Salesforce’s Next Buy: Applications or Platform?

by

CRM Analyst, Software Advice

Salesforce.com came onto the scene in 1999, bringing customer relationship management (CRM) software to the cloud. Since then, they have made bold moves to become a powerful force that has completely disrupted the CRM niche. Acquisition has been a large part of their growth strategy, and based on our analysis, the two areas they have focused on are applications and platform. Why? Because these are what make up the core of Salesforce's strategy.

Many view Salesforce as an applications provider, and for good reason. They have strong market share in sales and service applications. And at this year’s Dreamforce conference, all the hoopla was around social apps for the enterprise. However, Salesforce is often quick to say that they are a platform provider first. As early as 2003, Salesforce’s chief strategy officer at the time, Tien Tzuo, openly stated the company’s desire to become the “business web.” They have been ruthlessly dedicated to this idea ever since, with the ultimate goal of becoming the platform that all companies run their business apps on.

They have built a profitable corporate strategy with their applications. But it’s the platform that will ultimately provide Salesforce the competitive advantage to take on the mammoths of Oracle and SAP. So, what is Salesforce, really – an applications or platform provider? And in what direction will they acquire next? I decided to take a look at Salesforce in both areas and explore the central factors at play in their future acquisition strategy.

Salesforce Acquisitions

YearCompany ($ Value)FunctionAppsPlatform
2006Sendia ($15M)Wireless app development
2006Kieden (*)Search marketing
2007Kenlet (*)Crowd-sourcing tool
2007Koral ($5.3M)Content management
2008Instranet ($31.5M)Knowledge management
2009GroupSwim ($6M)Enterprise collaboration
2009Informavores ($6M)Business process management
2010Jigsaw Data Corp ($142M)Crowd-sourced data management
2010Sitemasher (*)Website building platform
2010Activa Live Chat (*)Live chat support
2010Heroku ($250M)Ruby-based PaaS
2010Etacts ($6M)Email contact management
2011Dimdim ($31M)Web conferencing
2011Manymoon ($25M)Social productivity tool
2011Radian6 ($326M)Social media management
2011Assistly ($50M)Social customer service

 

* Denotes undisclosed amount

 

Telling a Story With Applications

One of the many things that Salesforce excels at is “smarketing,” or smart marketing. They realize that consumers don’t identify with a piece of software. Rather, consumers identify with the story, or narrative, around it. So, while the platform is at the heart of Salesforce’s strategy, applications and the social enterprise provide a much more compelling narrative.

Paul Greenberg, President of the 56 Group, LLC, explains: “If you watch Marc [Benioff]’s speeches, they’re pretty much teamed around, ‘Here are the business outcomes you can expect from us.’ When they talk to a CIO or CTO on the technical side, they’re going to talk about Force.com, but their public messaging will never be about that. That’s not the way smart people market.”

The story that Salesforce’s CEO Benioff has weaved is not only compelling – but also profitable. The Sales Cloud and Service Cloud are Salesforce’s biggest cash cows. Then, there’s the more than 800 apps available on the Salesforce AppExchange – of which Salesforce takes 20 to 40 percent of each transaction. Clearly, apps represent a significant portion of Salesforce’s revenue. So you can bet that even with their focus on the platform, they will still continue to push apps.

Because of this, I believe we can expect that Salesforce will continue to make acquisitions that expand their application set. I see several possibilities:

  • They will acquire to better serve the SMB. Salesforce started out in the small and mid-sized business (SMB) market. But they soon outgrew the mom-and-pop model and started serving larger enterprise customers such as Dell, NBC Universal and Qualcomm. In September of this year, however, we saw Salesforce refocus their target market with the Assistly purchase. Assistly is designed to help small businesses deliver socially-enabled customer service. Salesforce has expressed the desire to get back to the SMB market, and that’s where Assistly plays. We can expect to see several more acquisitions in this area, particularly as Salesforce builds out the Sales and Service Clouds for their SMB customers.
  • They will acquire to fill gaps in the apps layer. Salesforce offers a comprehensive set of cloud applications, but there are holes in their ecosystem. For example, they are still trying to get a handle on marketing automation. After the Radian6 purchase earlier this year, there was buzz about a Marketing Cloud, though we’ve yet to see anything along those lines. Radian6 doesn't seem to be the answer, so I wouldn't be surprised if Salesforce starts fishing for some of the CRM Idol finalists.
  • They will enter the growing strategic HR Market. Human Resources (HR) software has lent itself well to the SaaS environment, based on the success of companies that have entered the market. Salesforce has a strong alliance with Workday, but it primarily serves the high-end enterprise. One possibility would be for them to purchase a SumTotal or Taleo and develop a Force.com-based HR product using that intellectual property.

The Competitive Advantage of the Platform

The apps may be Salesforce’s cash cows, but Force.com is its baby. And Benioff has been ruthlessly dedicated to the platform since Salesforce’s beginning. The reason is simple. Based on sheer competitive activity, platforms are the way many companies have gone – at least to some degree or another (Microsoft, Oracle, etc.). If Salesforce wants to enter the higher echelon of it's competitors, Platform-as-a-Service (PaaS) is how they’re going to do it.

So far, Salesforce seems to be owning te PaaS playground. The Oracle database platform has been around for decades, but recently, Oracle has been focused on Fusion Apps and exadata boxes. They do have a PaaS offering, but it is still relatively nascent. Microsoft has been a platform provider since the release of MS-DOS, but their PaaS play, Azure, is currently being used by small percentage of Microsoft customers. Of the big players, the only one focused entirely on platform at this point is Salesforce. Judging from the current market, not only can Salesforce compete on platform, but they could potentially dominate it.

Another reason Benioff is focused on platform is because, with the growing cloud applications market, it’s where the real money is. Compared to apps, the platform typically costs less to develop and is generally less expensive to support. Then, once it is developed, the platform becomes the foundation for an entire ecosystem. This strategy allows Salesforce to become a ubiquitous force. Not only will companies operate on the Salesforce platform, but developers will also use and build upon the applications that sit on top of it. All things combined, that chalks up to a massive revenue stream.

Salesforce has never wavered from their focus on platform, and they don’t plan to do so anytime soon. There are a couple of ways I see them moving forward.

  • They will acquire to fill out the technology stack. Looking at the last few years, they have added the Database.com capability, VMforce for Java developers, and Heroku for Ruby on Rails. They want their platform to be open and accessible to everyone – not only for development, but also integration. I see Salesforce building out their system to make it even easier for companies to connect their on-premise applications and data stores to Salesforce’s cloud and ecosystem of products. I also see them making a strategic acquisition in mobile to improve the delivery of information, no matter what device a user is accessing it from.
  • They will acquire the core guts of an ERP system. At this point, everyone has Salesforce in their crosshairs, and the big guys like Oracle and SAP are expanding to compete. Oracle just purchased RightNow, a cloud CRM vendor, to take on Salesforce directly and make a big statement in the process. When Oracle and other big players reach product parity in the cloud, Salesforce could be rendered a point solution and will therefore need to expand it’s solution to become more meaningful to the enterprise. In order to compete, Salesforce needs to focus on ERP. Currently, Salesforce is investing in two ERP solutions: Kenandy, which offers financial modeling, and RootStock, which has manufacturing and discreet manufacturing functionality. Salesforce could potentially acquire both partners, purchase a supply chain vendor and bring it all together to operate as a seamless ERP solution on the Force.com platform. As for a long-term strategy, building out ERP is the only option that will allow Salesforce to enter that higher echelon of enterprise software and truly compete with the leaders.

These are my predictions for Salesforce going forward, but when it comes down to it, it’s really anyone’s guess. So, what’s yours? Where do you think Salesforce is headed next? Please weigh in by voting in our poll, and leave your commentary in the section below.

Special thanks to Paul Greenberg and Brian Sommer for lending their expertise.
 
  • http://twitter.com/cshaul Chris Shaul

    Lauren, thank you for this informative article.  I think that what you say is on point, however, I don’t see them chasing the ERP market anytime soon.  

    The recent acquisitions have been around the Social Enterprise.  I see SFDC as wanting to lead the market in Enterprise Social apps.  For example, Chatter is now opening up with APIs and with the last three acquisitions mentioned in your table above, they are becoming a social provider/integrator for the enterprise.Further, with such companies as Financial Force, the accounting side is covered.  Marketo and Eloqua (and others) cover the marketing space.  So with third parties handling the extensions of the application, Salesforce is left to focus on becoming the Facebook of the Enterprise.

  • http://twitter.com/cobiacomm Chris Haddad

    The SalesForce application platform is fairly nascent.  WSO2 Stratos Platform as a Service offering contains many enterprise-class platform components (i.e. business process server, complex event processing, business rules, data service server, identity server, governance registry, enterprise service bus) which would complement the existing SalesForce platform stack. 

  • Andy Mulholland

    A good analysis of a company that has proved able to create a new market in that it is literally creating new sources of expenditure from business managers beyond just the traditional IT budget. I believe that they are well positioned to support the growth in tablet and smart phone based front office services that are becoming the new focus for many enterprises and expect over the three year period that social crm will become an integrated front office environment delivered through ‘services’ on non pc devices in much the same way as the last period focused on PCs developed ERP as a back office integrated environment. Points i have made on my own blog on the topic at http://www.capgemini.com/ctoblog

  • http://twitter.com/JoshuaMinton Joshua Minton

    Outstanding article, Lauren! I agree with many of the point you’ve made here. There are serious gaps in the CRM package that need to be filled out, notably the Mass Marketing functionality. I have had more than a few clients who have been frustrated at the lack of native functionality to mass email and then become shocked at the sticker price of a robust solution like Exact Target. Also, I don’t think you mentioned this but they need a more robust data management tool/interface than the outdated and frankly rudimentary data loader provides. I urge all of our clients and friends who use Salesforce to engage a third party solution like DemandTools by CRMFusion (my favorite).

    But as for the whole App versus Platform debate–it’s all marketing to me. In my experience, when CIOs hear the word “Cloud” today, they are starting to get the brand impression of doing more with less which is a good thing. I was recently a Salesforce Senior Developer for an 8,000 Salesforce user org at a mid-to large market Financial Services company and I only had 9 other people on my time. You can’t get that scale of efficiency for that many users outside of the cloud right now.

    So when talking to C-level execs, it’s all platform because that’s what they know. But when you’re talking to Sales and Service Managers, Developers and Administration, it’s all Apps–agile, iterative project creations that deploy new functionality on top of new functionality, all of which add up to become a versatile, multi-faceted platform, one which should always be in the process of becoming more and better.

    Again, excellent article!

  • http://siddheshkabe.co.in Siddhesh Kabe

    Salesforce is walking the edge between Business executives and developers. While the former have a lot of money, the later need technology, platform and more important…. freedom. 
    With Apps, CRM and other enterprise level tools they can easily target big dollars but at the same time they have to market it harder. With platform, if it rides the wave, it catches on… it acts as marketing on its own. Salesforce have proven market leader in former and have huge gap in the later. My vote will be for technology stack because Salesforce has  been trying to get into technology since a long time now. Its about time they evolved.

  • Ken

    Great post!

  • http://www.navayugainfotech.com/sf_mplementation.html Sat

    This Blog was awesome! The demand for Salesforce has been Increasing rapidly…

  • Rajesh Parthasarathy

    Thanks for the great article.

    My bet is that the next major step depends on the changing Cloud Equation and how Mega vendors are moving forward. Unfortunately many are either targeting or partnering Salesforce. A game of chess, although Salesforce do have an edge today.

    I remember analysts mentioning that there is a huge rush towards cloud with all mega vendors looking for buying niche companies to fill up the gaps and all small time cloud players wanted to encash on the situation by selling at the earliest.

  • http://twitter.com/Tabraiz Tabraiz Feham

    Thanks for the great insight on Salesforce acquisitions and future strategy. I really want salesforce to push on ERP solutions since they are very well poised to do it on cloud and do it well.

  • http://twitter.com/Bucholtz Bucholtz

    Here’s my take on SFDC this year – not as a SugarCRM guy, but as a CRM journalist:1. SFDC (and virtually all major CRM vendors) completely whiffed in the 2009-2010 time frame by not acquiring a top-flight marketing automation vendor and actually integrating it into their applications to, y’know, actually provide modern, effective marketing automation. Hearing Marc say that Radian 6 and Marcel would build out the marketing cloud almost made me fall out of my chair at the Q&A, because it suggests that Marc doesn’t understand what marketing automation is or what Radian6 is. Or he thinks the media doesn’t know what those things mean. 

    2. Radian6 now poses an internal problem: do you build it into the core product to add analytics muscle to the social profile and kill an existing revenue source, or do you keep the two separate and minimize the transformational potential of Radian6 for Salesforce’s core product? That’s a tough one.

    3. How long are we going to let Salesforce get away with calling itself a cloud company, when really it’s a distributed SaaS company that runs on its own wholly-owned infrastructure? That’s not cloud in the current sense.

    4. They have the dough and the inclination to acquire, and thus on paper ought to be able to stitch together a top-to-bottom solution by picking up key applications, at least on paper. But on paper you don’t have cultures to mesh, geographies to span and financial people to mollify. So it’s a lot harder than it seems. What I sincerely hope for is that there’s a realization of when it’s time to stop buying and start unifying; otherwise, you turn into Oracle. In the bad way.

    5. From a business standpoint, it’s been surprising to see them start to drop prices – enterprise licensing, for instance, is a great example of how they’ll go to price to win big accounts. I don’t know how long you can go with a bifurcated message to SMB-MSE – pay for all your goodies! – and large enterprises – hey, we have a deal for you! –  before everyone wants the big discount. But they have the luxury of a large study group to watch over the next year or two.

    6. The Data Residency Option was one of the most significant things they announced in 2011; it was an admission that the hosted model was preventing them from getting into some key accounts and that they would have to find a work-around to the delivery model that underpinned the company in order to continue to grow. It’ll be interesting to see if demand for this grows, and if it does, how Salesforce will deal with it.  Those are all concerns, and I bet they’ll get a handle on three or four of them by the time the ball drops in Times Square next year. They have smart people and resources. However, I think that trying to own the solution, top to bottom, leaves you unable to react to changes in the market and changes in technology. It’s like having both hands and both feet on the Twister board – you may find yourself off balance when the next move comes. It also puts you in a position of having a single set of options for your users, and the cloud is going to present users with more options and better options for applications, and at a lower cost. There will be many customers who are pleased as punch to have their application mix dictated to them, but there will be others (who are more sophisticated, at least at first) who, if given the choice, will opt for applications that are better fits for their businesses if they can be easily integrated. So while SFDC will do well in the near term with a nice stack of applications, the world may be moving away from a Pre Fix menu and more toward an “easy ala carte” approach to finding the right applications. The cloud and social media are accelerating this, and those are two powerful forces that even SFDC has acknowledged. 

  • http://twitter.com/Bucholtz Bucholtz

    Here’s my take on SFDC this year – not as a SugarCRM guy, but as a CRM journalist:1. SFDC (and virtually all major CRM vendors) completely whiffed in the 2009-2010 time frame by not acquiring a top-flight marketing automation vendor and actually integrating it into their applications to, y’know, actually provide modern, effective marketing automation. Hearing Marc say that Radian 6 and Marcel would build out the marketing cloud almost made me fall out of my chair at the Q&A, because it suggests that Marc doesn’t understand what marketing automation is or what Radian6 is. Or he thinks the media doesn’t know what those things mean. 

    2. Radian6 now poses an internal problem: do you build it into the core product to add analytics muscle to the social profile and kill an existing revenue source, or do you keep the two separate and minimize the transformational potential of Radian6 for Salesforce’s core product? That’s a tough one.

    3. How long are we going to let Salesforce get away with calling itself a cloud company, when really it’s a distributed SaaS company that runs on its own wholly-owned infrastructure? That’s not cloud in the current sense.

    4. They have the dough and the inclination to acquire, and thus on paper ought to be able to stitch together a top-to-bottom solution by picking up key applications, at least on paper. But on paper you don’t have cultures to mesh, geographies to span and financial people to mollify. So it’s a lot harder than it seems. What I sincerely hope for is that there’s a realization of when it’s time to stop buying and start unifying; otherwise, you turn into Oracle. In the bad way.

    5. From a business standpoint, it’s been surprising to see them start to drop prices – enterprise licensing, for instance, is a great example of how they’ll go to price to win big accounts. I don’t know how long you can go with a bifurcated message to SMB-MSE – pay for all your goodies! – and large enterprises – hey, we have a deal for you! –  before everyone wants the big discount. But they have the luxury of a large study group to watch over the next year or two.

    6. The Data Residency Option was one of the most significant things they announced in 2011; it was an admission that the hosted model was preventing them from getting into some key accounts and that they would have to find a work-around to the delivery model that underpinned the company in order to continue to grow. It’ll be interesting to see if demand for this grows, and if it does, how Salesforce will deal with it.  Those are all concerns, and I bet they’ll get a handle on three or four of them by the time the ball drops in Times Square next year. They have smart people and resources. However, I think that trying to own the solution, top to bottom, leaves you unable to react to changes in the market and changes in technology. It’s like having both hands and both feet on the Twister board – you may find yourself off balance when the next move comes. It also puts you in a position of having a single set of options for your users, and the cloud is going to present users with more options and better options for applications, and at a lower cost. There will be many customers who are pleased as punch to have their application mix dictated to them, but there will be others (who are more sophisticated, at least at first) who, if given the choice, will opt for applications that are better fits for their businesses if they can be easily integrated. So while SFDC will do well in the near term with a nice stack of applications, the world may be moving away from a Pre Fix menu and more toward an “easy ala carte” approach to finding the right applications. The cloud and social media are accelerating this, and those are two powerful forces that even SFDC has acknowledged. 

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