Salesforce.com's new gamble

Company aims to expand reach beyond CRM with new development, partnership strategy. One question: How will plan generate cash?

Matt Hines Staff Writer, CNET News.com
Matt Hines
covers business software, with a particular focus on enterprise applications.
Matt Hines
6 min read
Looking to expand beyond its hosted CRM roots, Salesforce.com has embarked on a new strategy: letting customers build their own systems.

The company, seen as a leader in the movement toward so-called software as a service applications, is making a bet on a new development system--called Multiforce--that lets partners and customers custom-tailor the software and build their own services.

Though betting on a custom development strategy may seem at odds for a company whose slogan is "No Software," analysts said the plan--at least what they've heard of it so far--makes sense. Its big goal is straightforward: Give more companies reason to sign up for Salesforce.com's services, and keep existing customers happy so that licensing money keeps rolling in.

"At some point demand will level off and they'll need to have the next thing, and this is it," said David Bradshaw, analyst with U.K.-based Ovum Research. "It's a way to grow their footprint, as there will come a point where they slow down in adding new customers and as there's increased competition. It's pretty good forward thinking."

Salesforce.com's chief executive, Marc Benioff, introduced Multiforce last month. This fall at the company's annual user meeting, Salesforce is expected to disclose other details of the plan, including pricing and the names of hosted-software partners, executives said.

Right now, Salesforce continues to grow revenue and sign new customers. In mid-May, Salesforce reported first quarter 2006 net income of $4.4 million, or 4 cents per share, compared with income of $437,000, or zero cents per share, for the same period in its fiscal 2005. The company increased its overall revenue to $64.2 million, compared with $34.8 million for the same period last year.

Salesforce said in its earnings report that it now counts roughly 267,000 subscribers, of which it added 40,000 during the first quarter.

Like other analysts, Bradshaw believes Benioff's gambit could prove a savvy move if companies can quickly build additional tools that add value to Salesforce's products.

Multiforce is also aimed at giving independent software vendors an opportunity to create products that expand the capabilities of Salesforce's existing tools. Using the development platform, customers and ISVs are promised the ability to create new systems

in the form of so-called Web services that blend seamlessly with Salesforce.com's user interface and draw on data housed in the company's CRM tools.

For instance, Salesforce has already created a tool that taps into the application programming interface for Google's street mapping software. The hosted application is designed to let a Salesforce user generate maps to a customer's offices using data from online CRM systems and Google's code.

One partner, DreamFactory Software, which makes customization and integration technology for hosted software, is using Multiforce to extend the more basic CRM features built into Salesforce's offerings.

"The components they offer made it easy for us to assemble an application that does something entirely different than what Salesforce does, so, you can understand why there's a great amount of benefit in this for us, and for them," said Eric Rubin, president of DreamFactory. He said his company's new product, dubbed DreamTeam, was built in only six weeks using Multiforce.

In addition, Rubin said the exposure to potential clients throughout Salesforce's customer base made the decision to embrace Multiforce an easy one.

Where's the payoff?
That may help attract partners. But one thing about the new Multiforce plan remains unclear, said analysts: How will Salesforce drive revenue using the customer and ISV-built applications?

"Salesforce still needs to iron out the business model, and it must give developers enough of a revenue opportunity while getting something for themselves," said Sheryl Kingstone, analyst with Boston-based Yankee Group.

"Companies might want to build complimentary applications using Salesforce, but they won't always need Salesforce CRM for all users, and that could be a potential hiccup. (Salesforce) has to figure out a way to price effectively around that challenge."

Benioff said the initial benefit to his company will include the sale of more licenses to existing customers, and further proof to offer potential buyers that the company is more than just an application services provider.

"We can make customers succeed if we provide the tools for rapid development and for deployment within a trusted, on-demand environment," Benioff said in an e-mail interview. "Multiforce will demonstrate how software as a service is not just a more successful way to deploy applications but also how the model fundamentally changes the game in building applications."

Another goal is to encourage CRM naysayers haunted by stories of failed installations to reconsider, Benioff told CNET News.com. The thinking is that if companies are offered more control over just how their applications are designed, they'll ultimately rely even more on those more valuable custom-built applications, he said.

At the heart of Benioff's new strategy is the idea that companies with deep industry knowledge will have more success creating

their own specialized programs than Salesforce could ever put together. Unlike rivals such as Siebel Systems, which already offers six different flavors of its own hosted CRM tools for customers in different vertical industries, Salesforce is betting customers, and more importantly ISVs, will clamor to build their own applications.

For several years, Salesforce watchers have wondered whether the company would expand beyond CRM to hosted human resources or financial applications, in essence creating a hosted rival to SAP and Oracle, the two largest makers of enterprise software.

Benioff has been hatching the Multiforce plan for years, said Ovum's Bradshaw. "The first meeting I ever had with Benioff, three years ago--that was exactly what he said," Bradshaw recalled. "He wanted Salesforce to become a platform provider, and his vision was that rather than just offering CRM, the company could support people's business process from a broader sense."

If Salesforce succeeds in defining a clear business model, Kingstone said, Multiforce is likely to inspire a large number of ISVs and customers to build their own hosted tools, an effort that is almost sure to advance Salesforce's goals. She said that unlike currently available add-on tools for Salesforce, which merely link back into the company's products, the development tools give ISVs the opportunity to create an "ecosystem of services" that merge with the company's tools on a deeper and more streamlined level.

In that sense, Kingstone said, Multiforce is similar to efforts such as rival software maker SAP's NetWeaver program, which also aims to give its partners the ability to build Web services middleware that communicates with its own enterprise systems.

With Multiforce "you can picture partners building an application that has embedded experience in the Salesforce user interface, and with partners mimicking that interface, they essentially become an application within Salesforce for the user," Kingstone said. "That's the way that it's similar to NetWeaver and other Web services efforts, and it allows Salesforce's core products to grow without the company building all this for themselves."

Other industry watchers have noted that at worst, Multiforce could serve as a way for Salesforce to keep customers focused on its existing CRM tools while it works to add new applications. Rebecca Wettemann, analyst with Nucleus Research, said Salesforce cannot depend on the application-development tools alone to generate continued growth, but, she said, the platform will give customers something to focus on while the hosted CRM provider continues to build additional products.

"No one is expecting Salesforce's applications business to stand still. The company is recognizing that as more competitors come into the space and more sophisticated customers are looking at on-demand, they need to do something else to stay on top," Wettemann said. "If you look at Microsoft's partners within its Great Plains group, they've been successful because a lot of those companies intimately know their customers' businesses.

"Whether Salesforce is going to find those sorts of very valued partners remains to be seen," said Wettemann. "But that's what they need, someone, or something, to lead the customer to increased value in Salesforce.com."