As Oracle prepares to digest Siebel, Jason Stamper and Angela Eager ask what went wrong at Siebel, and what the deal means for customers.

Announcing that the company he founded in 1993 had finally succumbed and agreed to a takeover by Oracle, Tom Siebel said: "Today is a great day for Siebel Systems’ customers, partners, shareholders, and employees." Perhaps he had time to come to terms with the idea of being bought by his former employer and erstwhile competitor, Oracle. Anyway that day has come, and for $5.85bn, the deal was done.

Tom Siebel was once Oracle’s top salesperson, and while there he came up with a new sales force automation application that he brought to the attention of Oracle’s CEO Larry Ellison, and as the story goes, Ellison thought about bringing it to market but later ditched the idea. Tom Siebel promptly left Oracle in 1990, and three years later founded Siebel.

Siebel grew rapidly, floated in 1996, and from sales of just $8m in 1995 topped the $2bn mark in 2001. Thanks in no small part to Tom Siebel’s evangelism, ‘customer-centric business’ was the catch phrase on the lips of every discerning enterprise.

Like everyone else Siebel had a tough time during the dot-com crash, but it was hit particularly hard as at around the same time numerous analyst reports started to expose grand, enterprise-wide CRM projects that had spectacularly failed.

Gradually it dawned that many of those failures were down to companies not addressing the business process and cultural change needed to successfully implement CRM: technology does not do it on its own. In tandem, the CRM software companies improved their user interfaces and ease of use, and began introducing vertical templates, pre-built integrations and improved management tools that made projects easier to handle. CRM appeared to be back.

But already bloodied, Siebel was also by now facing a new threat from the hosted CRM vendors: most notably salesforce.com but also RightNow, salesnet and others. In the traditional client-server CRM space competition was growing too, from SAP, PeopleSoft, Oracle, Microsoft and mid-market players such as Sage, FrontRange and many others. By 2004, Siebel’s sales had slumped to $1.3bn as customers increasingly looked to one-stop shops and hosted alternatives for their software needs.

Victim of change

Siebel had grown very big in an incredibly short time, and it suddenly started to look lumbering and slow to react when once it had been so nimble and innovative. It was particularly slow to fully recognise the huge growth that would be seen in hosted CRM and a monthly licence rental model by salesforce.com et al. By May 2004, Tom Siebel could see that Siebel was in trouble, and he could see too that the industry had changed. He split his role as both chairman and CEO, becoming chairman while a new CEO was brought on board. Change was afoot.

The company’s second quarter figures this year put the final nail in the coffin. Sales were up from $301.1m to $313.6m as a result of improved maintenance, but licence revenue, the real arbiter or performance, fell 17.4%.

Commenting on the results, Siebel’s CEO George Shaheen said: "I’ve made a commitment to shareholders to improve Siebel’s financial performance over time and we are taking the necessary steps to achieve this goal. Although we’ve made some progress, we still have more work to do." In the end there just was not enough time.

As Tom Siebel said on the conference call on the announcement of the acquisition by Oracle, "What really brought this together was a shift in market dynamics we’ve seen in the past three, four or five years." He argued that businesses used to want to buy best-of-breed software from best-of-breed vendors, but now they want to buy integrated applications suites from fewer vendors: "An integrated family of applications that minimise their cost structure," as he put it.

Market consolidation

There has certainly been a huge wave of consolidation in the applications industry as customers have demanded integrated applications suites from fewer vendors, and the larger vendors have hoovered up the competition to keep their own growth ticking along.

But while all of the large vendors have been making acquisitions, Oracle has played the biggest role in driving that consolidation. Its hostile acquisition of PeopleSoft, which had already bought JD Edwards, showed how determined it was to gain muscle through acquisitions in order to better compete with enterprise applications market share leader SAP. It has followed that up with the acquisitions of Retek, Siebel and many more in-between.

So why did Oracle want Siebel, knowing as we do that the company faces serious challengers on several fronts? "In a single step, Oracle becomes the number one CRM applications company in the world," says Oracle’s Ellison. "Siebel’s 4,000 applications customers and 3.4 million CRM users strengthen our number one position in applications in North America and move us closer to the number one position in applications globally."

Oracle also notes that CRM is the largest and fastest growing of the major segments of the enterprise applications businesses, and it quotes IDC figures that estimate it to be worth more than $8bn in 2004, expected to grow to $10bn by 2009.

Predictably, the new wave of hosted application providers were dismissive of the deal. Greg Gianforte, CEO and founder of RightNow Technologies, said: "On demand delivery is the future of the software industry… it will be very difficult for any of the old client-server vendors to make the transition. Siebel was ahead of most, and they failed."

Marc Benioff, salesforce.com CEO, was typically sardonic about the deal, commenting: "Oracle put Siebel investors out of their misery. We have been doing that for Siebel customers for years."

As you would expect, there were critical observations about the deal from more traditional client-server CRM software vendors, too. Michael McCloskey, CEO of midrange CRM vendor FrontRange Solutions, noted: "I don’t think the move by Oracle is going to change things in the foreseeable future. As with other enterprise players, its technologies are too heavy and not geared to meeting the very different needs of the mid-market."

Enterprise CRM player Onyx, which has been transitioning into a customer-centric process management software company, said it does not know why everyone is saying that customers want large, integrated suites in the first place. "There are some customers who want fewer choices, but we find more often that the opposite is true," says Richard Furby, Onyx managing director, EMEA. "They don’t always want a massive suite, in fact what they want is flexibility and agility."

Meanwhile, James Utzschneider, product marketing manager, Microsoft Business Solutions Group, says: "Internally at Microsoft, we are a Siebel shop and have been for five or six years. But at our annual sales conference this past summer, we unveiled the new version of Microsoft CRM to 10,000 of our sales people and [Microsoft CEO] Steve Ballmer asked them if they wanted to use it. The applause was deafening… so Microsoft now has 20 internal projects where we are deploying Microsoft CRM across the company."

No guarantee of success

While it is hardly surprising that the competition would seek to criticise the deal, there are nevertheless some questions that need to be asked. While Siebel gives Oracle a major CRM boost and is expected to give Oracle and SAP level pegging in the CRM market share stakes this year – with 15% each according to AMR Research – even their size is no guarantee of future success as both are under pressure from those on-demand vendors and others.

That the new model is a threat was evident when SAP admitted recently that it was planning a hosted CRM service this year, and Microsoft has recently started hinting at an on-demand CRM push. Here Oracle will want to make as much progress as it can with Siebel’s offering in this space, Siebel OnDemand. Trouble is, it is based heavily on technology from rival IBM.

Siebel OnDemand realised $202m in total contract value during the second quarter and has 40,000 users. It experienced 252% year-on-year growth and grew 21% in the second quarter of 2005 compared to the preceding quarter. Siebel claims it had a 58% win rate against salesforce.com during the second quarter.

Described by Oracle president Charles Phillips as one of Siebel’s "jewels", it is also a source of contention because it is IBM-centric, based on DB/2 and WebSphere and hosted in IBM data centres. "We don’t know enough about it yet," admits Phillips.

But there are fundamental differences between Siebel OnDemand and Oracle’s own hosted applications. Whereas Oracle has taken its standard applications and offers them as a service over the Internet based on a single tenancy architecture, Siebel uses a multi-tenant model.

Customers want their own instance and the ability to manage their own database, according to senior VP of Oracle Applications John Wookey, although he said there is growing interest in multi-tenancy from larger customers.

Oracle maintains that the way customers are viewing the on-demand model is changing because where the utility model was considered advantageous on cost grounds, now it is being viewed as a way of transforming IT services.

Oracle is keen to establish its hosted credentials, pointing out that it has offered a hosted service since 1999. However, its single-tenancy model is a world away from the multi-tenant architecture on which the on-demand sector has been built. Besides, Oracle’s hosted business has only around 500 customers, primarily running HR in hosted mode, although Oracle says they are large customers and the business is growing 60% per year.

Oracle is looking to integrate with Siebel CRM OnDemand, but that will be a challenge given its IBM affinity. "We are continuing to improve our relationship with IBM," says Wookey, citing its decision to provide native support for Oracle applications on WebSphere. "We will continue to work on that. We will make Siebel OnDemand decisions later."

However, there was a hint of possible changes to come when he said, "There are licence advantages when we use our own technology so that is something we’ll work on."

One consolation must be that SAP is in the same position of only recently realising the value of the on-demand model. Where SAP appears to be developing its own solution, by acquiring an established solution Oracle has gained an upper hand.

But aside from the on-demand applications, what other integration should Oracle and Siebel customers expect? Ultimately Oracle has said it will incorporate Siebel’s CRM applications into its Project Fusion, which is designed to bring together the best aspects of Oracle’s acquired applications: including PeopleSoft, JD Edwards, and now Siebel.

But in the meantime Oracle also plans to continue selling the suite via a dedicated sales force, at least initially, and it will safeguard the Siebel offering because it plans to make it the centre of its own CRM plans. This makes perfect sense, because Siebel’s CRM functionality is superior to Oracle’s.

However, while that might be good news for Siebel customers, it raises questions for former PeopleSoft CRM customers who could be using CRM functionality from Vantive, PeopleSoft’s newer model or JD Edwards’ You Centric-based CRM software. These could be sidelined, as could the existing Oracle CRM applications.

A key issue for Oracle and its customers, then, is just how well it will manage the integration and redevelopment of the Siebel product line along with its other home-grown and acquired products. It is a huge challenge. For CRM alone there are seven code bases to contend with. Outside of CRM there are also additional code bases to add to the mix as a result of other acquisitions such as the Retek buy.

Oracle has been going all out to reassure customers that Siebel products will be maintained and developed. At a meeting for Siebel customers during Oracle’s recent OpenWorld conference, Oracle’s Phillips gave an assurance that the existing Siebel architecture would continue to be supported, including support for Siebel on IBM DB/2.

"There is no need for anyone to worry about disruption," says Phillips. "If you were thinking about buying Siebel for a specific functional need, go ahead. You will continue to receive enhancements and support and it will be integrated with Oracle applications and infrastructure. All products will move forward but there will be a path to Fusion too."

CBR Opinion

Though all large acquisitions carry considerable risk, Oracle claims that it was able to digest its PeopleSoft acquisition faster and more efficiently than it had expected. The Siebel acquisition makes Oracle the market share leader in CRM software – a high-growth segment – and takes it that bit closer to arch rival SAP in the overall enterprise applications business. Meanwhile, although customers are right to ask questions about the future of their Oracle, PeopleSoft and Siebel applications, there is no reason to panic: Oracle has committed to support Siebel for the foreseeable future. Longer term, while Project Fusion is a massive undertaking for Oracle with considerable challenges, it also aims to bring together among the best HR, CRM, ERP and systems software in the industry. Meanwhile, expect Oracle to make yet more acquisitions.

By Jason Stamper

http://www.cbr-online.com/article_cbr.asp?guid=B1BABC91-C588-4D40-ACEC-585371F145B4

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