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Siebel jumps into software rental market

As an analyst survey finds growing demand for subscription software models, Siebel dives in and starts swimming with the current.

NEW YORK--Renting somebody else's computing systems to run corporate software is increasingly popular, and Siebel Systems is adjusting to the new reality.

Siebel sells customer relationship management (CRM) software, which lets companies track details such as customer purchasing habits, salesperson performance or support-line wait times. Although Siebel leads the CRM market with its packaged software, it faces competition from companies such as Salesforce.com that host the software and just sell access to it.

News.context

What's new:
Siebel Systems, the market leader in prepackaged CRM software, acknowledges the need to offer customers an alternative model: subscription sales.

Bottom line:
A new IDC study shows that growth in subscription sales will outpace that of packaged software. Siebel's move may let it surf a new wave.

More stories on Siebel Systems

The Salesforce model has advantages for companies that don't relish the complication, time commitment and expense of installing their own CRM software. And though Siebel remains committed to the idea of selling software packages, it's embracing the idea of hosting the software for customers to rent, said David Schmaier, a Siebel executive vice president speaking at the CeBit America show here.

"We see a growing demand for hosted CRM," such as the company's own Siebel OnDemand service, Schmaier said in the show's keynote address. "It's relatively small," with sales of $500 million in the overall $23 billion CRM market in 2003, "but it's growing fast," he said.

One way Siebel hopes to stay ahead of the purely hosted CRM companies is by taking a hybrid approach that lets the same customer run some CRM systems on its own and tap into Siebel's hosted service for other areas, Schmaier said. "You can mix and match," he said, and upgrade from a hosted service to an in-house system when more features are needed.

One of the themes at this year's CeBit is CRM. Other companies exhibiting at the show include PeopleSoft, Microsoft and a small CRM hosting company called Epicor.

Siebel founder and former Chief Executive Tom Siebel had been scheduled to speak at CeBit America, but canceled at the last minute. In May, Mike Lawrie from IBM replaced Siebel as chief executive.

The new reality
Siebel may have picked a great time to make its move. According to a forecast released Tuesday by market researcher IDC, the prevailing method of selling software--offering a perpetual license to a package of software, as Siebel has traditionally done--is in decline. At the same time, selling software subscriptions--the Salesforce model being one example--will grow.

IDC predicted that sales of software sold through subscription licensing will grow at a 16.6 percent annual clip from 2003 through 2008 to reach $43 billion, while the traditional system of perpetual licenses will see a drop each year of 0.3 percent.

The subscription model offers advantages for software companies and their customers, IDC said.

"Subscription models help vendors increase the predictability of their software revenues, making it easier to demonstrate future health," Amy Konary, program manager for IDC's pricing, licensing and delivery service, said in a statement. "Customers enjoy the low up-front cost of the subscription model and the ability to build an ongoing relationship with the software provider that they pay on an ongoing basis."

A survey found that 43 percent of vendors expect a majority of their sales to be on a subscription basis in six years.

An earlier IDC survey of 100 vendors found that 43 of them expect a majority of their sales to be on a subscription basis in six years. Customers have tended to overbuy software under perpetual licensing, but are unwilling to do so in the uncertain economic climate. They are increasingly looking at software as a service.

Smaller customers especially tend to gravitate toward the hosted service, Schmaier said. Among Siebel OnDemand customers are Merced Systems, eTelecare, SupportSoft and the World's Finest Resorts.

These smaller companies generally need basic CRM functions, Schmaier said. Hosted CRM is gradually getting more sophisticated, though, with increasingly elaborate "analytics"--the ability to extract useful trends from customer information.

Indeed, analytics and its close cousin, business intelligence, will be one of the main reasons for CRM growth, Schmaier said.

Companies will use increasingly sophisticated analytical tools that aren't just able to examine trends, but that also will forecast the future--such as predicting, well before a quarter closes, whether a company will meet its sales target, Schmaier said. A later phase will take those predictions and adjust company priorities accordingly, thereby triggering a salesperson to push a particular product.

These higher-level features are among the enticements Siebel hopes to use to keep customers buying its software for in-house use.

Another feature is increasing specialization for specific industries, including automotive, finance, retail, life sciences, and communications and media, Schmaier said. And Siebel is adding other modules to increase value, he said. The first is "loyalty management systems" that try to reward return customers. Another is messaging systems to send advertising messages to customers who bring mobile computing devices into wireless networks such as those at Starbucks.

Siebel is sensitive to pricing pressure, especially with the recessionary economy of recent years and subsequent diminished technology spending. But packaged CRM is still worth it for many customers, Schmaier said, citing another IDC report that found that new CRM systems paid for themselves within a year for half of companies that installed them.