Siebel: No time for apologies

Earlier this year, fortune's winds began to shift for Tom Siebel.

The founder and chief executive of the enormously successful Siebel Systems saw his software company's revenue drop in the first quarter. With German rival SAP closing in on the No. 2 position in the market, Microsoft also announced plans to introduce competing software by year's end.

Studies from market researchers suggested a high rate of customer dissatisfaction with customer relationship management software, a segment in which Gartner and Merrill Lynch rate Siebel as the largest player.

If any of this should be cause for worry, the CEO isn't letting on. Since leaving Oracle to found his own company in 1993, Siebel has pushed Siebel Systems to the top of the rapidly growing CRM market. With more than $2 billion in sales last year, Siebel Systems commands 45 percent of the CRM software market.

Siebel recently talked with CNET News.com at his San Mateo, Calif., headquarters about the future of the business applications market, the role of information technology in the government's homeland security plans, and an increasingly nasty spat with rival SAP.

Q: Siebel introduced a homeland security product recently that allows government agencies to track suspected terrorists as a company would track its customers. Are any government entities biting?
A: It's used by the Transportation Security Agency. That's the only government agency I'm aware of right now that's using it. This is the agency that was formed after Sept. 11 to deal with airport security.

How is the agency using your products?
They're using it associated with the screening and training with all personnel that they're hiring in airport security.

What does your software help them do?
It helps them keep track of potential employees, who they are, what their backgrounds are, what sort of training programs they need, ongoing training.

In terms of infringing on privacy, can computer-based monitoring and profiling be taken too far?
If we look at what we knew going into Sept. 11 about the backgrounds of these people--and for what it's worth, none of these people were citizens--our government knew that money had been transferred from al-Qaida operatives. They knew there were a number of people with visa violations. They knew these people had left abandoned aircraft running on runways in Miami. All the things we knew about these people--we had everything we needed to know to be able to stop the crisis of Sept. 11.

I have to worry about everybody who is either in my market or thinking about entering my market. I stay awake at night worrying about it.

But basically because of the way that we're structured, it's very difficult for the FBI to communicate with themselves, even because they keep everything in manila files. We knew the day Mohammed Atta met with Iraqi agents in Prague. We knew the day he entered the country. We knew the day his roommate (Marwan) Al-Shehhi got a $100,000 wire transfer from an al-Qaida operative. We knew all these facts. If they had been able to associate these facts, people never would have blown up on Sept. 11. It's not a question of if we're going to share information across agencies about these things. The only question is how many people are going to die before we do it. The idea that the American people will incur some sort of intrusion or loss of privacy to live is ridiculous. How intrusive is an airport security check?

There are inconveniences, and then there is loss of privacy. There's a difference, right?
Hello. We're doing everything but body cavity searches. We're doing strip searches. This is not inconvenience. These are major public humiliations, embarrassments--and physically invasive.

So how far is too far?
We're suggesting that for people who are criminals and who violate the law that the government should be able to associate the information across agencies. I don't think anyone is going to repeal the Bill of Rights. Whatever policies the government deems proper for the sharing or partitioning of information, we can help enforce those policies and solve them. The public policy issue is different from the technology problem. We're just solving the technology problem.

CRM software is obviously a very competitive market. Your recent tussle with SAP over some Siebel ads that ran in Europe is evidence of that. Are you worried about SAP gaining on you?
I'm worried about everyone gaining on us every minute of every day. Are you kidding? This is what I do for a living. This is what I'm paid to do. I have to worry about everybody who is either in my market or thinking about entering my market. I stay awake at night worrying about it.

What are you doing to maintain a lead in the market, besides mudslinging?
I didn't do any mudslinging. Have you seen this ad? Here it is. Look at this. "Bayer runs Siebel. Deutsche Telekom runs Siebel. Nestle runs Siebel. IBM runs Siebel." These are all Siebel customers. At the bottom it says, "Siebel CRM is the #1 CRM company installed in the SAP installed base." This is a statement of fact.

Didn't a German court order Siebel to stop running these ads?
The German court ruled that this ad--without any discussion of whether one of these statements was true and without allowing us to present our case in court--represents unfair competition in Germany. They have ruled that every impression this runs will be a 250,000 euro fine and six months in jail for the manager of Siebel in Germany. Now I ask you, what is going on here? Do you think maybe this German market is not as open as some other markets around the world? Do you think maybe the secretary of commerce might be interested in this kind of stuff? I think that maybe that's what's going on here. I think we might have a market that might be a little closed.

Our customers do not perceive us as an arrogant company.

So, what am I doing about competitors? I'm building the best products in the world and making sure my customers are the most satisfied in the world. This is what I'm doing.

I must get e-mails every day from Salesforce.com (a CRM rival) that says they've stolen customers from Siebel and can save companies bundles of money by offering CRM in a hosted format that is far cheaper than owning and maintaining the software. What do you make of them?
I think they're not a factor in the marketplace. They don't have meaningful market share. The company's CEO left; its CFO left; and they can't get financing.

Siebel at one point spun off a company to sell hosted CRM applications and then folded it. Why don't you think this model works?
We had a separate company called Sales.com, and we folded it back into the company. I do not believe it's an economically viable model business model as a stand-alone company. There have been a lot of companies based upon the premise that companies will want to outsource their application software to a third party. This is what this whole ASP market was about...You look at the progress of those companies based upon that premise; they're all failing.

Why doesn't it work as a business model?
Because people don't seem to want to buy products that way. These companies are either all bankrupt or on the verge of bankruptcy. So the market for some reason exploded. By the way, we were one of the early companies offering our products that way, and we still do offer our product through that form factor so people can get our ASP model if they want. But for some reason, this is not how companies want it. It makes an intuitively comfortable argument--but for some reason, it's just not how people want to buy software.

All the major CRM companies have introduced Web versions of their application. In terms of technology, what exciting developments lie ahead? Where does CRM go from here?
I don't think we're all there now (in terms of Web-based CRM). I think everyone is giving it lip service. But I think if you look for very high-performance, thin-client, zero-footprint CRM around product families that are functionally complete, that can operate with very high levels of currency and very high transaction volumes, I'm not sure everybody's there. I would agree that Siebel is there.

So what's next in terms of technology?
I think the big trends in CRM are going to be related to having very robust marketing analytics across all products. I think a very important area is going to be to lowering the cost of application integration for the end user.

How will you accomplish that?
We've done a great deal of work with something called the Universal Application Network. It's a combined initiative of IBM Global Services, Accenture, PricewaterhouseCoopers, Cap Gemini Ernst & Young, Vitria, Tibco and Seebeyond.

And what will the initiative do?
It lowers the cost of application integration by probably a factor of 100. We've built a very elegant architecture that reduces the effort involved in application integration by an order of magnitude. Essentially, we've reduced the number application connections, where N is the number of applications we want to connect. So at General Motors, for example, we need to connect 5,000 applications.

I do not believe you can find a Siebel customer that has switched to another CRM vendor.

Using traditional connectivity solutions, this what we call in the business an N-squared problem--which means 25 million application connections that we had to establish and maintain. This is what we call a nontrivial problem. There aren't enough programs in the world to solve this. And so we reduced it from an N-squared problem to an order of N. So that's the economics of what we've done. And we're going to have virtually every leading integration provider coalesce on the same architecture.

Do you think Siebel is perceived as an arrogant company, and is that a problem?
Our customers do not perceive us as an arrogant company. I believe we're a company committed to whatever it takes to make sure each and every one of our customers succeed. I believe we're a company focused on being a leader in its field. I believe we're a company that's focused on carrying ourselves in the market with a high degree of professionalism. So I think those are the primary characteristics of our company.

After a disappointing first quarter for enterprise software, some analysts are questioning whether the business software market will bounce back later this year as anticipated. You said in April when discussing your first-quarter results that you couldn't believe sales wouldn't pick up in the second half of the year. Have you changed your mind?
I believe it will pick up this year. I think it's highly likely we'll see an increase in the demand for information technology in the course of 2002.

What signs do you see that would indicate this?
There are a lot of signs that are fundamentally healthy signs for the economy. We saw growth in GDP in the first quarter. We're seeing dramatic reduction in inventory levels. We've seen increased consumer activity. And I think that as it relates to capital expenditures, those are going to lag consumer spending a little bit. The question is, how far? Are they going to lag it by years? Unlikely. Will they lag by months or quarters? I think they will.

It's highly unlikely that we won't see an increase in technology spending this year. Will it be a dramatic increase? I don't think so. I think it will be 2003 before we see the thing really moving again in a big way.

What do you consider "moving in a big way?"
The average private investment in software has increased by 19 percent a year for the last 30 years, so I would say something 20 percent or greater. This would define returning to normalcy.

Another problem for the software industry is a loss of confidence that products work as advertised. What does the software industry need to do to ensure the quality and usefulness of its products?
I think it's absolutely imperative that for software application companies to be successful, they have to deliver exceptionally high-quality, high-performance products that meet or exceed the company's own expectations and, more importantly, meet or exceed the customer's expectations. I think we have many, many examples in the software industry of enterprise application software companies disappointing the marketplace.

What is the trouble then?
Companies are releasing products that don't work well. And there are companies that have very, very well-established track records now over many, many years of doing that.

Yet lately, CRM software is getting a bad rap. Recent studies show that a large number of CRM projects fail to deliver on their goals, and dissatisfaction with the technology runs high within executive ranks. Is this another case of reality not living up to expectations?
This is not lately. These problems go back to 1990. CRM projects have historically been enormously unsuccessful, as have many enterprise resource management projects and human resources projects and manufacturing projects. With that being said, you'll find that there are statistics cited, frequently cited, about CRM projects that fail. However, you will not find this in the Siebel installed base. In the Siebel installed base, we have achieved the highest levels of customer satisfaction in the information technology industry.

How do you measure customer satisfaction?
We have an outside audit firm by the name of Satmetrix, and they audit our customer satisfaction levels four times a year. What we're always looking for are areas of improvement, and there are always areas for improvement. And they measure the quality of our products, our services, our contract vehicles, our pricing, our service responsiveness.

What is your relationship with Satmetrix? Are they completely independent of Siebel?
We took an equity interest in that company a couple of years ago. We have no board representation, no regular communication. We do have a small investment in it, that's true. It's a great company. But we've invested in lots of companies.

So nearly half of all CRM projects fail to meet expectations. Siebel has more CRM customers than any other software company, and you're saying none of your customers are in that camp?
I believe you cannot find a Siebel project that does not perceive itself as being successful. I do not believe you can find a Siebel customer that has switched to another CRM vendor. There are many examples of the reverse of that, where people have switched to Siebel.

We reported in April that Siebel had instituted a group to help customers that may not be getting the bang for their buck. What are you doing with these customers?
What we have is a red account list where there are red flags in an account, things that we're concerned about. And by the way, with projects of this size--and these are incredibly large information technology projects--there are always problems 100 percent of the time. But the difference between us and the other software vendors is not how frequently we encounter problems; it's what we do when we encounter one.

What kind of problems do you see most often?
There are software anomalies; there are documentation anomalies; there are project management problems; there are change management problems; there are operating system problems; there are networking problems and training problems. In projects of this size, believe me, there are always problems. And this is not specific to CRM. This is any large information technology project. This is what the world's really like. So we have a very rich support infrastructure to support our customers and get them through all these things.

The response I hear to the question of why software projects fail is that the customer did not plan well or didn't delegate well or made poor decisions. Is that really fair? Shouldn't the company selling a product that costs millions of dollars shoulder some responsibility for its ultimate usefulness?
Absolutely. This is the point I'm making. We don't see it as our obligation to simply deliver bug-free software. We do whatever it takes to make sure the customer succeeds. So absolutely, I think it should be the software company's responsibility. And this is the responsibility that we take upon ourselves.