SalesForce.

com: The Disruptive Technology of Software as a Service

Aaron Griggs
Stevens Institute of Technology | Systems Engineering | SYS 625 Spring 2007 Edited February 2012 for submission to Stevens Institute of Technology Ph.D. application

INTRODUCTION
SalesForce.com along with others in the Software as a Service (SaaS) marketplace has reshaped the way we do business from the IT backend systems to the out front user interfaces. This paper focuses on how SalesForce.com identified a market primed for innovation. The innovation as Christensen describes in The Innovators Dilemma was not better performance, more features and higher margin customers. Rather, SalesForce.com attacked the Customer Resource Management (CRM) market with a disruptive technology that was lower performing, had less features and pursued lower profit margin customers. The result is other CRM vendors playing catch-up and losing market share.

SOFTWARE AS A SERVICE
SaaS is the shift where software applications are hosted as services over the Internet changing information technology from a capital expense to an operational expense. The ubiquitous nature of Internet browsers and adoption of standards for presentation (HTML), transmission (HTTP) and structure (XML) have created the SaaS infrastructure. SaaS is a rather simple concept to grasp. Instead of buying a software application which installs on a corporate system, the application is delivered over the Internet and consumed in a web browser. Therefore, the consumers do not install and manage a product on systems they own. To someone that is a consumer of applications and does not configure or maintain the systems, the difference between SaaS and traditional software may not seem that big. After all, there have been many applications consumable in browsers. But, someone within the organization must still provision and manage these application systems. IT management is quite costly along many facets including customer support, logistics, customization, technology refresh just to name a few. Today with the convergence of standards, broadband and software technologies; SaaS is causing most software application vendors to rethink their product lines. Yet, there are a few innovators that recognized this convergence and acted years ago. Christensen recognized just these types of providers: In the near future, internet appliances may become disruptive technologies to suppliers of personal computer hardware and software.1 One such provider is SalesForce.com.
1

Christensen, Clayton. The innovator's dilemma: the revolutionary national bestseller that changed the way we do business, HarperBusiness, New York, 2003, xix.

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SalesForce.com: The Disruptive Technology of Software as a Service

SALESFORCE.COM
SalesForce.com was founded in 1999 by CEO Marc Benioff. Benioffs vision was CRM delivered on-demand.2 Benioff spent thirteen years at Oracle where he ran smaller projects some focusing on the Internet. He was considered on the fringe.3 This seems to have made him perfectly suited to bridge the complex CRM application world with delivery over the Internet. In 1999, the CRM market was dominated by SAP and PeopleSoft. Siebel had established itself as a solid CRM provider founded in 1993 by a fellow Oracle executive Mark Siebel. In fact, Siebel was the fastest growing technology company over the last 5 years with a market capitalization of $19 billion. Benioff had actually invested in Siebel when it first launched and was no doubt leveraging that equity to establish SalesForce.com.4 But, none of the CRM vendors had successfully marketed a disruptive technology approach. SalesForce.com resolutely focused on CRM delivered through the innovation of SaaS.

THE INNOVATION
Christensen outlines three areas of his failure framework where sustaining technologies prevent disruptive technologies from taking hold within an organization. SalesForce.com followed the disruptive path over the sustaining path. The first failure framework attribute is disruptive technology is about: cheaper, simpler, smaller, and, frequently, more convenient.5 SalesForce.com did not set out to make a better CRM system. They set out to make it easier for smaller organizations to leverage CRM functionality. The price particularly sets SalesForce.com apart. The charge to the customer is a per month cost of $65 to $125. The cost of a traditional CRM solution can be twice as much.6 Lets compare SalesForce.com to Siebel when SalesForce.com first started signing up customers in 2000. SalesForce charged $50 per month for the first five users and $50 per month for each additional user. For 25 sales reps that is $50 user/month x 21 users x 12 months/year = $12,600/year. Siebel or a typical CRM vendor would cost about $63,000 for just the installation.7 Add in maintenance and support costs which are typically 17-22% the original licensing fee per year.8 The maintenance cost alone at 20% of $63,000 is $12,600/year. Is it coincidence that the maintenance cost for a typical CRM solution was close if not exactly the same as SalesForce.com cost? Not likely.

2 3

http://www.salesforce.com/company/leadership/executive-team/index.jsp#benioff. Who says ceos can't find inner peace: salesforce.com's benioff brings spirituality to the job of selling software as a service, Business Week Online, September 2003, http://www.businessweek.com/magazine/content/03_35/b3847080_mz063.htm. 4 Feuerstein, Adam. Mammal vs. dinosaur? salesforce snaps at siebel, San Francisco Business Times, February 11, 2000, http://sanfrancisco.bizjournals.com/sanfrancisco/stories/2000/02/14/newscolumn1.html. 5 Christensen, xviii. 6 Roush, Wade. The customer is sometimes wrong, Technology Review, October 2005, http://www.technologyreview.com/Biztech/14818/page2/. 7 Feuerstein. 8 Whiting, Rick. Lower-Cost options free it from software maintenance fees, InformationWeek, August 28, 2006.

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SalesForce.com: The Disruptive Technology of Software as a Service

The second failure framework attribute is the customers performance needs increase at a slower rate than the technology performance.9 SalesForce.com did not initially meet many customers performance needs especially customers in larger organizations. Their first group of consumers were smaller organizations with lower performance requirements which was a market segment neglected by traditional CRM vendors. Yet over the last few years, SalesForce.com has captured the market of more traditional CRM providers as well. First, without question SalesForce.com has grown in users. The paying subscribers are 646,000 at 29,800 companies with revenue of $144 million. Probably the most telling number is the largest subscribers for a single customer are 25,000. Therefore, SalesForce.com is meeting the needs of larger organizations.10 Many traditional software vendors including Siebel and SAP entered into the SaaS CRM market.11 Therefore, it is evident the market is demanding SaaS and no longer just a disruptive technology. Searching in Google for CRM SaaS many new players are listed as well. With respect to performance, SalesForce.com had high profile outages in late 2005 early 2006.12 The absence of Service Level Agreements (SLAs), denial by SalesForce.com that an outage actually occurred and poor configuration management highlighted the performance did not necessarily map to the customers needs. A core area of SaaS is solid operations especially since most if not all the customers data is hosted by the service provider. If the service providers site goes down or experiences degradation in performance, the customer has no alternative path of execution. SalesForce.com recovered as there seems to be little abandonment of their service. The third failure framework attribute is the investments made by organizations are geared towards rationale areas such as improving the functionality for the firms leading customers.13 SalesForce.com faced this dilemma early when the venture capitalist stressed listening to the customers. Benioff refused to accept the customers supposed need to host their CRM data themselves. Benioff felt the decision was not rationale thus keeping the organization on the right track for a disruptive technology provider.14 Rationale investments will not go after the unknown. As Christensen highlights in agnostic marketing, forecasting the emerging market is near impossible.15 In SaaS, an emerging market is evolving with respect to application integration. SalesForce.com is building a market place for third-party applications via their AppExchange. Also, the developers of the applications are supported by the Apex developer network. SalesForce.com could emerge as the infrastructure provider for many useful applications for CRM and possibly other industries.
9

Christensen, xix-xx. Salesforce.com's Fourth Quarter Fiscal 2007 Financial Results, February 21, 2007, http://www.salesforce.com/assets/pdf/investors/Q407_Press_Release_2-21-07final_w._Financial_Stmts.pdf. 11 Beal, Barney. Is ibm the real winner in the crm saas wars?, SearchCRM.com, March 1, 2006, http://searchcrm.techtarget.com/originalContent/0,289142,sid11_gci1169996,00.html. 12 Boucher Ferguson, Renee. Customers report major salesforce.com outage, eWeek, January 30, 2006, http://www.eweek.com/article2/0,1895,1916928,00.asp. 13 Christensen, xx. 14 Roush, http://www.technologyreview.com/Biztech/14818/page2/. 15 Christensen, 182.
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SalesForce.com: The Disruptive Technology of Software as a Service

SalesForce.com had a huge advantage over the sustaining organizations, the company was a startup. The organization could be molded to the structure required to succeed. Led by Benioff, SalesForce.com did just that.

THE ORGANIZATIONAL STRUCTURE

Not much information is available on the internal structure of SalesForce.com or historical accounts of how the company grew. In lieu of detailed accounts, the FY 2006 annual report was analyzed. To understand the disruptive technology (SaaS) influence, Siebel Systems last annual report was analyzed (FY 2004 due to merger with Oracle in FY 2005) to compare with SalesForce.com. The tables below document the comparison in revenue and expenses based on percentages. The Appendix contains the actual data. From Table 1, the operations (monthly subscriptions) for SalesForce.com are the dominant driver of revenue. Siebels operations (software licenses) are much smaller than the professional services (consulting) that integrate the CRM solution into the customers environment. A common complaint in complex software integrations is the army of high priced consultants required to make the system work.
Table 1 Revenue Comparison

Revenue SalesForce.com Siebel Systems

Professional Operations Services 91.79% 8.21% 38.27% 61.73%

As shown in Table 2, SalesForce.coms costs are almost equally split between operations and professional services.
Table 2 Cost of Revenue Comparison

Cost of Revenue SalesForce.com Siebel Systems

Professional Operations Services 52.78% 47.22% 3.45% 96.55%

Regardless of how easy a software product is to use, there is still a mapping of the customers business process to the CRM operations. It appears SalesForce.com may keep the customers cost of professional services down to avoid the stigma of high priced consultants. Looking at Table 4 in the Appendix, SalesForce.com has lost money on professional services every year except 2004 and 2003. No surprise that Siebels cost of revenue is completely dominated by professional services. Operating expenses are show in Table 3. Although SalesForce.com is considered state of the art for web applications, the cost of research and development in comparison with Siebel is quite low.

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SalesForce.com: The Disruptive Technology of Software as a Service

Table 3 Operating Expenses Comparison

Operating Expenses SalesForce.com Siebel Systems

Research and Marketing General and Development and Sales Administrative 9.92% 67.57% 22.51% 39.50% 47.09% 13.41%

SalesForce.com explains this difference by the fact there is less complexity and legacy software to support. Siebel must support software that runs on many different platforms and operating systems which is more complex and requires much more testing.16 By hosting on a single platform and operating system while also keeping all the instances in a single location (i.e., central hosting facility), the research and development required by SalesForce.com is greatly reduced. Since the SaaS solution brings CRM functionality to individual users, it makes sense that marketing and sales cost would be a higher percentage than a traditional software vendor; mainly because there are more possible customers. General and administrative cost is a bit higher at SalesForce.com but the data is too sparse to analyze the difference. Revenue and expenses illustrate the different structure SalesForce.com takes over traditional software vendors. SalesForce.com focuses more on operations and support although maintains a large professional services arm. Marketing and sales dominates the operating expenses.

CONCLUSION
SalesForce.com leveraged the disruptive technology of SaaS to capture market share in CRM. While the CRM competitors focused on the sustaining path, SalesForce.com successfully navigated the disruptive path. Entering 2007, more and more providers are building applications that are delivered over the web. SalesForce.com has a first mover advantage in the emerging market of third-party application integration. With the lessons learned from early adoption of the SaaS technology, SalesForce.com should continue to lead in the CRM space and possibly other on-demand areas.

16

SalesForce.com 2006 Annual Report, 3.

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SalesForce.com: The Disruptive Technology of Software as a Service

APPENDIX
The tables below document the revenues and expenses for SalesForce.com and Siebel Systems.
Table 4 SalesForce.com Revenue and Cost17

Revenue (in 1000s) Operations* Professional services and other Total Revenue Comparison Operations Professional services and other Total Cost of Revenue (in 1000s) Operations Professional services and other Total Cost of Revenue Comparisons Operations Professional services and other Total *Operations are subscription support.

2006 280639 29218 309857 90.57% 9.43% 100.00% 34457 34669 69126 49.85% 50.15% 100.00%

2005 157977 18398 176375 89.57% 10.43% 100.00% 12727 20727 33454 38.04% 61.96% 100.00%

2004 85796 10227 96023 89.35% 10.65% 100.00% 7782 9491 17273 45.05% 54.95% 100.00%

2003 47656 3335 50991 93.46% 6.54% 100.00% 7199 3164 10363 69.47% 30.53% 100.00%

2002 21513 896 22409 96.00% 4.00% 100.00% 3718 2329 6047 61.49% 38.51% 100.00%

17

SalesForce.com 2006 Annual Report, 33.

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SalesForce.com: The Disruptive Technology of Software as a Service

Table 5 Siebel Systems Revenue and Cost18

Revenue (in 1000s) Operations* Professional services and other Total Revenue Comparison Operations Professional services and other Total Cost of Revenue (in 1000s) Operations Professional services and other Total Cost of Revenue Comparison Operations Professional services and other Total

2004 487127 852666 1339793 36.36% 63.64% 100.00% 13316 443585 456901 2.91% 97.09% 100.00%

2003 482274 871954 1354228 35.61% 64.39% 100.00% 18357 490006 508363 3.61% 96.39% 100.00%

2002 700344 934963 1635307 42.83% 57.17% 100.00% 21612 542938 564550 3.83% 96.17% 100.00%

*Operations are software license support, on-demand cost and revenue not called out so assume in operations cost.
Table 6 SalesForce.com Operating Expenses19

Operating Expenses (in 1000s) Research and development Marketing and sales General and administrative Total Operating Expenses Comparisons Research and development Marketing and sales General and administrative Total

2006 23330 149598 47986 220914

2005 9822 96311 30268 136401

2004 6962 54600 16915 78477

2003 4648 33522 12958 51128

2002 5308 24605 8317 38230

10.56% 7.20% 8.87% 9.09% 13.88% 67.72% 70.61% 69.57% 65.56% 64.36% 21.72% 22.19% 21.55% 25.34% 21.76% 100.00% 100.00% 100.00% 100.00% 100.00%

18

Siebel System 2004 Annual Report, 80, http://www.sec.gov/Archives/edgar/data/1006835/000100683505000012/form10k.pdf. 19 SalesForce.com 2006 Annual Report, 33.

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SalesForce.com: The Disruptive Technology of Software as a Service

Table 7 Siebel Systems Operating Expenses20

Operating Expenses (in 1000s) Research and development Marketing and sales General and administrative Total Operating Expenses Comparison Research and development Marketing and sales General and administrative Total

2004 368387 478816 119783 966986 38.10% 49.52% 12.39% 100.00%

2003 310686 358318 106594 775598 40.06% 46.20% 13.74% 100.00%

2002 299051 337690 104541 741282 40.34% 45.55% 14.10% 100.00%

20

Siebel System 2004 Annual Report, 80.

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