Profitability may be elusive for on-demand CRM

On-demand CRM vendor Entellium's financial troubles, complicated by fraud charges against executives, might prove to be a cautionary tale for other vendors as well as existing and prospective customers.

News recently broke that Entellium's former CEO and chief financial officer had drastically overstated the company's revenue for years to entice investors. The executives have been charged with wire fraud and the Seattle company's future is in doubt.

But Entellium's financial woes -- which appear serious, aside from the executives' alleged wrongdoing -- might be a warning sign for CRM (customer relationship management) vendors.

While there is plenty of global market growth -- on-demand CRM subscription revenue will more than double by the end of 2013 to US$3.8 billion, according to Datamonitor -- profitability is not guaranteed, the research firm said.

Datamonitor said vendors should look past merely growing top-line revenue numbers and focus on cutting operational expenses, along with getting more mileage out of existing assets.

On-demand vendors should also move to form partnerships to boost their sales channel and help them meet specialized customer needs, according to Datamonitor.

"Verticalization and customization will be the new battlefields of on-demand vendors, and go-to-market strategies will also need to
change accordingly," the firm said.

CRM vendors contacted this week said their operations are sound, albeit citing different reasons.

"Scale is what makes the difference here. With 47,100 customers, over 1.1 million subscribers, and approximately 170 million transaction daily, Salesforce.com clearly has scale," Salesforce's vice president of corporate strategy, Bruce Francis, said in an e-mail.

Francis pointed to Salesforce's second quarter fiscal 2009 results, which showed earnings of $0.08 per share, up 167 percent year-over-year. That translates into about $10 million in net income on revenue of roughly $263 million.

"We feel that the advantages of cloud computing will be very clear in this kind of environment. Customers will be much less willing to make big risky bets on mega-purchases of software and hardware for on-premise solutions," Francis added.

Wall Street has apparently not shared Francis' confidence in Salesforce. Its stock price has steadily fallen in recent months, from around $74 in June to about $26 in early trading Friday.

In addition, Salesforce's chief financial officer recently predicted a price war could erupt among on-demand vendors.

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