Client Issues of CRM Software Vendors and the Investment Community

Research Brief Client Issues of CRM Software Vendors and the Investment Community Abstract: Customer relationship management software vendors are struggling to increase license revenue and market share, while investors are struggling to gain value in their holdings. By Thomas Topolinski Recommendations Software vendors must focus on the market trends, forecasts, segment growth projections and pricing models to ensure optimized growth from aligned strategies and plans. Investors in the customer relationship management (CRM) software market must focus on vendor performance on new license revenue, however, they need to look for opportunities in the detail of the CRM market s segments and subsegments to find opportunities for higher growth targets. Publication Date:7 October 2003

2 Client Issues of CRM Software Vendors and the Investment Community Client Issues of CRM Software Vendors and the Investment Community CRM software application vendors are faced with huge challenges caused by drops in license revenue during the past two years. Coming off an explosive year-over-year growth rate of 89 percent in 2000, license revenue went into negative growth levels in 2001, dropping 6 percent, then dropping another 25 percent in 2002. The forecast for this market calls for negative 16 percent growth in 2003 (when it bottoms out), then 1 percent growth in 2004 and 5 percent for 2005. Investors in CRM software also have challenges because of the drop in revenue, which affected the valuation of the firms. Most of the vendors have realized decreases in value during the past two years. Yet, for those investors that look closely, there are higher growth opportunities in specific areas of the market. With this in mind, Gartner Dataquest is highlighting the top issues of the CRM software vendors and the investment community. These issues have come from research performed with the vendors and investors, through inquiries, consulting work and discussions at events. The top issues, along with a preview of our intended research, are described below to help the software vendors and investors approach these major challenges and opportunities. What Is the Market Size and Forecast for the CRM Application Software Market? Knowing the size of the CRM application software market is key in planning new products and setting new strategies and directions. Investors want to understand the potential growth prospects of the market, while the vendors need to align their product and sales strategies to the demand potential. Gartner Dataquest publishes a Market Statistics report, which shows the market size. We also publish a forecast and trends report highlighting the drivers and inhibitors of market growth, as well as theforecast.thesereportsareavailableinaworldwideformat,aswellas detailed regional reports for Asia/Pacific and Europe. Additional detail can also be accessed through inquiries and custom cuts of the data. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 October 2003

3 Which Regions and Vertical Industries Are the Hottest CRM Software Markets? Opportunities abound in specific regions and vertical industries within the CRM software market. Knowledge of recent performance by the vendors in these segments is valuable in sales strategies and planning. Gartner Dataquest publishes research on market performance in the top 14 industries and 6 regions, as well as forecasts for future growth trends. The Market Statistics and forecast and trends reports contain detail on these segments, and more information is published in regional reports, research perspectives and through inquiry. Which System Integration and Consulting Partners Are Most Successful in CRM? Well-chosen partnerships and alliances with key system integration and consulting partners can increase the sales and market coverage of a CRM software vendor. Especially in these difficult times, researching new partners can be key to the growth and success of a software vendor. Gartner Dataquest focuses on external service providers and can assist software vendors with their ongoing search. How Will CRM Software Vendors Prioritize R&D Expenditures to Take Advantage of the Market Opportunities? The CRM software market contains many subsegments that are growing at different rates, such as CRM marketing. This subsegment is forecast to grow at a 10 percent compounded annual growth rate (CAGR) during the next 5 years, compared with the overall CRM software market's five-year CAGR of 0.9 percent. CRM analytics and marketing resource management (MRM), subsegments of CRM marketing, are key drivers for this growth. Gartner Dataquest's analysis and research on which subsegments will present the best market opportunities assists vendors in seeking to optimize their R&D investments, and assists investors on where to look for opportunities. What Types of Pricing Models Are Being Used in the CRM Software Market? Pricing has become a hot topic with vendors, especially in a time when wide-spread deep discounting has been used. Common questions we field include: what kind of pricing models are my competitors using and are there new models available which we haven't pursued? Gartner Dataquest researches and monitors pricing models from many vendors and can assist in analyzing current models and exploring new ones. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 October 2003

4 Client Issues of CRM Software Vendors and the Investment Community What Is the Trend for Maintenance and Support and Services Within the CRM Software Market? Many of the CRM software vendors have increased their focus on maintenance and support, as well as services, to offset the drop in new license revenue. We have seen an increase over the past three years in maintenance and support, and an increase in custom services by the software vendors. In fact, many of the vendors have crossed the ratio line by having much more revenue in services and maintenance than in license revenue. We have research available through inquiry, as well as other Gartner research from various groups focused on these issues. What Is Causing the Gain or Loss in License Revenue With the CRM Software Vendors? As a software vendor, monitoring the performance of your competitors is key. As an investor, monitoring the comparative performance of new license revenue reveals much value for decision making. Understanding the root causes for a vendor's performance is even more valuable, and can arm your sales teams with important information for competitive positioning. In performing market research on the CRM software market, we gain not only the quantitative data on vendor performance but also a qualitative perspective as well. This information is available in many of the reports published throughout the year, and can also be accessed through specific inquiry requests. Are the Integrated Enterprise Application Suites Gaining Share in the CRM Software Market? Pure-play CRM software vendors led the growth in past years. However, integrated enterprise application suite providers have been challenging the leaders during the past two years. Integrated enterprise application suite vendors offer applications spanning multiple enterprise functions, such as human resources, financial services, manufacturing operations, supply chain, product life cycle and CRM. Yet, there are many CRM bestof-breed vendors that have found niches in CRM marketing, customer service and support, and others. Many of these best-of-breed vendors are achieving steady growth in their own specialty areas. Gartner Dataquest has had a strong focus on these integrated enterprise application suite providers as well as the best of breeds, and have been projecting the trends for the past three years. Much research is available on this perspective, and more detail can be available through inquiry, event presentations and audio conferences. In addition, a recent report have been published on the titans vs. pure plays for the software market as a whole, and is available in the Software Spotlight, under the Focus area on Gartner.com. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 October 2003

5 Which Software Vendors Are Having Financial Viability Issues? There are many aspects to financial vendor viability, and recent performance of new license sales is a key indicator to beginning the assessment of a vendor's health. Gartner Dataquest's research delves into the depths of new license performance of the top software vendors in the market. Many vendors are having significant challenges and are experiencing financial viability issues. Our Market Statistics break down, by vendor, their two-year history of license revenue performance within the CRM software market, detailed to regions, industries, top functions, platforms, company size and other segments. Market share by vendor is available, as well as year-over-year growth for each segment. How Does CRM Software Spending Relate to Overall IT Spending? Comparing CRM software spending to IT spending provides valuable insight to the trends and forecast of the market. Gartner Dataquest publishes the IT Databook, which contains information on the total IT spend number, as well as a breakdown of the CRM software market. We also do a quarterly audio conference on the software industry, focusing on IT spending compared with the software industry. How Does the "Intent for Implementation Within 12 Months" Affect Market Share Compared With Reported New License Sales? With the increase of integrated suite applications, Gartner Dataquest has focused on a new perspective highlighting the purchaser's intention of a new license acquisition. Several vendors are selling CRM applications as part of a whole suite, which allows a client to obtain a CRM license without having the clear intent of implementing the software immediately. This perspective of "intent for implementation within 12 months" creates a factor that sheds a different picture on the CRM software market and the market share of vendors. Our CRM Market Statistic reports include this perspective, adding value to investors and software vendors by highlighting a different view of the market. Is Adoption for Wireless and Mobile Functionality Within a CRM Application Increasing? Vendors and investors have been seeking information on new opportunities within the market, including wireless and mobile technologies. Gartner Dataquest has focused on this segment within the market and continues to monitor the performance and growth aspects of wireless and mobile capabilities within the CRM software market. The CRM Market Trends contains details, definitions and projections of this space. Additional detail is available through inquiry. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 October 2003

6 Client Issues of CRM Software Vendors and the Investment Community Gartner Dataquest Perspective Stay Focused on the Real Issues With uncertainty riding a little lower with the end users, and with the restrained economic outlook and the lower business confidence in the businessvalueofit,itcanonlybesensibletoadvisecontinuedcautionfor the near future. CRM application software vendors would do well to ensure that the client issues are incorporated in their strategies and tactics. Investors in the CRM software market can gain value beyond the traditional financial performance data, and seek out hot opportunities within the market. By understanding the client issues of the vendors and the investment community, Gartner Dataquest designs its research agenda to deliver relative information of high value to the real issues at hand. Key Issue What client issues should Gartner research address? This document has been published to the following Marketplace codes: SOFT-WW-DP-0149 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. 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. 117647