CRM BUYER SPECIAL REPORT

Pawns in the CRM Chess Game

In the CRM marketplace, speculation is swirling about hostile takeovers and mega mergers. Consolidation seems destined to place almost all of the market’s power into the hands of a few well-known players.

Meanwhile, smaller CRM vendors are quickly — and quietly — disappearing. Consensus about the future of such firms is hard to come by: Some analysts claim many of today’s survivors will thrive, while others already have consigned them to the junk heap. Lost in the shuffle are thousands of CRM customers who face the prospect of having to change vendors or lose support for solutions they currently use.

Will small, independent CRM vendors survive, or are they just pawns in the industry chess game, destined to be eliminated or subsumed by larger, more powerful players?

Incredible Expanding CRM Vendors

It has not helped small CRM firms that their product launches and other news have been largely drowned out in recent months by the maneuvers of industry heavyweights Oracle, PeopleSoft and J.D. Edwards. PeopleSoft has been trying to shake off Oracle’s hostile takeover bid, which has been extended three times since the original offer was made in early June.

The success or failure of Oracle’s bid depends not only on winning the acquiescence of PeopleSoft shareholders, but also on the decisions of state and federal regulators, who may attempt to stop the acquisition on the basis of antitrust concerns.

Moreover, even as PeopleSoft fights a public relations war to defeat the takeover, the company is touting its own acquisition of J.D. Edwards, which was completed on an accelerated timetable because of the Oracle threat. CRM market leaders SAP and Siebel Systems also have swallowed some of their smaller competitors.

Better, Or Just Bigger?

According to the big CRM players, larger companies can create better products and superior service for customers.

“The beauty of the software business is that, as the business grows, we are supporting a larger number of customers on the same technology base,” Joe Davis, vice president and general manager of CRM at PeopleSoft (Nasdaq: PSFT), told CRM Buyer. “This allows us to build out more functionality.

“The argument that fewer vendors will lead to less visionary work on their product lines is incorrect,” Davis added. “In fact, one reason that PeopleSoft undertook the J.D. Edwards acquisition was so a lot of different innovative products could be combined and we could offer the best to customers. Plus, with our combined revenue, we will be able to do more research and development.”

Although SAP (NYSE: SAP) executive Darc Rasmussen agreed that larger companies can do a better job than small ones of selling and supporting CRM, he also noted that an intense focus on acquisitions and the generally sluggish technology market have suppressed research and development efforts at firms involved in the three-way acquisition clash.

“When companies struggle with falling revenues and are trying to deal with predatory takeover bids, as a result they lack the capability to invest in new technology development,” Rasmussen, vice president of SAP’s Global CRM Initiative, told CRM Buyer. “SAP is uniquely positioned to take advantage of that in that we have been able to maintain revenue and grow our research and development. We invested over $1 billion in R&D last year alone…. Meanwhile, we are seeing 40, 50 and 60 percent R&D declines from some of our niche competitors.”

Not Just Small, But Agile

However, some CRM experts see the massive size of market leaders Siebel, PeopleSoft and SAP as an opportunity for smaller CRM developers.

“This is going to slow down the pace of innovation,” Joerg Rathenberg, senior director of marketing and business alliances at KXEN, told CRM Buyer. KXEN develops predictive analytics software that is either purchased directly by customers or integrated into enterprise applications by larger software firms.

“If the larger firms were really effective at what they do, they could take all of the pieces of software and make them work together,” Rathenberg said. “But that’s impossible. You always have to sacrifice somewhere if you want to keep the software’s main impact intact.”

Such forced tradeoffs create opportunity for smaller CRM vendors, which can develop new products faster and provide better customer service than their larger rivals, Rathenberg said.

“Oracle isn’t known for very good customer service,” he noted. “They don’t listen to their customers, and [they] try to crank out as many products as quickly as possible…. Siebel is very well known to be arrogant and not necessarily listen to customers or deliver what customers want.”

Can’t Buy ‘Em? Join ‘Em

In addition, small companies might find survival depends on partnerships as much as innovation, Aberdeen Group research director Karen Smith told CRM Buyer.

“Ultimately, I believe that many of the smaller, best-of-breed CRM vendors will need to build their functionality to complement other business management solutions and move aggressively to partner with the appropriate software and service vendors in order to remain viable,” Smith said. “Others will undoubtedly be acquired. Those who position themselves against large CRM offerings and do not offer substantially different and deeper product offerings or strong service and support options will have an arduous time surviving independently.”

Smaller firms also might look to the small- and mid-size business market for survival, she added, because this market segment may be overlooked or underserved by larger players in the long run.

Here To Stay?

While large CRM vendors recognize the value of partnering with niche developers, especially in their efforts to conquer specific vertical market segments, most of them also see a dim future for these small competitors, whose struggle to survive could impede new sales.

One major concern for customers is that their vendor of choice might disappear, leaving them without support or future development of purchased software. Small vendors are especially vulnerable to this stigma. Also, they are unable to provide the same cost savings as larger vendors, which can offer software consolidation across an organization.

“We used to compete on every deal by fighting a two-front war,” Davis said. “We would take on Siebel as the entrenched market leader and at the same time be fighting with individual product area best-of-breed companies. Now, with market consolidation and customer concerns about viability, we’ve really seen these smaller companies go away. It’s us, SAP and Siebel, and that’s pretty much it.”

Indeed, in an environment marked by cautious buyers and fiercely competitive behemoths, small vendors may feel as if they are running uphill. Still, the takeover brouhaha may not be all bad for independent CRM players; if Oracle and PeopleSoft end up focusing a lot of time and energy on fighting each other, smaller vendors could win contracts based on their willingness to give clients their full attention. In addition, small companies are no longer the only ones that must reassure customers about their software’s future viability.

At the moment, therefore, opportunity exists for the so-called CRM pawns. While it is unlikely that any small vendor will vault to gianthood in the current economy, it is entirely possible to carve out a profitable niche. It is the best of times and the worst of times to be a small CRM vendor.

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