Analyst group Ovum says that vendors cannot keep their growth going
through service revenues, because this is tied to licence
sales.
The general perception is that customer relationship management
(CRM) has been immune to downturns in corporate IT spending. But
the CRM software market will contract this year, and will only
rebound next year provided the general economic climate
improves.
Sales wobbles
CRM software vendors have not had a good
start to the year. There was strong growth for almost every vendor
up to the fourth quarter of 2000, then a weakening in the first and
second quarters of 2001.
However, the fall in revenues looks as if it could be reversed.
Software sales are typically stronger towards the end of the year,
and vendors, while admitting to tough market conditions, are
boasting of increases on the equivalent quarter of the previous
year.
Software licences
Revenue from software licence sales
alone paint a much clearer picture. Software revenues rose
quarter-on-quarter for all CRM software vendors up to a peak in the
fourth quarter of 2000, and then fell in the first two quarters of
2001. Revenues rose whether vendors were involved in large
acquisitions of other companies or not. (In many cases, software
revenues have risen quarter-on-quarter during several years.)
An exception to this trend is Chordiant, where licence revenues
continue to rise. Another exception is SAP, which claims to have
had increasing CRM product licence revenues for the first and
second quarter of 2001, but has not given any comparable figures
for 2000.
Both these
 | | "Service revenues cannot make up
for the growing shortfall in licence sales for the CRM
vendors" | | | | | |
| | Source: Ovum | | |
|
|
vendors have strong customer bases in Europe, while the majority of
other vendors covered by our research make most of their sales in
the US - this geographical difference offers a possible
explanation.
The overall picture, however, is starkly clear: most CRM vendors
have licence revenues for the second quarter of 2001 that are
between 40% and 80% of their fourth-quarter highs in 2000. Even the
mighty Siebel is at only 80%, and falling.
Service revenues
The difference between total revenues
and licence revenues is down to two main elements:
- Software maintenance
- Consultancy and systems integration
These sources are both driven by licence sales, although they are
time-lagged with respect to the licence sales. They can continue to
rise for a while after a peak in licence sales, but will inevitably
fall some time later.
Some vendors have other sources of revenues. They may develop
customer software from scratch, for example. For most dedicated
software vendors, the other sources of revenues are tiny compared
with licence fees, maintenance, consultancy and systems
integration.
Service revenues cannot, therefore, make up for the growing
shortfall in licence sales for the CRM vendors.
Software maintenance
The user organisation pays the
vendor a subscription fee for software "maintenance", which
includes telephone support, bug fixes and other software updates.
This service does not cater for version upgrades, which are
normally treated as new licence sales, usually at a discounted
price.
Maintenance fees provide a long-term revenue stream for vendors.
They are typically worth 10% to 20% of the original licence fee for
every year the user organisation continues to subscribe. (Users can
stop subscribing and continue to use the software, but this is not
usually a good idea for business-critical software.)
In a mature software market, where products change slowly, a
product might have a five-year life span before it is upgraded. A
vendor can potentially get up to 100% of the original licence sale
in maintenance fees, spread over five years. However, the CRM
market is still young, and vendors announce new versions quickly.
Total maintenance income will be nearer to 20% to 40% of the
original licence fee, spread over one to two years.
Consultancy and systems integration
Consultancy and
systems integration are the services that software vendors provide
to their customers during the implementation of their software.
Implementation and customisation usually account for many times the
cost of the software. This is called the "multiplier effect".
However, software vendors account for only a small proportion of
the market, while systems integrators such as Accenture, KPMG and
IBM Global Services take the lion's share.
Software vendors generally provide specialist technical knowledge
on implementation projects, using their intimate knowledge of their
own products. They take great pains not to take revenues away from
systems integrators, which they view as important partners.
Systems integration revenues come from staggered payments after the
original software sale, and the payment due date of the software
vendor's cut varies from project to project, depending on the point
at which their specialist knowledge is required. CRM projects
typically take a minimum of three months, but a year or more is not
unusual.
Sometimes vendors gain systems integration revenues from historic
sales. For example, customers may want to make changes after the
implementation is complete. However, this is ultimately tied to a
sale of their product.
What's behind the downturn in revenue?
The obvious
cause of the downturn is the reluctance of corporations to spend as
much as they did on CRM in 2000. Everyone who sells into the
corporate market has experienced a rapid slowdown in spending.
Training, advertising, new software projects - you name it. Any
spending that is discretionary has seen a very sharp cutback as we
entered 2001.
Corporate budgets were cut for the year, and it is no accident that
this slowdown started on 1 January, although its seeds were sown in
the second half of 2000. At best, the slowdown will begin to end on
1 January 2002, when corporations that have weathered 2001
reasonably well will begin to reinstate their spending. At worst,
however, it could continue, particularly if US consumer confidence
declines from its remarkably high level.
Ovum, therefore, sees no prospect of an early turnaround in the
fortunes of the CRM market.
Who else is affected?
Let us shed a tear for the
systems integrators. They were bigger benefactors of the CRM market
than the software vendors, because of the "multiplier effect".
Since their main costs are people, they have little option but to
let people go - and hope to re-recruit when times get better.
Further information:
Ovum:
www.ovum.com