Salesforce.com Inc. recently reported first-quarter results showing growth of more than 80 percent in its paid-subscribers count and revenue from the year-ago period, then followed that news by announcing two high-profile endorsements this week: a partnership with Accenture Ltd. and a 5,000-seat licensing deal at Merrill Lynch & Co. Inc. But as Salesforce.com's star continues to rise, analysts are stepping up their warnings to customers that hosted applications can carry steep costs over the long run, especially for larger organizations.

Research firm Gartner Inc. estimates that after three years, the cost for complex organizations of running Salesforce.com will surpass that of traditional, packaged CRM (customer relationship management) software. Salesforce.com's strength is SFA (salesforce automation) functionality; while it offers tools for customization and adding additional applications to its platform, building out those features requires a customer to invest the resources themselves or work with a third-party ISV (independent software vendor).

Gartner cites integration of production planning and scheduling information from logistics systems, complicated pricing contracts, detailed quotation information and access to customer financial data from accounting systems as areas where Salesforce.com may not be robust enough to support complex customers' needs without additional, potentially pricey, customization.

In a report issued this week probing the ROI (return on investment) Salesforce.com delivers to customers, Nucleus Research Inc. found most customers reported positive returns, with the scale of those returns depending primarily on how rudimentary the customers' previous CRM efforts were. More than 70 percent of the 29 Salesforce.com customers Nucleus polled were replacing a basic or paper-based contact management system; for these users, the ability to access information in one unified database delivered immediate time savings and better sales visibility.

Nucleus also found that while Salesforce.com touts marquee customers like Merrill Lynch, big enterprise deals remain rare exceptions for the company. Salesforce.com's average deal size is for 17 users, and in Nucleus's survey, 45 percent of respondents were running Salesforce.com for fewer than 100 users. More than 90 percent of those polled had fewer than 500 users. The danger for Salesforce.com is that smaller customers are the ones most likely to jump ship: More than a third of Nucleus's respondents said they would consider changing CRM vendors or were in the process of doing so.

"People are more open to switching," said Rebecca Wettemann, Nucleus's vice president of research. "If you've reached the point where you have positive ROI from an on-premise solution, you're probably not going to change. Whereas with an on-demand solution, unless you've done a lot of work on customization, you haven't invested as much and might be open to other options."

Salesforce.com doesn't disclose its renewal rates. Executives brush aside questions about the issue by pointing to Salesforce.com's track record of constant subscriber growth over the past four years; Phil Robinson, Salesforce.com's vice president of global marketing, said the company is satisfied with its ability to both hold on to current customers and win new ones.

With 267,000 subscribers from more than 15,000 organizations, Salesforce.com currently holds the lead in the hosted applications market it helped legitimize. Faster than many would have predicted, it has carved out a sizable chunk of the market: The $64.2 million in subscription revenue it reported last quarter isn't far off the $75 million traditional CRM leader Siebel Systems Inc. brought in from license sales. To counter Salesforce.com's jabs, Siebel has taken to prominently touting its industry-leading base of 3.2 million users. It also fires off a press release every time its Siebel CRM OnDemand service wins a deal in which the prospect also considered Salesforce.com.

Showing growth isn't hard in the early years when you start from nothing, as Salesforce.com did in 1999, but the company's ability so far to sustain its momentum is winning over doubters like John Freeland, the managing partner of Accenture's CRM practice. "Eighteen months or so ago, I have to tell you, I was a skeptic on the business model," Freeland said at a Salesforce.com event this week where he announced Accenture's partnership agreement with the company.

When Freeland first began tracking Salesforce.com, he doubted whether it would move beyond the midmarket into the large, enterprise customers Accenture works with. But Salesforce.com's gains over the last year convinced Accenture to devote additional staffing resources and executive-level attention to supporting the company; just recently, Accenture closed a deal to implement Salesforce.com at a major insurance company, Freeland said. And so Accenture, a longtime close partner to Siebel, will help Salesforce.com in its efforts to expand its enterprise presence.

Siebel is under fierce attack from shareholders concerned about its slumping sales and series of management changes -- but for customers, the intensifying industry competition may be paying off. Three years ago, Nucleus issued a devastating assessment showing that more than 60 percent of Siebel reference customers it interviewed reported a negative ROI after more than two years of use. In a new set of ROI reports released this week, Nucleus places Siebel the top of the industry, for both enterprise and hosted deployments.

"What we've seen in the past year or so [at Siebel] is a refocusing on service -- really, a greater sense of responsibility for making customers successful," said Nucleus' Wettemann. Siebel's product road map, with an emphasis on analytics and vertical editions of its OnDemand service, is also pleasing customers, she said.

Meanwhile, Salesforce.com is facing its own escalating competition as it works to prove it can meet the demands of larger customers and deliver enough value to longtime subscribers to keep them paying monthly subscription fees.

"The challenge that they're facing is what happens to any first mover in a market," Wettemann said. "Other people start to really develop and focus on catching up."

» posted by abennett

IDG News Service

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