Our analysis for Q2 shows a sharp downward revision from what we considered a conservative growth forecast at the end of Q1. At that time we forecast growth in the global CRM market at 30% in 2001; we now believe that this will be more like 6% growth globally, although there is a likelihood that Europe will outperform this figure at about 15%.
In many industries a growth of more than 10% per annum would be welcome, but in the CRM business where vendors enjoyed around 100% growth rates in Y2000, there is inevitably a certain amount of carnage as adjustments are made.
For many this means laying off people, but also cutting back on ineffective marketing; for some it just means the realisation that their products are unsuitable for the new realism and attitudes in the market.
More than a dip
We were, however, correct in our assessment that the first quarter was more than a temporary dip in demand after which normal growth would be resumed. A real change in the marketplace has occurred, with end user companies in all sectors exhibiting considerable caution and attempting to apply more rational business judgements to an area most still regard as business critical.
There is a significant inconsistency between the demand and supply side of the market, which will not be resolved until mid 2002. Hewson Group expect the market size for CRM in 2001 to be $8.05bn. When all associated services are accounted, for we consider that the market is now worth in excess of $47bn, which is slightly under IDC's estimate of $68bn, but considerable variables affect this figure and either could be correct. Certainly, $8.05bn is a very accurate figure and not far from other analysts' calculations.
So many people have been surprised by the abrupt slowdown in the CRM market because the latent demand is so palpably strong. Far from being anywhere near saturation, the business of applying CRM correctly remains out of reach for the majority of companies across the world. Customer management and Go To Market abilities remain, for all but the most insular of executives, a matter of the utmost priority.
The reason for this does not lie in the hype generated by the CRM industry, but in the fact that customer expectations and behaviours have changed in such a fundamental way that to ignore them (and the different ways of conducting business-to-business relationships) threatens the survival of almost all companies.
No status quo
There is no comfortable status quo to which global commerce will return. Instead the years 2002 and 2003 will reveal market leaders and best practice companies who understand and manage their markets and customers better than others in their sector. Consumers will have more benchmarks by which they will judge under-performers. Everyone reading this analysis is ultimately a consumer or a business partner in some way and this supposition can be readily verified.
Failure of supply
Despite latent demand and despite the very many vendors that exist, there has been a failure of supply. Our tables show that Siebel has 25% of the market by revenue, and one of the reasons for this has been that this highly competent company has been the only one able to address the tier 1 or enterprise sector that is the driver and trendsetter for the whole market.
Siebel have dominated the channel and the minds of end users to the point where Siebel is a byword for CRM. The benefits to the whole market that Siebel have produced should not be under-estimated, but the situation probably became unhealthy by last year.
Market dynamics demand proper competition and SAP and Oracle have failed until very recently to provide this. We believe that these two companies will become much more significant in certain sectors by the end of this year, but that Peoplesoft will emerge as the company best able to close the gap on Siebel.
At the same time major channel players in the consultant and integrator communities will become much more interested in smaller vendors with attractive functional, sector or technical abilities and this will accelerate the growth of vendors such as Chordiant, Point and Pivotal.
The growth of a better, deeper competition will address a concern that we have expressed for over two years Ð there simply has not been the supplyside infrastructure to develop and deliver to the market - particularly the continental market outside the UK.
The second paradox is that the CRM business Ð of all businesses Ð should be good at communicating with its market. We believe that this is fundamentally not the case and that as CRM has become more complex and more demanding of 'solutions' type approaches, the more the vendors and integrators have relied on product selling approaches and hype-based marketing which has damaged credibility.
The third paradox is perhaps the most telling. In supply terms there are many very good analytics companies and in most cases these vendors are experiencing very challenging market conditions and have disappointing revenues as a result. This makes little sense as almost every significant business operation needs to carry out much more sophisticated analysis of their customer interactions than they do.
Hewson consider that the failure to acquire and apply analytical software reveals deep-seated inabilities to understand the full scope of CRM and in many cases, explains the poor returns achieved from multimillion dollar investments in operational CRM systems.
Points to ponder
¥ Growth in the Global CRM market in 2001 has slowed very abruptly from 100% in 2000 to around 6%, but will still be worth $8.06bn this year.
¥ Europe will outgrow the global trend this year and in 2002. Growth in 2001 will be 15% to $1.92bn.
¥ Some national or sector players will outperform North American competition.
¥ A much stronger market will return by the end of this year and will show growth of 40% in 2002. Recessionary or difficult trading conditions may help rather than hinder sound investment in CRM technologies.
¥ÊParadoxes abound in the market with the most obvious being the lack of ability by many vendors to supply appropriate solutions for the market.
¥ The public sector or Citizen Relationship Management becomes an increasingly important area.
Hewson consider that the third quarter will see some very poor results as momentum in the market really trails off. We expect something of a revival in Q4 for a number of reasons. Firstly, there will be a return to 'must do' investment in CRM after a period of reflection and a better understanding of ROI and business strategies. Many companies will want to take advantage of some heavily-discounted offers. Secondly, the impact of SAP Oracle and Peoplesoft will be having an effect.
We do not expect a wholesale recovery much before the end of this year, but we expect strong growth in CRM to resume in 2002. This expectation is almost regardless of economic conditions in the USA or Europe. In fact, we expect that recessionary or more 'difficult' trading conditions will force companies to invest in operational and particularly in analytical CRM as they fight to provide better market mechanisms and to identify and retain profitable customers.
The factor that may change the most is the emphasis on speed as more and more investment decisions are made on the assumption that there will be a very fast payback.
This may have a negative impact on some of the longer-term projects either under way or being planned, and is likely to favour some of the faster deploying software vendors such as Chordiant, Point, Pivotal and Peoplesoft as well as integrators with fast track approaches. Our assessment of global growth in CRM for 2002 is 40% which would realise a market value of just over $11.3bn.
Public sector impact
A significant impact will be felt in 2002 from public sector (or e-government) investment. The first signs of this trend have started to show both in the USA and Europe, and we believe that political considerations in the UK will see considerable pressure from central government for initiatives to accelerate in 2002.
Hewson consider that different drivers will apply to these projects. At a political level the messages will be about Citizen Relationship Management and will indeed reflect the needs and aspirations of people who require better service from their central or local government authorities. On another level, those authorities will be keen to use technology to be far more efficient in the allocation of their budgets as well as in revenue collection.
The combination of these powerful influences will mean that the public sector is going to be very important indeed and will be symbiotic with private sector initiatives. Those vendors who cannot compete will find cause to regret it.
Other significant trends in Europe that are identifiable from mid 2001 through next year are the emergence of mid market demand and also the development of national markets in a way that has not occurred to date. These trends are extremely hard to assess but we think that the major economies of Italy, Germany, France and Spain will evolve much more quickly in CRM terms by mid to late 2002, but more evidence is needed before we can be clear on the scale and speed of this.
The global market
The Q1 figures come against a perceived background of failure and depression in techstocks generally. Forecasts everywhere were downgraded after the heady results achieved in Y2000 when for example the Hewson World Wide Growth Index for CRM recorded 130%. It is not surprising that the Q1 results showed a marked step back from this high level of growth.
Taken as a whole, though, the figures still show growth when set against the same period last year and we believe that the global market and particularly Europe has massive underlying demand for CRM systems.
Hewson Group regard the first quarter of this year as more than a temporary dip in demand after which normal growth patterns across the industry will be resumed. We think that a real sea change occurred during this time, which will affect which vendors are winners and losers and also how CRM projects are looked at.
Crisis of confidence
We believe that the crisis of confidence in the techstock market was in part rational and in part irrational. The Internet bubble burst as markets everywhere realised that business was not going to revolutionise around a single channel. The near panic that occurred in Y2000 concerning ÔInternet competitivenessÕ manifested itself in many ill-advised strategies and investment decisions. These investments have not yet been quantified and will almost certainly total many billions of dollars. For many companies the only result was the building of attractive websites with no integration, either by manual process or technology to other parts of the organisation.
HewsonÕs own e-business surveys and those of other organisations constantly showed how ineffective the deployment of most web strategies was. Unsurprisingly, this caused a climate of caution as far as investment in information technology was concerned. Coming so soon after the questionable investments in Y2K bug fixes and in very expensive back-office solutions a reasonable and sceptical attitude emerged amongst CEOs and their boards about the wisdom of investing in IT.
Hewson believe that this scepticism is a good thing as it appears to be engendering a new realism and a more thought-through approach to strategies surrounding CRM. The evidence that we see from the market is that far from rejecting investment in CRM technologies the tendency may in fact be to spend more but in a carefully targeted way.
The fact that customer behaviours and expectations have changed forever is inescapable. This will bring more, not less, dependence on CRM for improved service levels, multi-channel access both to and for the customer, and the best possible mechanisms for transacting trade. Support for this theory is provided by the heightened interest we see in ROI Ð not on the basis previously seen, which was to draw very narrow conclusions in support of capital funds, but a much wider analysis aimed at defining value strategically.
The new realism and the temporary halt in very high growth rates have had a double effect on the market. Firstly, the massive spend undertaken by many vendors to achieve revenues was suddenly exposed as highly inefficient and the debt levels incurred have caused a slowdown in marketing activity - perversely, a lot of this slowdown has occurred in Europe which represents the market with the most development potential.
Throughout Y2000 Hewson were critical of North American CRM vendors for failing to develop good interfaces with their marketplace, for failing to address those customers overwhelmed by complexity and by deploying under trained sales and pre sales forces, where numbers substituted for thoughtful sales strategies.
The market is now rightly wary of certain vendors with bad track records and also of those where it feels that a too narrowly drawn application is being sold rather than a solution. The New Realism also recognises that process, analytics, the supply chain, collaboration and leverage of transactional data are all legitimate and important elements of a high return CRM strategy.
Whilst we think that operational CRM systems will continue to be the key drivers in investment decisions and concepts, we also believe that seamless integration of the back office will have a more and more important impact on the market.
The advance of a much wider definition of CRM will be seen first in the Enterprise space and cascade down very quickly through the enterprise market. The impacts of this can already be seen as a number of vendors are punished for having applications that are either too component based or too focused on the web as a channel, or because they are seen as financially unviable.
Companies with elegant, integratable architectures such as Chordiant, Point, e-Ware and others will do well and SiebelÕs new product may yet be classified here. Good platform players such as Pega and Pivotal will do well this year and we expect that ownership of the mid-market will soon become a real issue.
The big trend, however is towards highly integrated front back office solutions. In the Enterprise market we expect that Peoplesoft, Oracle and SAP will take increasingly large market shares this year. Further down the market, a powerful confirmation of this trend can be seen in Sage GroupÕs acquisition of Interact to create a form of ERP/CRM solution for smaller companies. How this will play out is hard to predict.
Our estimates for this year show Siebel with a market share almost identical with last year at 23.4%. SAP, Oracle and particularly Peoplesoft take increased market share with Peoplesoft at 7.4%, Oracle at 6.4% and SAP at 5.4%. The effect of these companiesÕ CRM marketing will be to make the enterprise or tier 1 market a very hard one for the smaller vendors to compete in.
On the other hand we believe that only Peoplesoft will really have a good CRM story this year, and that Oracle and SAP are still six to nine months off - either for product reasons or in OracleÕs case the correct market approach. Siebel will not be caught by any of these companies in Y2002 but it is important to realise how important CRM is for all them.
CRM is and will be the dominant application and it is difficult to conceive of ÔpureÕ back-end solutions being acquired without acknowledgement of their carry-through to the customer area. So, for SAP, Oracle, Peoplesoft and maybe companies in the supply chain area, getting the customer / market management story right is not an option, but a necessity.
They are, however, in the right place to take advantage of the widening of the CRM boundaries. These facts and the inclusion into CRM of supply chain, collaboration and end-to-end process, whether in the Internet channel or elsewhere, explains the very big numbers being put on the CRM market by Y2004. Hewson Group assess this at more than $40bn in Y2004.
This analysis looks at the Global performance of the leading 30 CRM vendors during Q1 and Q2 Y2001. We take account of the published revenues or estimated or advised revenues for non-quoted companies. As usual we have based our market size on revenues (both licences and services) achieved by packaged application vendors. These are key drivers in the marketplace and other revenues such as integration and consultancy services realised by third parties can be calculated as a consequence.
Our inclusion or exclusion of certain vendors is a matter for debate. We have not yet (over the last year) received any criticism of the list or the revenues set out. We acknowledge that CRM is an area where the boundaries are unclear and almost certainly widening. At present we have based our inclusion on relatively narrow definitions of CRM Ð essentially operational or analytical CRM applications. The 'true' figure for CRM which may include substantial back office contributions is likely to be larger - perhaps significantly so over the next three or four years which may cause us to revise our figures in future.