Defend and attack

9 February 2006

Siebel has long dominated the CRM market, but the launch of new technology and a belligerent marketing campaign suggest executives fear that competitors are fast gaining ground.

Tom Siebel is on the defensive. His company, Siebel Systems, is still the global leader in customer relationship management (CRM) software, but both the market and his share of it are under attack.

Not only do many analysts expect the CRM sector to show little growth in the coming 12 months (see The CRM market), but German software giant SAP, among others, is grabbing an increasing portion of what little business there is.

Tom Siebel's reaction has been swift and violent. A former top salesman at database and applications giant Oracle, he appears to have copied the infamous, aggressive marketing techniques of his former boss, and many say mentor, Larry Ellison. In April 2002, Siebel began placing full-page advertisements in high-profile business publications that set out to ridicule SAP's CRM efforts.

According to the advertisements, Siebel has seven successful CRM software releases and more than a million users; SAP has six failed CRM 'attempts', is a novice, with just one product shipped, and has an unclear number of users.

But those 'facts' do not tally with independent analysis of the CRM market. SAP is actually now on the third version of its mySAP.com CRM suite, and researchers at Gartner believe that its share of the high-end market is about 20% - and growing. Siebel, on the other hand, is struggling to reverse a slide in revenues from licence sales.

Stunted growth
All this must be maddening for Tom Siebel who, as chief executive and chairman, still closely controls the CRM empire he founded in 1993. By going over the heads of IT directors and appealing directly to vice presidents of sales at the world's largest companies, in less than a decade he almost single-handedly created a €7 billion market for sales automation and customer relationship management software - often called the front office.

The Siebel brand remains formidable and the company, thanks to its deafening marketing noise, is still viewed as the runaway market leader.

Siebel, now part of the Nasdaq 100, also boasts an enviable record of profitability and sales growth. Between 1997 and 2001, its revenues jumped ten-fold to $2.05 billion (€2.3bn).

But this level of growth is looking increasingly unsustainable. Investors, worried that the company is poised to hit a brick wall, have sent the company's stock plummeting. Since mid-2001, its share price has more than halved, valuing the company and its $1.9 billion (€2.1bn) cash pile at 'only' $12.2 billion (€13.7bn).

Siebel's first-quarter results to the end of March 2002 show that such pessimism is at least partly justified. The company reported a 16% fall in net income to $76.9 million (€86.5m) on sales down 25% to $477.8 million (€537.4m).

It was, Tom Siebel admitted in a conference call, "Clearly worse than we expected, worse than other technology companies expected, and worse than anybody on this call expected." Moreover, he said, vendors are suffering from "the worst IT capital spending environment maybe in history".

Searching for the positive spin, Siebel insists that, despite this setback, the company is in "a large market, a growing market and at the early stage of its potential". Others find it hard to feel so positive about Siebel's prospects.

Admittedly, it is a tough market for all technology companies, but a drop off in demand for Siebel's core product suggests the problem runs deeper. The market for sales force automation applications, where Siebel began its march to greatness, has run its course, argues Kevin Lucas of AMR Research. The strain is starting to be reflected on the company's balance sheet, he says. Revenues from licence sales dropped by more than a quarter to $246 million (€276.5m) for the quarter to March 2002.

Vertical lift
In an effort to reverse this decline, Siebel is pitching its wares to a new customer base - public sector agencies. Siebel has, in fact, championed the concept of 'verticalisation' - tailoring suites for specific industries, such as financial services and communications. These vertical offerings are now said to account for somewhere between 65% and 75% of Siebel's revenues.

In particular, Tom Siebel has told colleagues that he now regards the untapped potential of 'e-government' as one of his priorities. Sales professionals are touring Washington with Siebel's 'homeland security' application, for example.

But some of this lobbying has left a bitter taste, such as when the CEO told Capitol Hill investigators that Siebel software could have helped prevent the terrorist attacks of 11 September 2001. Critics say that the company's much-vaunted US and European boards of directors, populated with political dignitaries including the former heads of state of Britain and Italy, should have advised against pushing such a message.

With its core market in the doldrums, the CRM tag has become too narrow for Siebel. Despite the fact that it once prided itself on being a dedicated CRM vendor, with all the experience and expertise generated by such a comparatively narrow focus, the company now prefers to call itself a vendor of ebusiness applications.

Yet its name remains synonymous with CRM, which, say analysts, is making it hard for Siebel to break into new markets. The launch of employee relationship management and partner relationship management (ERM and PRM) software, billed as CRM offshoots, has yet to make much of an impact.

Meanwhile, the enterprise resource planning (ERP) giants, SAP, Oracle and PeopleSoft, faced with saturated markets for their own core products, have been circling ever closer. Although early releases of their CRM products met with ridicule, they are now starting to make a serious claim on Siebel's turf.

SAP, for example, says it now has 1,500 CRM customers, and analysts have praised the broad functionality of its suite. Furthermore, SAP says it has 1,000 developers working on the industry-specific versions of the software, to help it compete more effectively against Siebel's 20 vertical offerings.

PeopleSoft has equally grand CRM ambitions, reflected in a gruelling product-release schedule in 2002. And Oracle is working on a cheap CRM alternative that lowers the cost of ownership while minimising risk and implementation times. Indeed, the latter's current rate of progress, says Gartner, suggests that it will emerge as a clear challenger to Siebel in 2003.

Despite these efforts, in terms of mind share and CRM functionality, the ERP, or back office, vendors know they're playing catch-up. No single vendor of CRM software currently offers complete functionality, but Siebel comes much closer than the rest.

That is why the big three are attacking Siebel where it is most vulnerable - in integration between the front and back office.

Disintegration?
Critics have long argued that integration is Siebel's biggest weakness. There has been no simple, standard way of integrating Siebel's front-office applications with back-office ERP suites. For example, it was left up to SAP to provide the application programme interfaces required to connect its R/3 suite to Siebel applications.

"The integration problem has always been on Siebel's side," argues Klaus Besier, CEO of CRM vendor Firepond and former head of SAP's US business.

Siebel, understandably, downplays the integration issue. Integration costs, it says, make up only a small proportion of the overall installation cost of its software.

Nevertheless, the company, clearly worried that it will become marginalised as the ERP giants push integrated application suites to their massive installed bases, has been stung into action. In addition to its negative campaigning, Siebel has pulled together a network of integration software vendors and systems integrators to create a universal application network (UAN), designed to make it easier to integrate disparate applications (see Integration, integration, integration).

The creation of the UAN is seen as a significant long-term move. Denis Collart, who heads up the global CRM practice at consultancy Andersen, believes that Siebel is attempting to become an application 'hub'. "Siebel says that integration between the front office and the back office is an illusion, but it clearly wants to be the integrator at the front office," he says.

Market research group Gartner takes this a step further. It suggests that in the next few years CRM suites could evolve into an "application operating system", supporting an ecosystem of related applications, in which the suite also drives logic, business rules, security and workflow for the associated applications.

But critics argue that the UAN will provide little immediate relief either for customers integrating Siebel's application suite today or for Siebel executives hoping for a swift uplift in sales. Defending its share of a slowing market and against the sales techniques and massive installed base of Oracle, SAP and PeopleSoft will be difficult. Tom Siebel's negative campaign against SAP was only the first salvo. Expect more belligerent rhetoric - from all sides. Things in the CRM market are about to turn ugly.

The CRM market

Even the most mild-mannered of market analysts have strong opinions about the customer relationship management (CRM) sector. And just about the only thing that they seem to be able to agree on is that the days of stellar growth are over.

Beyond that, there are wildly differing views regarding the development of the market; the progress being made by erstwhile enterprise resource planning (ERP) software vendors; and the impact of the wider economic slowdown. Just to add to the confusion, vendors are also flooding the market with their own statistics, often manipulated to paint a more flattering picture of their position.

AMR analyst Kevin Lucas represents the middle ground. He expects the market to grow 17% in 2002. That is well down on the 2000 figure of 71%, but way above anything else in the enterprise software sector. Christian Lucas, vice-president of technology investment banking at Merrill Lynch, goes as far as to call CRM "a key driver of the enterprise software sector."

Gartner, currently bearish about the technology industry as a whole, believes that the CRM market declined by 8% in 2001 as it hit the analyst group's dreaded 'trough of disillusionment', and forecasts that it will post zero growth in 2002. That will intensify the immediate near-term scramble for market share, says Garter, as vendors jockey for position ahead of expected steady growth from about 2004 onwards.

This "re-engineering of the front office", as Andersen's global head of CRM, Denis Collart, phrases it, will be sustained well into the next decade. "It's very difficult to imagine that organisations won't want to industrialise marketing, sales and services in the way they industrialised the back office in the 1990s."
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Integration, integration, integration

Siebel Systems is hoping to regain some of its momentum in the customer relationship management (CRM) software market by heading off the growing 'integration versus functionality' battle.

To that end, at its European user conference in Barcelona, Spain, in April 2002, executives announced a new application integration framework, grandly dubbed the universal application network (UAN), which is intended to make it easier to plug disparate applications together.

UAN is not a Siebel product. It was developed by a consortium of enterprise application integration vendors, including Webmethods, Tibco, Vitria, Seebeyond and IBM, and by large systems integrators, including Accenture, KPMG, Cap Gemini and IBM Global Services. Tom Siebel, however, says that it was his company that mobilised and bankrolled this feat of cross-industry collaboration.

At the heart of the UAN is a standard integration server. This includes a common object model; a framework for defining common objects in XML; a transformation layer; and a transport layer to pass messages across applications.

Siebel and third-party applications are connected to the transport layer by adaptors. This is where the claim to universality somewhat breaks down. Under current plans, each middleware vendor will use its own adaptors and integration server when installing the framework for a customer.

Siebel's key contribution to UAN is the provision of a business process layer for the integration server. It has defined 200 'out-of-the-box' XML-based business processes that sit within a business process controller. These industry-specific processes, executed by the controller, weld the network and applications together. Integration, says AMR's Kevin Lucas, follows the business process.

The UAN vision is, however, still clouded by uncertainty, suggesting that Siebel ran ahead of itself in rushing out the announcement. The UAN fails to resolve the problem of providing adaptors to integrate legacy systems, says AMR's Lucas. There are few details about the pricing structure and how it will be sold. And there are doubts hanging over the summer 2002 launch date for the UAN, given the lack of any evidence of the product's existence outside the realm of Microsoft PowerPoint presentations.

Whenever it surfaces, early versions of UAN will be "crude," predicts Lucas. "It certainly will not solve everything," he says.
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