Benioff's Big Bet

If the next five years go as close to plan for Salesforce.com Inc. CEO Marc Benioff as the last five, enterprise-application vendors might wish he and his "no software" mantra had never come along.

Benioff last week cast his company as the impetus behind a new era in application development, removing any lingering doubt that he's shooting to replace today's dominant application vendors with Salesforce's software-as-a-service model. "If we're not, then I've been doing the wrong thing for the last 5-1/2 years," Benioff says. "We want to be the ones that replace SAP and Siebel and PeopleSoft. Someone needs to, and it might as well be us."

If the company's steady rise is any indication, the market isn't betting against Benioff. Salesforce's revenue is expected to nearly double during fiscal 2005 to $170 million, and its stock price is up about 40% above the June initial public offering price.

At the company's user conference last week in San Francisco--the first since its IPO--Benioff introduced Salesforce's latest strategy to break out of its salesforce-automation pigeonhole and establish itself as an on-demand application architecture that customers can use to build a wide range of business apps, with the company's growing suite of services at the core. The company introduced two offerings: a customization toolkit called Customforce, spun off from its sforce application-development platform, and On-Demand Marketplace, a collection of third-party applications, tools, and services built by more than 60 certified partners using the company's sforce Web-services APIs.

Customers can either use the combination of sforce and Customforce to rejigger their Salesforce app to suit their needs, or, if those capabilities already have been built by one of Salesforce's partners, they can buy them from the On-Demand Marketplace, which boasts tools for everything from data warehousing and enterprise resource planning to project management and wireless extensions.

Salesforce's software-as-a-service model is getting companies to re-examine how they acquire and use apps. It's frequently imitated, most notably by archrival Siebel Systems, which all but created the customer-relationship-management market and now sometimes appears to react to what Salesforce does more than the other way around.

Benioff's approach could boost the application-service-provider model in general. ASPs of the late 1990s offered apps that couldn't be customized. But advances such as beefed-up HTML, pervasive broadband connectivity, and the rise of Web services have let services providers--Salesforce in particular--build applications specifically as hosted services and provide for substantial customization of those applications.

Salesforce's on-demand model allows those customizations to be transferred when a hosted application is upgraded, overcoming a major reason business-technology managers hesitate to upgrade critical on-premises business apps. When Salesforce upgrades its CRM applications, customers don't need to do anything because all local customizations still work. "The technology never goes out of date," says Richard Purchase, director of service development and IS at Innovex UK Ltd., which helps pharmaceutical companies manage temporary sales help. "Why would we want to reintroduce the upgrade issue?"

The notion of Salesforce as a platform provider is being well-received by customers who find Benioff's strategy a logical fit with efforts to simplify their IT environments. "Salesforce allows us to remove the 'I' from the 'T,'" says Marty Howard, CIO of Patient Care Inc., a $200 million-a-year provider of home health care. Howard's goal is for Salesforce to be one of three apps handling 99% of Patient Care's computing needs, and he expects that simplicity to let him shrink an already-lean IT staff of 20. Instead of having to buy additional applications to handle functions such as human resources and document management, Patient Care plans to use the combination of sforce and Customforce to build those capabilities directly into its Salesforce environment. "I'm trying to build an application portfolio with as few moving parts as possible," Howard says. "Every moving part you take out of the system allows you to reduce resources."

It's too early to tell how widely Benioff's vision will resonate, especially with large companies. Some, like Cisco Systems and payroll-processor Automatic Data Processing Inc., have licensed thousands of seats of Salesforce apps, but most of Salesforce's customers are small and midsize businesses that can't afford on-premises deployments of CRM software packages. Still, Salesforce has influenced the software industry disproportionately to its size and will continue to do so. "This is the kick-off of a major inflection point," says Denis Pombriant, an analyst at Beagle Research Group. "They were a disruptive application. Now they're a disruptive service and a disruptive platform."

Naturally, Salesforce's competitors will have none of this. Siebel is taking a completely different approach to CRM-as-a-service, rolling out vertical-industry versions of its year-old on-demand offering. Throwing app-building and customization tools at customers is simply outsourcing development to users, Siebel execs say, when what customers really want are custom applications built by vendors with expertise in their industries. Benioff insists customers want their own apps, not the same things their rivals use. But Siebel co-founder and senior VP Bruce Cleveland points out that Siebel has spent six years developing analytic capabilities, an area where Salesforce's own customers say the company is far behind. "These are serious business problems that require deep understanding," Cleveland says. Salesforce says it's planning to introduce beefed-up analytics within the next couple of quarterly releases.

For many companies, the attraction of the on-demand application model is more flexibility and less maintenance. Personnel-services provider Innovex has to adapt to fluctuations in its staff as customers' needs change. "I can't afford to be left sitting on 150 seats," Purchase says.

Conversely, E-business integrator InFact Group earlier this year chose Siebel On-Demand over Salesforce in part because business-development director Richard Napier found Salesforce's customization capabilities--which were less robust at the time--to be a turnoff. "I didn't want to have to do configuration," he says. "I wanted to just get up and run."

Benioff is doggedly committed to his vision, betting that his idea of "no software"--while quaint now--ultimately will prove to be an accurate forecast of a future in which the service quality, not programming sophistication, will determine which vendors thrive. "What we provide customers is not technology," Benioff says. "We provide customers success."

Part of Salesforce's allure is its culture, which places a premium on customer relations. "If we make the customer successful, then they adopt our product and make it a part of their culture. It's enlightened self-interest," Benioff says. "The reason we want to make the customer successful is that we'll end up being successful ourselves."

--with Charles Babcock