Having once dismissed it as economically unviable to offer customer relationship management (CRM) software as a service, rather than as a package, market leader Siebel watched the success of young rival Salesforce.com and decided it could not stand on the sidelines any longer. Early in 2004, it jumped back in.
Now after a year later, Siebel's attempt to diversify into hosted services looks like it is paying off. During those 12 months, sales of its hosted CRM OnDemand product accounted for $26.1 million of the company's total $1.34 billion revenues.
Although this is only a small fraction of overall revenues, Siebel CEO Mike Lawrie likened OnDemand's first year's performance to Salesforce.com's first year in business – a comparison that augurs well. Salesforce.com, is growing fast, and advisory firm Gartner has forecast that the company will become the third largest CRM vendor by the end of 2005, surpassing Oracle and PeopleSoft's combined CRM activities.
Now, a head-to-head battle is emerging between Siebel and Salesforce.com. In January 2005, Siebel stepped up its challenge with a slate of new services. The company announced OnDemand Release 6, which features industry-specific editions, out-of-the-box specialist sales workflows and customisation tools. The new vertical products, aimed at financial services, medical, automotive and high-tech sales industries, fulfil Siebel's promise to focus on CRM processes as well as the underlying technology.
In addition, the recent acquisition of Edocs, an e-billing and customer self-service software provider, will enable Siebel customers to widen their online application activities.
"We have changed the game in hosted CRM with this release," boasted Bruce Cleveland, senior vice president and general manager, OnDemand and SMB at Siebel Systems. "And we're only just getting started," he added.
Executives at Salesforce.com don't see it that way. In early March, the company released a new product that allows more extensive customisation, a move that echoes Siebel's strategy. "Salesforce.com is creeping onto almost every CRM selection list, regardless of the company size – and it's winning," said Laura Preslan, research director at AMR Research.
That makes Siebel's fightback in services all the more important. But what does that do for software sales? CEO Mike Lawrie admitted in a conference call with analysts that Siebel executives had been worried about cannibalising its own on-site CRM revenues, but he insisted that the impact of that has been offset by the expansion of the market brought about by the wider reach of hosted CRM.
Gartner analyst Ed Thompson is not convinced it is problem free: he points out that the Siebel's sales team currently earns a hefty commission from selling expensive proprietary CRM products at the enterprise level. The hosted OnDemand product is a cheaper subscription model and does not provide adequate short-term financial incentives to encourage sales staff to promote it, he argues. "The big issue for Siebel is how to compensate their sales guys," he says.
Even so, Siebel thinks it has no choice but to persevere with the hosted model, which analysts at AMR Research predict will continue to gain traction.
"Before OnDemand release 6, Siebel could only compete with Salesforce.com on price, but now, with better features and functionality, it is well positioned to be a real threat," says AMR.