Sea change at Siebel: Is hosted CRM on the horizon?

What a difference a year and a limp economy make.

Not quite 12 months ago, Tom Siebel, CEO of Siebel Systems, was disparaging subscription-based CRM in the trade press. It was a doomed delivery model, he said. And, in fact, he had good reason to say so, given that Siebel had already attempted subscription CRM in 1999, when it launched Sales.com, only to fold it two years later.

Well, that was then. Last month, rumors began circulating in the media that Siebel, the leading CRM market shareholder, might partner with IBM Corp.'s global services unit to offer subscription-based hosted CRM for midmarket customers.

Officially, neither company has commented on the reports. However, in a July webcast addressing Siebel's sluggish second quarter revenues, Tom Siebel responded to the rumor, saying, "I'm not prepared to make any announcements at this time. ... But let's make it clear we remain committed to that space, and we plan to accelerate our activity in that area."

Rich Reimer, Siebel's director of product marketing, told SearchCRM.com, "We're not religious about this. ... [But] the truth is that the delivery model is a red herring. It's focusing on the wrong thing. You need to look at the capabilities that come out of the box. And the companies focusing on the subscription model are relatively new to the market, so their capabilities are relatively immature."

Regardless of Siebel's true feelings toward subscription CRM, various pressures -- an ongoing soft market for enterprise software, rising interest in subscription-based software by midmarket customers, and the success of CRM ASPs such as Salesforce.com -- may force the company to reconsider the subscription model as a possible source of extra revenue.

Denis Pombriant, vice president and research director for CRM at the Aberdeen Group, estimates that subscription CRM will be a $2 billion global market by 2006, up from $395 million this year. Of course, that's still a fraction of the overall CRM market, which is projected to be $17.7 billion by 2006.

Pombriant believes a subscription option would help Siebel attract more low-end and mainstream midmarket customers, as opposed to the larger, early-adopter midmarket companies that Siebel tends to attract now. "It would be more appealing to early majority midmarket users who require more structure ... a high level of service and support, as well as low cost and precision in terms of on-budget, on-time delivery," he says. He predicted, in a May report, that Siebel and PeopleSoft were likely to offer subscription versions of their software sometime this year.

"Siebel is in a planning phase right now," says Wendy Close, research director at Gartner Inc. "The large enterprise market for CRM is more saturated, and the midmarket is huge. I think they'll come out with something new by the end of the year."

Sheryl Kingstone, a Yankee Group analyst, agrees: "As of six months ago, they were pooh-poohing this whole space. Now they're feeling the pressure, probably from IBM to team up with them for on-demand [IBM's subscription hosting strategy], and from companies like Oracle and Salesforce.com that have a more viable outsourcing option. ... They're scrambling to change their road map."

Kingstone notes, however, that any change in Siebel's position doesn't mean it intends to have a rehash of Sales.com. For one thing, the ASP model itself has become more mature and viable. For another, Siebel would be able to count on Big Blue to provide expertise and infrastructure, not to mention extra credibility. (And IBM already sells hosting services to Siebel customers who want to buy a license but outsource the management.) In addition, she notes, Siebel's software now boasts a Web architecture, making it better suited for subscription-based delivery.

"There is a major difference between the past and today," Kingstone says. "This won't be Sales.com resurrected. This will be a completely different approach to the market."

Subscription-based CRM appears to be where more and more midmarket customers are headed, according to Gartner's Close. "Gartner's strategic planning assumption is that, by year-end 2004, more than 25% of midsized businesses investing in CRM software will opt for the ASP model," she says.

One reason for an increasing preference by midmarket companies for subscription-based offerings is the speed of implementation, simplicity of usage, and, of course, price. According to Gartner, a Siebel license runs $16,000 to $25,000 per user, including software, services, training and hardware. Conversely, Salesforce.com charges just $995 per year for up to five users, or $65 per user per month for midsized businesses. For enterprises requiring more advanced customization and integration services, the price is $125 per user per month.

But Siebel is unlikely to mimic Salesforce.com prices. A more probable model is the one launched by Onyx Software Corp., a midrange CRM competitor of Siebel's, in late May with IBM. Through IBM's On-Demand service, customers can subscribe to Onyx for an average fee of $150 per user per month, with an up-front charge of $100,000 for 30-day implementation services, including data import, customization and training.

"The IBM offering provides access to almost our complete range of functionality, but in an easy-on subscription model. At the same time, it doesn't shortchange you by saying you can pay with a credit card and turn it on this afternoon [as do some lower-end subscription-based offerings]," says Eben Frankenberg, Onyx's executive vice president of global business development.

IBM's director of global application-hosting services, Piero Chiodo, said the appeal is both price and fast implementation. "The design point of the solution is to be up and running in a few days," he says, noting that the average customer will purchase from 50 to 150 seats.

What do midmarket customers themselves say they want? Sixty percent say they'd still prefer to own their CRM license, not rent it, notes Gartner. That is likely to be especially true in security-conscious industries such as health care. And some midmarket companies may opt to purchase part of their CRM functionality while outsourcing others. For instance, Lumenos, a health insurance provider for self-insured companies, uses Siebel for customer service and Salesforce.com for sales. Chad Pomeroy, Lumenos' chief technology officer, says both models have their usefulness.

"With sales, we were looking for a hosted solution that was browser based, mobile and required very low overhead for support," he said. "But for customer service, we require so much customization and integration with our other systems that Siebel is the better option. And, of course, being a health care company, we've got security and privacy issues to worry about. So I can't see looking for a hosted customer service solution."