Beagle Research Group

Picking a community partner

A community, a.k.a. community of interest, is usually thought of as a large group of people with some common reason for associating.  These days that usually comes down to the user group but in practice a community can be any group that is passionate about a product or service and wants to improve it.  Communities are as old as the hills and I have often cited the informal gatherings of enthusiasts for the steam engine that sprang up spontaneously in the English Midlands in the middle of the eighteenth Century.  In a short time these enthusiasts helped turn an unwieldy contraption into the heart of the Industrial Revolution.

Not much has changed.  Today and the idea of community is making a comeback for many good reasons.  First among them, communities work, and also, with social media all the rage, communities have become very affordable and computing technology has amplified their impact, making them a great vehicle to drive innovation and growth.  It’s no surprise, then, that lots of vendors are elbowing each other aside to claim the mantle of community and at this point, a confused public might well ask, “What makes a community anyhow — and how do I choose a partner?” Below is my unscientific summation of what to look for when trying to select a community.

Make sure that they understand what a “community” is.  Many suppliers use the word community, because it’s “hot”, but they aren’t actually building a community.  For instance, if the supplier builds a website and invites 5,000 people to “join”, and if the “members” don’t know each other and don’t interact with each other, it’s probably more of a panel rather than a community.  The difference is important because a community proves its value when members examine and share ideas.  A panel is just a fancy survey mechanism.

Understand their specific capabilities.  There is a wide array of objectives that communities address.  Find out where the supplier has expertise.  You might want to look at the Forrester construct for the types of objectives for different communities:  Listening, Speaking, Energizing, Supporting and Embracing.  Ask the supplier what they are good at then match your requirements to their strengths.  If they say “everything”, assume that they aren’t being straight with you.

Get clear on their engagement metrics.  Any community vendor should be able to specify three numbers for you that describe an engagement pyramid.  At the base is the number of members you’ll have; in the middle, the number who will come in and read, but not actually participate and create content; and at the top the number who actually will participate.  The higher the participation numbers, the higher the engagement — which is really where the gold is.

Make sure you understand what you are getting for your money.  Will the supplier recruit members for you? Will you get weekly reports?  Will the supplier monitor participation and interact with your community members?  How often?  Will the supplier do some work for you, or will you have to do it yourself?  “Self-service” often sounds good, and it’s very profitable for the supplier, but you might not have time for that option.  Furthermore, managing a community is a skill that you might not have in-house and your community’s success is dependent on that skill.  Remember, if it was easy to do everyone would already be doing it.

Get references.  It never hurts, especially in a new market like this.  Ask the supplier for the names of three clients they’ve worked with for at least six months.  Call those clients and ask about their experience.  Would they do anything differently?  Focus especially on what happened when there were problems or when service was especially important.

Visit the supplier’s offices.  If you are spending a lot of money and a significant portion of your budget, you should kick some tires.  Meet the management and prospective members of the team that would manage your account.  Talk about your needs and your vision and see if there is overlap.  Make sure you feel that they will be able to build confidence with executives in your company.  Ask for biographies of their staff and make sure that you have partners with experience that is relevant for your company and industry.  Lastly, understand whether there is depth in the organization, and notice whether you feel more or less confident after that visit. 

Ask if they’ll work with your partners.  If you have an ad agency or PR firm or other interactive partner, find out whether they are willing to integrate their efforts with that firm.

Find out what’s new.  Ask about their future plans, their innovation priorities, how their solution will change over the course of your relationship, and so on.  If you are working in the community arena, you want a supplier who has ambitious plans for the future and who will keep up with you.

Understand their experience.  Ask for case studies of companies they have worked with in the past.  See if they can talk about their lessons learned, their mistakes, and how they have improved as a result.  Organizing a community is as much about methodology and service as it is about technology.  Beware of companies that just seem to have good technology, but who lack the real-world experience to handle your complex needs.

Ask the ROI question.  Many emerging companies do not have good ROI numbers because it’s hard to calculate and our research shows that customers often don’t take stock of their situation before plunging ahead with an implementation.  In that case everyone is left to wonder what the ‘real’ ROI is.  So if the prospective vendor cannot give you an ROI statement don’t be put off but weigh it in relation to the answers to all the other questions.

Picking a community vendor/partner might not be easy at this stage of the market’s evolution, but remember, it’s the early adopters that get the biggest returns on their investments in new technology.

Messaging in an on-demand world

The way we think of ourselves is not always the way others see us.  There’s nothing revolutionary about that idea — it’s common sense.  What’s interesting to me is the way it plays out in business.

Not long ago, I was trying to help a client company try to figure out how to compete more effectively with its biggest opponent in the market.  My client is coming from behind and as the number two in the market they have their eyes set on the top spot and the reputation and market share that comes with it.

What was particularly irritating for my client was that there really isn’t a great deal of difference between them and the competitor — an increasingly common condition for increasingly crowded markets — yet my client was trailing.

Part of the whole perception game involves deciding what your differentiators are and making the case to the marketplace that your differentiators are the only ones that matter.  If you choose right, you’ll go far; choose wrong and the sky will not fall but you must be willing to take a dispassionate look at your position and be courageous enough to do something about it. 

Taking a closer look at the messages for the two vendors told me a lot.  Both vendors offered on-demand solutions but my client played that card much more than the competitor.  Interestingly, the competitor treated on-demand as table stakes and peppered its messages with benefits that potential users could easily understand and at the end of the day, I think that’s the whole story.

My client’s messages appealed to the rational decision makers such as C-level officers while the competition chose messages that told the users — and everyone else — how the product would help them get their jobs done.  The messaging difference is not that stark though.  For example, both vendors talk about financial benefits that would appeal to the C-level decision makers. 

My client’s messages talked about high ROI but didn’t give a lot of supporting evidence.  On the other hand, the competition never actually used ROI but their messages were loaded with statements about percentage improvements in a business process that lead directly to ROI.  Those messages resonate with both groups.  Users see a benefit to their job performance and savvy executives can take the data and do their own ROI calculations in their heads.

Why am I bringing this up?

Well, for starters, I see many companies struggling with the on-demand message; they spend a lot of time and treasure to make their applications comply with the new fashion only to discover that there’s lots of competition with that particular capability.  Moreover, the market isn’t swarming over their offerings.  I see the same kind of thing in partner programs.  Small companies join partner programs and think their work is done, that customers will just show up and it will be order taking time, but that is rarely the case.

These aren’t catastrophes, it simply means there is more work to do and building a marketing program around on-demand is nice but it’s not enough either.  Regardless of the delivery mechanism, customers still want real benefits from the products they buy.  Over time I think we’ve forgotten this and we’ve begun treating technology like an investment that delivers a return for doing nothing, like a treasury bond.

Nothing could be further from the truth of course and my client’s struggles with messaging brings this message home.  If you want to talk about the return that your product or service can deliver when used correctly, by all means do so, but don’t expect that to be enough.  When you boil that message down what you are left with is buy our product because it’s so cheap it pays for itself in no time. 

That kind of messaging might be alluring to many but it is the first step on a very slippery slope in a price war.  No body wins a price war, even the customers who may make temporary gains but will lose everything when — Surprise! — the vendor can’t afford to operate at the price point it has engineered.

Similarly, don’t think that on-demand or whatever the flavor of the week is, by itself, will be enough either.  As a differentiator on-demand worked when the primary competition was on-premise and while there is still a lot of on-premise software the market now understands the difference and on-demand is the growth category. 

So the competition is shifting and with it our messaging needs to shift too.  If you are in doubt, take a look at Salesforce.com, the granddaddy of the on-demand movement.  The Salesforce messaging still talks about on-demand and multi-tenant but as secondary considerations.  For some time now, Salesforce’s major message has been about success, however a customer wants to define it.  Moreover, the company’s greatest evangelists are the customers that it calls CRM Heroes.

Monetizing streaming content

One of the next things to look at in CRM might well be streaming media. 

Think about it.  Sites like YouTube and many others have made it easy to author video content that can be consumed in numerous ways and the infrastructure for making video available to users is all around us.  Most importantly, a generation of content consumers is primed and ready to consume it.  What’s lacking and what will make streaming media a mainstream phenomenon is the same issue we have confronted again and again in the Internet age — how to monetize the content.

Monetizing content might not be at the top of your list but it certainly is top of mind for content producers.  One of the first things anyone would have to do to monetize, or place a value on, their content is to know how it is consumed.  Who watches, where, when and for how long are all vital questions advertisers want to hone in on before they place ads and spend big bucks.

For example, we web surfers are notoriously deficient in the attention span department so it is imperative for an advertiser to know how long any one video is watched across different audience segments, so they ad placements gain maximum impact. Because if viewers drop off before an ad appears, the whole advertising campaign will suffer.  Not a good career move.

Much the same can be said of trying to analyze who watches, from where and when — get those details wrong and your audience might be AWOL and your clever ads unwatched.  It goes beyond simple advertising though.  One industry watcher told me that there is an important security angle to be explored too.  Consider the case of an on-line university that makes courses available on the Internet.  How do they now know if their students are really attending?  Is the registered student staying for the whole class session?  Is that student taking the test or is that person hiring a professional test taker?

Back in the day when vendors were interested in Web site traffic, following click streams was all the rage and database oriented analytics packages were sufficient to meet the need.  Click stream analysis did not rely on real time number crunching and conventional analytics and data warehouse technology served the purpose.  Now fast forward to the near future and you might realize that conventional analytics won’t cut the mustard for one simple reason.  Where click streams generated giga- to tera-byte log files, streaming media generates peta-bytes of data and unlike click stream data streaming media logs need to be analyzed in real-time.

Conventional analytics is no match for the volume of data and the real-time demand of media streams.

Ok, you say, so what’s the solution?  Clearly it involves real time or near real time analysis of streaming web log data but such systems are only coming to market now. Most media server vendors don’t even supply analysis tools for their own gear and at this point vendors with a need to know what’s happening to their content are up the creek.

So it comes back to this — marketers might have great tools for creating streaming content users might get a kick out of consuming it but, at the moment, we don’t have the tools we need to do for streaming media what Nielson has done for commercial TV for decades (though admittedly Nielson does not provide its results in real time). Consequently, it’s hard to convince a savvy marketer to make an ad buy.

I expect this is only temporary and some enterprising startup vendor is at work developing the tools that will be needed to make content consumption realistic and profitable.

It's all about the business process now

There was a short announcement on the wire that I thought worth paying attention to on Monday February 25, 2008 — today, as I write this.  It said, “Market2Lead and ExactTarget announced a partnership to integrate ExactTarget’s email messaging web services into Market2Lead’s comprehensive, multi-channel marketing automation products.”

As announcements go it was the kind of thing you see a lot in the technology world. Two companies coming together to make a deal that makes a headline and is promptly forgotten. Too often this kind of thing starts off as a 50/50 partnership in which each side characteristically, and far from explicitly, expects that the other will put in 51 percent of the work needed to make the partnership fly. 

Good partners deliver in the high 40’s percentage-wise and the partnership teeters for a bit and is then forgotten. I don’t know either of the parties that well though I get briefings, but I see some things in the market that make me believe this time will be different.

My reason for optimism is rooted in simple market dynamics — this partnership will succeed because it has to.  There are too many other companies that offer both kinds of products already, so the fate of both companies hangs in the balance and failure is not an option for either one. How did we get to this point?

In case you’ve missed it, there has been a slow but steady move from monolithic software solutions to an approach that starts with the business process and works backward to see which solutions need to be integrated to provide end-to-end support.  This approach is entirely analogous to what happened when computer hardware suppliers opened up their busses and let in a growing army of peripherals suppliers. 

Over a few years we went from the computer manufacturer as a sole source for everything (Ok, we’re talking about the mainframe business in the 1970s before you were born, just humor me.) to an open environment where the operating system and system bus set the standard. Work with those two and you were a member of the club in good standing.

Today the ubiquity of processing power, wide open bandwidth and free storage have left us all free to imagine any number of options for supporting our business processes.  The net positive is that it is now possible to at least consider retiring all of those spreadsheet based “applications” or department based and developmentally challenged PC applications with more professional approaches. It sounds good and it is but it also involves many of what Chris Anderson termed “long tail” applications — things for which there are thin markets that do not usually support a massive software effort in the traditional sense.

That brings us back to partnerships. Increasingly, the onus is on the vendors to think bigger and to consider the whole business process, not just some little piece of it where they can put a fence up and open a lemonade stand if they are to find sufficient markets for their wares.  More importantly, everybody needs help generating market pull.  For this generation of integrators, the open standard is not the system bus or the operating system but the platform and stack. Like the hardware entrepreneurs of old, today’s software wiz kids know that building applications to the platform’s standards means greater interoperability.

Platform vendors like Salesforce.com and others (ok, guys like me) saw this several years ago and now the message is getting to the vendor and the customer. This might represent software’s new Golden Age but it could just as easily mark a top in the market. After all, during the bad old days of hardware maker hegemony a megabyte of memory had a cost of a mega-buck. Today hardware margins are thin and the business is not a lot of fun anymore.

What will happen in software is anyone’s guess but for sure it is part of the grand structure that the economist, Joseph Schumpeter, described as “creative destruction”. So it’s all about the business process now, ExactTarget and Market2Lead are just the latest examples.

SugarCRM and the alternate SaaS universe

Earlier this month SugarCRM announced that it had secured $20 million in a new financing round bringing its total funding so far to $46 million — a significant accomplishment for several reasons.

If SugarCRM is not familiar to you, it’s not a new Caribbean restaurant in SOHO.  Where exactly they got the name I never bothered to find out, but Sugar is an up and coming CRM vendor with a very different take on the market.  The company’s signal differentiator is that it is an open source product.  In other words, they freely give out the source code and a community of likeminded developers contributes to the code base by writing modules or simply providing enhancements and fixes.

You might be familiar with the open source movement from experience with Linux, the open source operating system based on Unix.  Increasingly, companies that want to run as lean as possible put their applications on Linux servers and that includes on demand solution providers, so there’s a good chance that open source is already in your life.

What’s interesting to me about open source, and Sugar in particular, is that in some ways it looks like a throwback.  Unlike on demand software that seeks to hide all of the complexity of operating system, database and code from the typical developer, open source puts it all out there for anyone who wants it.  And from the looks of it, there is a thriving and growing community of users who still want access to the code.

Sugar appears to be well positioned to support all tastes and all opinions in the on-demand vs. on-premises debate.  The company has neatly side stepped the issue effectively saying here it is do whatever you want.  As a result some customers operate in an on-demand fashion while others have a traditional IT strategy that brings the technology in-house.

It might seem heretical to on-demand true believers, but there are many companies that either don’t want to rely on “cloud computing” or who are constrained by regulations to keep close tabs on their data.  Who’s to say who is right?  There are banking regulations and there are also government edicts, especially in the European Union, about where data can be stored and for the sake of argument St. Tropez sounds a lot better to European ears than San Diego (personally, I would need to do more research).  There is absolutely no doubt that data center location will become a larger issue as American SaaS companies try to gain altitude in other markets.

Executives at Sugar tell me they took the $20 megabucks for expansion reasons, not to fund day to day operations, which to me says business is pretty good.  And Sugar is part of a growing list of companies that are trying to jump on the SaaS bandwagon while offering their own interpretations on how to get the job done.

To the list you need to add some heavy-weight names like Microsoft, Oracle and SAP but all are not created equal.  As the riffs on SaaS proliferate it will take a fine tuned ear to listen to the value propositions and determine if said propositions are right for any particular circumstance.

Here are some things to consider.  First just because a vendor offers you an on-demand or SaaS solution, it doesn’t mean that the offer is equivalent to another SaaS offer.  SaaS is not table stakes.  Consider who is doing the hosting and generally what’s on the other side of the cloud.  The gold standard is something called mirrored datacenters.

As the metaphor implies, mirroring means that the system is making an exact copy of everything that happens at another location.  In the event of a catastrophe the mirrored data center should be able to take over with minimal disruption.  But few SaaS providers have ponyed up with the capital needed to build mirrored data centers.  Often if you read a vendor’s IPO filings you will see that one of the uses for the capital raised in an IPO is for just this purpose.

So, one of the dangers of going with a reseller of a SaaS solution might be the reseller’s ability to keep you running in the event of a disaster.  Some vendors might counter by telling you there is a tape back-up but then you need to ask how long it takes to read all the back-ups back into a working system.  But this is a digression.

The other issue that some vendors like Sugar and Oracle with its grid computing architecture offer is the ability to bring together multiple systems in a heterogeneous configuration that contains both multi-tenant systems and single tenant systems to provide a kind of defacto redundancy.  If grid computing sounds appealing I recommend you let the vendors tell you about it.

So, to net it out, it looks like the on-demand debate has some distance left to travel.  The idea of a single centralized utility model is certainly one possibility but the market appears to still be experimenting and Sugar’s $46 million in funding is one example of how robust the experimentation is.  To borrow from a utility model argument from a while ago, it appears that some people are still content to dig their own wells eschewing town water.  But maybe the metaphor is more like the argument for solar panels — sometimes there’s an advantage to doing it yourself.

Oracle's Single Tenant Solution

When life gives you lemons, you need to make lemonade.  At least that’s the conventional wisdom, right?  Oracle’s announcement of a Single Tenant Enterprise Edition of Siebel CRM On Demand sounds like an instance of a company making lemonade (Single Tenant?) but before you jump to that conclusion you might want to think about it.

For a long time we have listened to a war of words over single-tenant versus multi-tenant as the appropriate architecture for on-demand computing.  The battle has been mostly one sided since about 2000 when the first on-demand SFA solutions began hitting the market. 

It’s useful to keep in mind that one of the big selling points for on-demand computing when it first got going was the swift and sure implementation it offered as compared with a traditional client server implementation.  The big competition for on-demand back then — in addition to conventional client-server — was called ASP for application service provider and most people had a hard time telling them apart.  But essentially, ASP was simply conventional client server software delivered over a VPN or virtual private network. 

It was guilt by association.  In the eyes of the on-demand community, conventional client server was bad and hosting it over a VPN was worse.  As a practical matter, those early solutions left something to be desired and ASP vendors discovered it was hard to make a profit because the hardware requirements were too great.  I think ASP went the way of other first generation solutions and I haven’t heard of any in years.  So the Oracle announcement is something of a throw-back but if it is, the similarities end as fast as you can say single instance.

Oracle has done some interesting things in its effort to make single instance something more than the defacto lemonade you can make with your lemons.  Consider this:

First, the applications themselves are no longer client-server and they haven’t been for quite a while — going back about four years to Siebel’s introduction of its browser based applications.

Second, Oracle has done a lot more than simply offer applications on a VPN.  With its vision of grid computing Oracle sees an opportunity to provide customers with single or multi-tenant solutions depending on their requirements. 

Much as you might like multi-tenant and think it is the technological equivalent of the introduction of the fork to Western Europe in the 12^th Century, you also have to — or should — acknowledge that there are times when you need the flexibility of “other means”.  Think fork is to roast beef as hands are to BBQ and you get my drift.

In fact, there are plenty of enterprises and industries where, for legal or regulatory reasons, the organization simply cannot subscribe to an on-demand solution that shares hardware.  Such organizations will be well served by a solution that doesn’t make them share and that seems to be Oracle’s approach at the moment. 

Nevertheless, it ought to be noted that grid computing opens up a lot of other opportunities as well.  Grid computing gives Oracle the ability to let some customers use single tenant solutions while others take advantage of multi-tenant solutions. 

This “have it your way” approach may mean the weakening of the multi-tenant argument in favor of on-demand computing but in reality, that argument has been weakening for some time.  As on-demand solutions have become increasingly robust and conventional software has begun to be simpler and easier to integrate, use and maintain, the two types appear to be converging on a point in the future when business software will be much more intuitive and configurable.  That day is still off in the distance and some would argue that on-demand computing has a comfortable lead. 

Nonetheless, it is the nature of business competition to look for ways to leapfrog ahead of competition in the service of the customer and profit motives.  That necessarily means the obsolescence of old products and ideas as new ones come to the forefront.  Oracle’s announcement of single tenant on-demand computing doesn’t take us that far down the road, but it is an important signal that things are changing again and that even in the avant guard world of on-demand computing, no one’s lead is permanent.

Recession-proofing with CRM

Recession talk is all around us and CRM has a role in helping any company get through the slump. How?  Take our quick quiz.

A recession happens when

a.       the economy falls off a cliff

b.      your neighbor loses a job

c.       you lose a job

d.      the economy stops growing

Yes, all answers are right, though economists and people who work inside the Washington beltway might give more credence to the last choice.  You might say, “That’s fine but what does this have to do with CRM?”  You’ll see.

The economy has been growing in a range of 3% to 4% per year which is generally enough to create jobs for the people who enter the market.  About four to five percent of the workforce is at any one time out of work but that’s more of a “float” phenomenon, in other words, it takes time to find that next position once you’ve left your old one.

So, the point I am trying to make is that even in a recession, if in fact we’ve crossed that line, there is still significant economic activity.  For example, the US economy generated about $13.13 trillion in activity in 2006 — the most recent data that I can find — also known as the GDP or gross domestic product.  Absent a recession, GDP should increase every year and the question becomes how to participate in that GDP and CRM can play a significant role in a down economy.

In my analysis, there are two significant parts of a market’s life cycle, the product innovation phase and the process innovation phase.  The first phase occurs when markets and categories are new and vendors jockey for position or market share.  In the product innovation phase, vendors make rapid improvements in their products as a way to differentiate from the competition.  No one worries too much about customer facing business processes — the second phase — at this point because all effort is invested in product and market share.

At some point, however, some competitors drop out and you are left with a core set of competitors who have survived a natural selection process that helped them figure out the business they are in and the products they supply.  That’s when the second phase, process innovation, kicks in.

In the process innovation phase, the competitive differentiation moves from product features to customer facing business processes.  In other words, you need to find ways to make your company easier to do business with — easier than the competition at least.  The companies that have reached this point have pretty good products which might vary by five or ten percent and appeal to slightly different audiences; but those differences are not as significant as getting orders right, agreeable payment terms, simple to understand and execute contracts and the like.  If you doubt this, consider how easily customers switch vendors when things go wrong.

As luck would have it, the process innovation phase of a market and a recessionary economy look a lot alike from this perspective.  In my view even without a recession we would be looking at a market place where product innovation has yielded to the business process.  Some clear markers include the great interest in the direction that has been called Sales 2.0, which encompasses a lot more than selling.  Social networking concepts, analytics, innovative new applications all work their way into the Sales 2.0 idea.  In one way or another, the emphasis in dealing with customers is in getting it right the first time.

Say you make products with many permutations and large bills of materials.  For you, getting orders right the first time is important and that drives — or should drive — an interest in things like configuration, pricing and quotation systems.  These systems help ensure products go out the door as the customer wanted them — with all the subsidiary parts and pieces — reducing the potential for returns, re-orders, credits, and on-site visits to correct a configuration, all of which cost money.

Or consider a company that licenses intellectual or other property that requires a complex contract to cover all contingencies.  The contracting process can add weeks to deal closings and involve attorneys (and their fees) all of which slow down deal flow and reduce margins.  Contract management systems that anticipate the nuances and build them into agreements can short circuit the customer’s legal people from needing to object.

There are lots of other examples too, but my point is that we are in a moment when, for a variety of reasons, we need to think about using some of the new applications that help us as vendors present a kinder and gentler face to the customer.  In many ways a recession is a classic time for excellence in business process execution but at the same time many industries are in a phase when process execution is paramount.  It’s kind of a perfect storm.

Spending money on new technology may not be the first thing on many people’s minds when the economy contracts but as usual the first competitors to take action will be the ones who reap the greatest rewards.  Fortunately, many or even most applications that deliver process improvement are available on-demand at a fraction of the costs that would normally be associated with traditional software.  A recession might not be a lot of fun but we have never had so many tools for combating one.

Would you pay $75 for Salesforce.com?

I got wind of a rumor yesterday that went like this:  Some high ranking people at Salesforce.com had approached Oracle to gauge Oracle’s interest in buying Salesforce for $75 per share. A reporter wanted to know if I thought that was a good idea. I said ‘no’ and here’s why.

Salesforce’s stock has taken a pounding so far this year losing close to 20% of its value since January. Last time I looked, CRM (the Ticker Symbol for Salesforce.com) was hovering around $50 per share so $75 would represent a 50% premium on the current share price.  Microsoft offered a bigger premium for Yahoo and they don’t even have Salesforce’s commanding market share.

As most adults know, the movement of any single stock’s price is highly dependent on the movement of the entire market. The fact that CRM is getting pounded despite advice the company has given the Street that its revenues would be stronger than originally expected this year is plenty of evidence to support this theory.  So while I see $50 for a share of CRM as a good price (if I am a buyer), I don’t think a lot of people are panicking and wanting to take the $75.

It’s not enough.  Why?

Well, to understand you need to look at a few things. First, Oracle doesn’t need more CRM (as in Customer Relationship Management) applications, they bought up most of the first generation of the remaining CRM companies and at least one on-demand product — Siebel CRM On-Demand. Also, I think Oracle would have problems with the SEC if they tried to buy another CRM company because the rest of the market contains some billion dollar companies who would complain that Oracle had monopoly intentions.  I know we know this already but this is a matter of what you can prove in court and a purchase of Salesforce by Oracle would tip the scales.

What I think would be appealing to Oracle would be Force.com, the application development and hosting infrastructure which will be one of the major architectures of its kind in the years ahead.

Now, it’s hard to value Force.com because it’s so new. But I think you can safely say that it’s worth much more than a $25 premium on the share price. I expect it will be the tail that wags the dog and that the CRM applications of Salesforce will be secondary revenue producers at some point.

Force.com would be something that everyone in the Oracle universe would want to get (Larry would insist) and its revenue potential could be very large.  Bigger than $25 per share which is why the $75 rumored price is too low.

There was also an argument that Larry is getting old at 63 (I believe) and people are wondering how much longer he wants to keep it up. The rumor mongers were suggesting that Marc Benioff might become the heir apparent if the buyout were to happen. I doubt it.  People forget that Larry really, really likes what he’s doing and, unlike Bill Gates, he probably won’t give away his multi-billions in his lifetime — there’s little interest in taking the foundation route.  Larry is a thoroughbred who, on his days off, runs around because it feels good.

On the other hand, Marc has proven himself to be quite an executive, taking Salesforce from startup to IPO without having a job ending dust-up with his board. Not bad at all.  But I don’t think Marc likes what he’s doing in the same way that Larry does. Marc has some extra curricular activities like his foundation, he likes to write books on philanthropy and he shows up at Davos now and then to hang with global leaders. 

Marc’s got a second act coming and it won’t be running a bigger software company than he has right now. He’s young, rich and increasingly well connected with self-made politicos like Arnold the Governator and Michael Blumenthal and who knows who else.  I have seen pictures in his office of Marc with Bill Clinton and Marc with George W. Bush. They are the kind of pictures that are taken for friends — just the two men smiling at the camera, buds. The pics are in black and white and have a timeless quality about them. Marc has a second act coming and he won’t be running a software company, me thinks.

So to sum it up, $75 is too cheap, CRM (the application) is less important than Force.com, the SEC would probably balk, Larry isn’t going anywhere but Marc is though we don’t know exactly where yet. All in all, I’d say the $75 per share deal is an interesting rumor but that’s about it.

Nevertheless, it’s a crazy world so we’ll all be looking for an announcement.

An interesting question about Force.com model

There's a comment by Raj Gupta to another column "Salesforce.com goes on tour" that bears looking into.  It reads in full:

"Perhaps this question is more for Salesforce.com, but what is the difference between a developer and user in this model of pay per login.

Is "developer" the person (or company) that uses the force.com platform to develop an application and "user" is the person who uses it -- in which case the user cost ($0.99 per login with caveats) is like a royalty paid to Salesforce for an appliation developed by a 3rd party using force.com platform -- or is it something completely different.

That's a good question.  My understanding, based on briefings and informal conversations with Salesforce staff is this.  Gupta's summation is accurate -- the organization that develops the application using Force.com pays no fee to Salesforce for use of the tools, hosting environment and all the rest of the technology supplied -- AKA 'The stack'.  You get it when you sign up for a developer edition account, which is free. 

The application's user would incur a fee from Salesforce for using the application.  Customers who already have Enterprise or Unlimited Edition can also develop, but the cost of development is bundled in (or is free) with their CRM subscription. The only cost to developers is if they choose to deploy the application on the Appexchange. There is a cost for the validation of the application. There may be separate costs if they go down the OEM route too, but that is separate discussion.

There is a charge for application use.  In this case, an occasional user would pay a buck but in more high use cases there would be a monthly fee of $50 (last time I checked) per month for the user.

There is a real cost associated with hosting a user regardless of who writes the code.  If you think not, ask yourself how any SaaS provider can afford to build a data center and supply it with consummable services like power, security and smart people.  Does it cost $50 per month per user?  No.  I know this because that would mean this is a breakeven proposition and who goes into business to break even?  I bet fully loaded the cost of supporting a seat is less than $10 per month.

So there's a profit motive involved, that's no surprise.  I fully expect the cost per seat-month to go down over time.  Right now, I think the pricing is based more on the comparison cost for an internal IT department to host a user and I suspect many CIOs see this as a good deal.  Go out a few years and there will be competition for hosting like this and prices will fall but that's still far off.

Users have to expect this kind of pricing -- which I view as reasonable.  After all, as Salesforce gets deeper into the platform business, its main source of revenue will be from selling generic seat hosting.  Most financial analysts and investors already know this.

Keep in mind that this mechanism also applies to the ISV market too.  That means that a potential $50 charge will be augmented by another charge by an ISV for a custom application, unless other arrangements are made.

Some models to consider --

1.  Salesforce invoices the end user for hosting services as well as the ISV's application and then pays the ISV for the application use minus billing and processing fees.  They've already experimented with this model and I think one of the reasons that Tien Tzuo, former Chief Strategy Officer at Salesforce, left to start an on-demand billing company is that everyone is discovering how Balkanized and hard the billing function is.  There's money to be made in billing and savvy people are backing start-ups in the space.  As Mike Braun, CEO of Intacct told me recently (see posting The diaspora) as on-demand software companies become more and more like other utilities billing will be the critical application for them.  A billing system lets you take a relatively generic service and package and price it in almost limitless ways.  Volume pricing comes to mind when I think about it.  It takes high speed computing, analytics and good reporting, as well as a lot of business rules to make it all happen.

But I digress.

2.  You could see another model in which a development company sells licenses to an application, just like conventional software today, but where the hosting company still charges monthly for basic service.  To me this looks a lot like cable TV today with basic and premium services.  The differentiator or enabler here will be the billing system.  On balance and depending on pricing, this could be a good deal to the enterprise customer because it reduces the capital expenditure needed to support IT and turns it into a line item expense.  I don't know what the tax implications might be though.

There are probably other models too that are waiting to be born and whether or not they are will depend on the applications built, the economics of being an ISV in this new world, and numerous other factors.  It's a wait-and-see game but it's also a good reason to follow markets and individual companies. 

It's also insights like this that drive investors' calculations.

Surprising call center adoption

I got a statistic stuck in my head last week during a visit to a client.  Sometimes you hear or see something so interesting for its oddity that it stays with you no matter what and this was one of those times for me.

There are actually two closely related bits of information and both relate to the call center.  Ready?  In the business-to-business (B2B) space less than 40% of the companies have purchased a call center system for customer service and in the B2C space less than 25% of companies have bought service call center solutions.

Just to be clear much higher percentages of these companies have some form of call center directed at customer service, they simply build and maintain these centers themselves or outsource.  I don’t know what the full compliment of call centers is but I would expect that close to all of the B2B companies at this point in time have some kind of function for taking customer calls.

So the question that sticks in my mind, amazes me and even permeated my sleep briefly one night, is why?  Why would a large (or small) company with other things on its plate decide to take on the rigors of building, maintaining and managing a call center infrastructure when it could easily enough ring up some software company and place an order?  I have to say I don’t know but, pundit that I am, I cannot help but to noodle on this and offer up some ideas. 

Idea number one — it’s less expensive to do it yourself.  That’s somewhat credible if all you look at is the cost of the raw elements.  However a lot of what goes into a call center is labor and smarts in the form of software and I have a hard time believing it’s better to write code rather than buying it along with all of the best practices it encompasses.  I’d call this the “IT centric solution” since it no doubt gives people in IT job security.

Idea number two — the call center grew organically.  It started as a small mushroom and mushroomed into a big mushroom.  Like anything that grows buy accretion before you realize what happened this simple little system grew into a great big legacy application that people are afraid to mess with today.  I call this the Supportzilla scenario and I can see how it could happen.  Start with a small investment and every time you reach a make-or-buy decision, the make part always looks better than ripping out the whole thing and replacing it with a packaged system.  This idea might have legs but I call it the “management through avoiding decision making” approach.

Idea number three — customer service is expensive and no matter what we spend on it, it’s never enough so we have to cap spending and that means no new spending on those pesky customers.  I call this either the “pure finance approach”.

There are probably other ideas but my brain is tired from not sleeping well because I am thinking about this idea too much. 

The truth is that call centers are expensive and they don’t usually show positive returns except for the fractional payback you get when you can boost productivity by handling more calls in an hour with a fixed number of agents.  Also, with so many moving parts, it really is easy to believe that the system you’ve nursed along for years is as good as anything out there or certainly good enough.  On top of all this there are the ongoing costs of constant hiring and training and re-training call center staff which may draw attention away from the issue infrastructure.

I guess there is one more alternative and it might be my favorite — companies don’t see enough value in packaged call center solutions period.  It’s not that the things are expensive per se, it’s that they simply don’t provide a solution to the problem of dealing with customers.  After all, these systems don’t help customers avoid the need to call the vendor, they just manage the call flow.  In the modern world they are necessary like so many other things.

A few years ago I did some research on CRM in the insurance industry and what I discovered then dovetails into this issue.  The data showed that there was an almost perfect split between insurance companies that bought CRM packages and those that built their own.  I recall even calling a few executives to verify the data and what I was told (and the data also confirmed) was that the products then available did not support enough of the business processes that the insurance companies needed covered. 

The executives’ logic was that they could either customize a package or build from scratch but when they did their own financial analysis, the insurance executives decided it was just better to start from scratch.  I don’t know if things have changed in the years since I did that research, I left the company where I did that research and never followed it up with another study.

Nonetheless, it strikes me that a similar situation exists in the call center.  There are so many business processes that could reasonably need to be supported in a call center that no vendor has gotten its arms around the problem yet.  If that’s true I wonder what, if anything, the vendors are doing about it.  The chances are pretty good that it will require a good deal of investment and with a market trained to build rather than buy it might be hard to generate a return on the necessary investment.

I wonder if anyone else is losing sleep over this.