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The Customer Is Sometimes Wrong is making software-as-a-service a popular idea.
October 1, 2005

The Case: In 1999, when former Oracle executive Marc Benioff founded, companies bought software and ran it on their  computers. The idea of handing  customer data to another company and then renting access to software running on its servers sounded insane. But today, “software as a service” is a viable business led by Salesforce, whose best early decision disappointed many customers.

You may have noticed that you’re spending less time lately using the software you purchased for your PC and more time using websites that offer the functionality of traditional software. For instance, if you manage your e-mail using Gmail, Yahoo Mail, or Microsoft’s Hotmail, or you’ve used Google Maps (see “Killer Maps” in this issue), then you’re part of a trend roiling the software industry: “software as a service.”

Software-as-a-service is a boon for consumers: it usually costs less than store-bought software and requires users to install and boot up nothing more complicated than a browser. Corporations see the same benefit, but multiplied across dozens of business units and hundreds or thousands of employees. Many of those companies have suffered through years of dependence on complex, expensive, and temperamental “enterprise” software, which manages everything from sales and customer support to inventory, shipping, payroll, and planning. So software-as-a-service can represent a welcome alternative to purchasing software packages from traditional vendors like IBM, Oracle, or Siebel Systems.

One company that was recently looking for alternatives is ClearCube, an Austin, TX-based maker of specialized hardware and software for the federal government and the health-care and financial sectors. Since 2001, ClearCube had been using customer relationship management (CRM) software from Siebel. CRM helps organizations keep track of current and prospective customers. It tracks customer contacts, logs sales visits, generates forecasts, and generally helps to convert sales leads into deals. But at ClearCube, only 35 percent of the sales staff was willing to use the Siebel software, says Dean Dresser, the company’s controller.

“It was a very painful, broken system,” Dresser says. “It was difficult and unwieldy to manage. Every time we went through an upgrade, all the customization we had done on the previous version would disappear.” And because people weren’t using it consistently, Dresser adds, the software couldn’t produce consolidated forecasts. “People would send me their weekly reports in Word or Outlook or Excel or on the back of a pizza box. As a result, we had no way of knowing the probability of closing deals.”

In 2003, Dresser’s boss gave him permission to do something about it. After looking at various makers of CRM systems, he settled on up-and-comer Beginning in April 2004, ClearCube gradually moved from the Siebel system over to Salesforce’s Web-based system. As we’ll see later, the decision to switch paid off for ClearCube. But just to push it through, Dresser had to overcome a lot of resistance within his own company, especially from its IT department, which complained about losing control over the company’s data.

As Dresser learned, that was a concern executives at Salesforce had encountered many times before – indeed, since the founding of the company. And it was one they had decided to ignore.

Drawing a Line
Marc Benioff left Oracle in 1999 to start a company that would sell CRM services over the Web. Why CRM? “It’s one of the best beachheads for on-demand software, because it’s especially amenable to the hosted model,” says Clarence So, who joined Benioff six months after the founding of the company and is now the company’s vice president and general manager of community, overseeing relationships between Salesforce’s customers and its partner software development companies. ”Salespeople are all over the place,” So points out, and it makes everyone’s lives easier if all they need to do to report their results and get their next assignments is find an Internet connection, open a browser, and log on to

But that logic wasn’t immediately apparent to prospective investors, whom it was So’s first job, from 1999 to 2001, to lure. “People were saying, ‘This stuff will never fly. Companies will never let anyone host their data.’ The word ‘control’ came up a lot.” According to So, the investors told Benioff to build both a self-contained CRM package and a hosted version, believing that the hosted version would attract customers but that these customers would eventually want to bring the software in-house..

The pressure to follow this advice was great. “In 2000 and 2001, every VC was going to their portfolio companies and forcing them to adopt a technology model that said, ‘Give customers choice. If your customers want you to host the software, do that, but if they want to bring it in-house, let them do that,’” says Tien Tzuo,’s senior vice president of product management. “A lot of startup businesses built technology models to accommodate this choice.”

Benioff and his small staff – mostly working out of Benioff’s home – considered it a bad idea to grant customers the in-house option. So they did the unthinkable: they walked away from the prospective investors who insisted on the “choice” model. “We’ve taken plenty of big bets, and the bet we took in 1999 was that we were not going to play that game,” says So. “We were going to go whole hog into the hosted model. Marc felt that the control issue was just an emotional issue, not really a rational issue.”

It was Benioff’s long-standing belief in the rationality of the hosted-software model that made him unwilling to compromise. In 1999, before he had his first customer, he had determined that the only way to make his service more attractive than competing CRM systems was to host all of his customers’ data in one place, which would simplify maintenance and upgrades.

Salesforce’s low prices, which haven’t changed since 2000, may have helped some customers get past their control worries. For small businesses (having five or fewer employees), Salesforce charges only $995 per year. Medium-sized businesses pay $65 per user per month, and big corporations pay $125 per user per month. Running traditional enterprise CRM software can cost a company twice as much, once the costs of hardware, IT staffing, and the like are factored in over the five-year lifetime of a typical software package, according to a study by the Yankee Group, a technology consultancy in Boston.

ClearCube’s controller Dresser eagerly testifies to the savings Salesforce’s hosted service brought his company. “The total cost of ownership is much lower than the traditional CRM software,” Dresser says. “Also, we’re not dependent on our IT department to fix stuff anymore, we didn’t have to put in a huge effort up front, and upgrades take place instantaneously without affecting our custom modules.”

Indeed, Dresser attributes part of his own company’s international expansion, growing revenue, and increasing profit margins (its 2004 fiscal year revenues tripled over 2003 and its profit margin more than doubled) to Salesforce. “There is no way we could have managed our growth into the four corners of the world without an integrated CRM,” says Dresser.

The migration of a host of other businesses from Siebel and other CRM providers to Salesforce has given the company the lion’s share of the market for Web-based CRM services.

The company increased its customer base by 40 percent in 2004, from 9,500 to 13,300, according to Forrester Research. Quarterly revenues almost doubled between its first quarter of 2004 and the same quarter a year later, from $35 million to $64 million, with profit margins hovering at about 5 percent. And Wall Street has rewarded the company handsomely, pushing its stock price from $11 per share at the time of its June 2004 initial public offering to about $24 per share in July 2005.

Siebel Systems still sells more CRM software overall but is struggling. Founded in 1993 by another Oracle alumnus, Tom Siebel, the company was initially dismissive of’s chances. Lately, however, the company has been following an “if you can’t beat ‘em, join ‘em” strategy, purchasing a hosted-CRM company called UpShot in October 2003 and rolling out an on-demand version of its own CRM software. But it may be too little, too late: Siebel’s stock has plummeted from more than $100 per share in late 2000 to less than $10 this summer, and the company posted a $50 million loss for the second quarter of 2005.

Now that the market has validated Benioff’s original bet, the company has begun encouraging customers to develop their own complementary programs. It’s already given them a software tool called CustomForce, which ensures that their custom modules will run on the operating system underlying’s entire product line, called SForce. Then there’s MultiForce, a user interface improvement that lets customers toggle between’s sales and support software, their own in-house applications such as e-mail and spreadsheets, and new applications developed by partners.

If that combination sounds familiar, it’s no accident. Clarence So likens Multiforce to Microsoft Windows and CustomForce to Visual Studio (Microsoft’s tool for developing Windows programs). In fact, Benioff has made no secret of his ambition to build into the Microsoft of Web services. “Our big bet now is that this is really going to be as big as Microsoft was in the client-server world, and as IBM was in the mainframe world,” says So.

Salesforce has attracted believers who say that as long as Benioff is in charge, the company has a shot at the big time. “Without question, his personality and his will to make this company grow and validate this space have been absolutely critical,” says Nick Blozan, a senior vice-president at OpSource, a Santa Clara, CA-based company that manages software delivery for software-as-a-service providers. “He’s the right guy at the right time. He’s pointing out that there are fundamental dissatisfactions with the old model, and I think you’ll continue to see all of this accelerate.”

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