM,.NET). These competitors could react in several ways, and in most cases have two or three years in which to make that choice. The options are not mutually exclusive and several could be pursued at the same time. The main options are: To partner with a back-office vendor. Examples are plentiful: Ascent Software and Scala; Selligent and Ross Systems; Access Commerce and QAD. Recommendation: There are many examples of where this has failed to deliver mutual benefit, such as with Siebel and Navision or Dendrite and Oracle. The key to success will be to have similar target customers, cultures and objectives. These types of deal should be limited to two or three at most to ensure sufficient focus on lead management and joint selling. To merge with a back-office vendor. Sage with Interact Commerce and eware with ACCPAC International are good examples. In the United States, a new CRM division was created to coordinate the operations of Best Software and Peachtree Software with SalesLogix and ACT. J.D. Edwards and YOUcentric are focusing on the high end of the midsize 22 January

4 business market. This type of merger is expected to become more common in 2003 and Recommendation: Merger sooner rather than later, if that is the strategy. If the merger process is not started within the next 18 months then it will probably be too late to resist the impact of Microsoft it would take at least that long to integrate the companies and products. Focus functionality on specific industries. During the CRM application spending slowdown, vertical specialists have been among the few able to claim success in this area. Examples include CAS Software, MEI (consumer packaged goods) and Cegedim (pharmaceuticals). Oracle, PeopleSoft, Siebel and SAP are taking advantage of this boom by creating verticalized CRM applications. This will be the second most common option taken by CRM vendors through Recommendation: Avoid broad verticals such as financial services or discrete manufacturing. Instead, narrow the effort to a few micro verticals (such as law firms, breweries, private banks and automotive electrical components). This option would require building sets of channels partners using the expertise and experience of targeted verticals and sub-verticals. Avoid the verticals dominated by Oracle, PeopleSoft, Siebel and SAP. Remain with or return to a local geography. Many CRM vendors may retreat from their pre-2001 geographical expansion plans. The costs and risks of supporting global expansion will be too high. This will mean, for example, European vendors retreating from the United States and U.S. vendors retreating from Europe, Asia/Pacific and Latin America. Recommendation: To avoid becoming obsolete by 2005, do not view this as a long-term survival strategy. It may provide temporary respite from the competition, but Microsoft's impact will be felt eventually. Instead, use this approach to gain insight into customers' existing installed base and select one of the other approaches as a long-term strategy. Move away from Microsoft architectures. One option will be to redesign the product so that it runs in a Java 2 Enterprise Edition (J2EE) environment as provided by IBM, BEA Systems or Sun Microsystems. This has already been achieved by large enterprise CRM vendors such as PeopleSoft, Chordiant and E.piphany, and by Relavis, which focused more on midsize Lotus Notes users. However, for many smaller CRM vendors "porting" their applications to another platform or supporting two platforms will be prohibitively expensive and success is not guaranteed, 22 January

5 despite the investment. Larger enterprises will have to live with both.net and J2EE. Recommendation: Check finances, as redesign costs are high. No new functionality at this time will give the competition an advantage. If you have fewer than 50 development staff do not attempt this route. Partner with Microsoft as a reseller. Microsoft will seek to recruit application software vendors as either resellers or as resellers that add vertical functionality to the core Microsoft product. The partnering model will depend on the degree of add-on functionality provided. This is likely to be the most common route taken by smaller CRM vendors. More than half of SMB CRM vendors in 2003 will become Microsoft partners providing templated, vertical-specific versions of MSCRM by 2007 (0.8 probability). Recommendation: Assess core skills first, as it may not be desirable to discard the majority of the development organization in favor of a more sales-focused culture. Discuss with the installed base the difficulties of migrating to MSCRM. Partner with Microsoft as a CRM services company. Another strategy for competitors would be to become more of a services company. It would mean stating that "Although we have our own CRM products, we also know how to deploy Microsoft CRM." It would mean migrating from a business model with an equal combination of license and services revenue to one with service revenue of more than 80 percent. Recommendation: Assess core skills first. Evaluate employee project-management and delivery skills. Consider deploying other application vendors' products, including Microsoft's rather than proprietary products. The response of the largest CRM and ERP vendors will be to move downstream in an attempt to capture a greater share of the SMB market. Manifestations of this approach are Siebel's MidMarket Edition, PeopleSoft's SMB strategy with its Accelerated Solutions and SAP's BusinessOne for small businesses. Many larger vendors have misunderstood the SMB market by thinking they just need to provide simpler versions of their software. Moving to a reseller or value-added reseller model means investing in serious channel management resources, especially during an economic downturn so far, the big players tend to prefer spending on direct sales models. Siebel, SAP, Oracle and PeopleSoft are not expected to succeed in halting Microsoft's expansion in the midmarket (see "IT Vendors Will Need Focus When Selling to SMBs in 2003," K and 22 January

6 "What CRM Vendors Must Know about SMBs," ITSV-WW-DP- 0247). Microsoft and Siebel Systems In August 2002, Siebel and Microsoft announced they would not renew Microsoft's reseller arrangement for Siebel's Midmarket Edition. In October 2002, they signed a new agreement with Siebel making a commitment to use Visual Studio for development, the.net framework for user interface development and the.net application server for running Siebel applications. BizTalk also joins Siebel's UAN initiative (see "Microsoft Woos Siebel Into a.net Gambit," FT ). Acronym Key COM Component Object Model CRM Customer relationship management DCOM Distributed Component Object Model ERP Enterprise resource planning ISV Independent software vendor J2EE Java 2 Enterprise Edition MSCRM Microsoft customer relationship management SMB Small-to-midsize business UAN Universal application network In the short-term, Siebel will gain from tighter integration with Office and Outlook, reductions in the user interface R&D budgets and the opportunity to tap into Microsoft's marketing budget. However, the deal is for three years, during which time Microsoft will be able to test.net with Siebel one of the largest application vendors. More importantly, at the end of the contract Microsoft can assess Siebel's status and act using the experience gained if Siebel has weakened, Microsoft could attack Siebel with its own MS product, but if Siebel remains the market leader, Microsoft could look to buy Siebel. Bottom Line: By 2006, Microsoft will be the fifth largest application vendor worldwide in customer relationship management (0.6 probability). To remain healthy, CRM midmarket players will have to join with back-office suppliers, focus on vertical niches or retreat to fewer geographies. The most common route for Microsoft-centered CRM vendors will be to become a Microsoft partner and resell or provide services for Microsoft CRM. 22 January