CRM's New Future

Oracle's planned purchase of Siebel will put it at the top of the CRM market, but competitors are ready to knock it back down.

Tony Kontzer, Contributor

September 17, 2005

8 Min Read

The talk last week about the big deal--Oracle's planned acquisition of Siebel Systems Inc. for $5.9 billion--centered on how it was the end of something. The end of best-of-breed apps. The death of software. The last mega-application-company combination. The final curtain on traditional customer-relationship-management applications.

What's more interesting is what comes next. The CRM market may be moving, but it's far from dying, despite the fate of its ailing, one-time champion, Siebel Systems. Founder and chairman Tom Siebel gave his blessing to the deal by pledging to vote his shares in favor. "What really brought this together was a shift in market dynamics," Siebel said in a conference call last week. Businesses are no longer interested in connecting standalone applications and want integrated suites from a single vendor, he said.

In Oracle, they'll certainly have plenty of CRM offerings to choose from, since it already sells its own CRM software, plus acquired applications from PeopleSoft and JD Edwards. But Oracle CEO Larry Ellison's move doesn't come close to consolidating the market or tying up in a neat package what businesses want in a CRM vendor. CRM software remains popular, grabbing nearly $3.5 billion last year for new licenses, according to research firm Gartner. And don't be fooled by the consolidation trend--58% of the market last year was scattered among more than a dozen smaller players such as Amdocs, Onyx Software, and RightNow Technologies. Choices for CRM, meanwhile, range far beyond big vendors' integrated suites to include on-demand, software-as-service models made popular by Inc., and offerings specialized for specific functions and industries.

Tom Siebel is right about one thing: The integration of CRM into broader suites holds appeal for some larger companies. "We're in the midst of undergoing a significant technology transformation across the company, and both Oracle and Siebel are key components of that," says Barry Libenson, VP and CIO of Ingersoll-Rand Co. The $12 billion-a-year maker of industrial equipment already has invested $30 million in Oracle software and $10 million in Siebel applications. Libenson is thrilled with the deal, though he acknowledges that one downside is losing some negotiating leverage. "We've always been able to say to Siebel, 'If it becomes onerous to do business, we'll go back to considering using the Oracle CRM platform.' That disappears now. But the benefits far outweigh that minor concern."

Oracle and Siebel are part of Ingersoll-Rand's tech transformation, so aside from losing leverage, the deal suits VP and CIO Libenson.Photo by James Leynse

SAP shows how successful the integrated-suite approach to CRM can be. Gartner estimates the enterprise-resource-planning vendor moved into the leading CRM spot last year, increasing its new license sales 17.4% to $601.2 million. "Oracle has a big house-cleaning and housekeeping mission on their hands that's really complex," says SAP America Inc. president and CEO Bill McDermott, referring to Oracle's nine acquisitions in less than a year. "It's probably the technical equivalent to building the Hoover Dam." And while McDermott wouldn't comment on rumors that SAP plans to offer its own on-demand CRM, his criticism of smaller competitors like Salesforce sounds like someone prepping a run at the market. "Customers tell me now they're not comfortable with the on-demand choices they have today," he says. "They're not comfortable with their precious data in the hands of a small company that has a multitenant data center."

While Salesforce, founded by another former Oracle employee, Marc Benioff, is growing fast--increasing sales of new subscriptions a blazing 84% last year--it has a tiny 3% of the market. Some see Oracle's acquisition as a cage-rattler for Salesforce. Ellison "is putting in place the capability to put together a variety of CRM offerings," says Barton Goldenberg, president of CRM advisory firm ISM. "Benioff should be worried as heck."

When the deal broke just before Salesforce's user conference began last week, the always-opinionated Benioff kicked into hyperdrive, claiming the acquisition will distract both Oracle and Siebel, letting Salesforce grab more market share. "There's never been a successful software acquisition of any large scale in the history of our industry," he says, citing the mergers of Excite and @Home, Microsoft and Great Plains, and IBM and Lotus among the noteworthy failures. He believes Oracle's hodgepodge of CRM products will scare away customers. "They're all being told that they have to move to something new that doesn't exist yet."

Indeed, big vendors swallowing smaller CRM companies is exactly the scenario that some of Benioff's customers want to avoid. There will be integration difficulties for Oracle with its many flavors of CRM, and possibly disruptions and fewer choices should Oracle consolidate its CRM portfolio. "It's confirmation of my decision to go with Salesforce 18 months ago," says Wes Benwick, CEO of Bennett's Business Systems, which sells copiers, scanners, and document-management systems.

chart: CRM Market Mix

Conversely, as Ingersoll-Rand prepares to integrate its Oracle database, E-business, and human-resources apps with its Siebel sales-force-automation, call-center, and analytics software, Libenson says the merger will bring some relief. "It provides an integration path that doesn't require that we do all of the work," he says. "My hope is that there will be a more significant level of interaction between the two platforms."

The deal certainly raises questions about how Oracle's competitors should respond. The addition of Siebel CRM OnDemand gives Oracle a legitimate software-as-service offering, where SAP has nothing, so far.

IBM could be a loser in the deal. The company has a longstanding partnership with Siebel, hosting its on-demand software, which also runs on the DB2 database platform. IBM senior VP Steve Mills acknowledged in a conference call last week that Oracle won't be warm to that arrangement, but IBM hasn't said whether it will ditch its relationship with Siebel. Mills downplayed the impact on IBM, saying there are thousands of apps vendors looking to align themselves more closely with the company. "The ecosystem readjusts itself," Mills said. "For every action, there is a reaction."

Microsoft remains a wild card. It has been a nonfactor, with its CRM strategy sputtering since launching a product aimed at small and midsize businesses in early 2003. Microsoft is skipping the 2.0 release of Microsoft CRM it had promised to deliver nearly 18 months ago and will instead offer a 3.0 version later this year, to include improved configuration, customization, and integration features. CEO Steve Ballmer recently declared that Microsoft would give Salesforce a run for its money in the on-demand CRM market.

Salesforce, meanwhile, is working to leverage its on-demand user community base. Last week it unveiled AppExchange, an on-demand applications marketplace that lets customers pick up preintegrated apps the vendor or other developers build for human-resources, finance, or specialized functions. "This is what our customers are asking for to take them to the next level and free them from the bondage of mainframe and client-server software," Benioff says.

As for Oracle, Ellison seems comfortable with his company's sizeable lineup of CRM offerings. He said Siebel's software would form the core of its strategy over the next few years and provide a foundation for a CRM suite Oracle plans to develop as part of Project Fusion. That's the company's initiative to combine its acquired technologies in a single software suite. Siebel's on-demand service eventually will offer all the functionality of Siebel's software, he said.

The laundry list of products isn't a major concern to Alaska Airlines, which became an Oracle database customer less than two years ago and started using Siebel's analytics software in January. It's negotiating to buy customer-loyalty and marketing modules from Siebel. The airline is prepared to do the early integration to link the two vendors' products, but it sees a reduced integration workload in the longer term. "It couldn't work out better for us," CRM director James Archuleta says.

But it looks like it will be 2008 before Oracle delivers a fully integrated product line via Project Fusion. For now, its acquisitions propel it to the top of the CRM market. Whether it stays there depends on how it handles the distractions of its acquisitions and fends off the mix of ambitious established rivals and fast-moving newcomers. The Oracle-Siebel deal could be the end of Siebel as we know it. But the market just got a whole lot more interesting, too.

-- with additional reporting by Paul McDougall and Laurie Sullivan

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