Can CRM vendors weather the storm?

Analyst group Ovum says that vendors cannot keep their growth going through service revenues, because this is tied to licence...

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.

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