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'No software!' snaps up software firm

20th Aug 2008
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Software as a service provider confirms it has acquired enterprise on-premise player InStranet. It demonstrates the clout of the SaaS sector - but what will the firm that boasts a “no software” logo do with a software company to look after?

By Stuart Lauchlan, news and analysis editor

The clout of the software as a service (SaaS) revolution was clearly demonstrated this week, as an on-demand CRM market leader acquired an enterprise on-premise customer service applications provider. confirmed that earlier this month it acquired InStranet, a Chicago-based maker of call centre software, for approximately $31.5 million. The buy gives technology that it will use both for its internal customer service purposes, but more crucially as a new SaaS offering that it hopes will take it into the customer self-service support space.

"The customer service and support market is about the same size as the salesforce automation market. We have a foothold in that market, but we needed strong knowledge management systems."

Lindsey Armstrong, EMEA president,

“The customer service and support market is about the same size as the salesforce automation market,” noted Lindsey Armstrong, EMEA president at “We have a foothold in that market, but we needed strong knowledge management systems. This provides us will high contextual and high personalised search technology. This is about competing the big guys in this market, the Siebels and the SAPs.”

InStranet makes so-called knowledgebase management software, which can improve companies' self-service support functions by making it easier for customers to find answers to common support questions. The software categorises customer information into data dimensions, such as their geographic location and the specific products they've purchased, so that it delivers answers that are relevant to a customer's specific circumstances. plans to integrate this into its own on-demand platform over the next 18 months and offer it up as Knowledge Base in 2009.

“A robust knowledge-based application is a top request from our customer service and support customers, and we’re confident that this new capability will help accelerate our growth in that business and put into larger service and support deployment,” said CEO Marc Benioff. “Service and support remains one of our biggest opportunities and this acquisition signals our most aggressive assault to date on this $3 billion market. The InStranet acquisition is another major step towards our goal of creating the same level of success for customer service that we are known for in sales organisations.”

InStranet, founded in 1999, has 44 employees, based in Chicago and Paris, who will join Alex Dayon, InStranet's CEO, will become a vice president of product management at Some 350,000 customer agents at various companies use InStranet, including Orange, T-Mobile, Expedia, Manpower and Comcast.

More consolidation in the applications market

The acquisition is the largest that has attempted to date and leaves the firm that boasts a “no software” logo with a software company to look after – or at least the users of the on-premise version of that software to support.

“When we look at doing an acquisition, what we look for is core intellectual property that is best of class, not if it’s on-premise or available as a service,” insisted Benioff. “In fact, most of the acquisitions that we’ve done have actually been on-premise software companies. Based on the quality of our platform, we are able to rapidly redeploy that intellectual property into a multi-tenant architecture and then deliver that as a service.

"InStranet has spectacular technology in the knowledge base area. We have partnered with them. They have integration between our core call centre and customer service offerings in their technology. Our customers really drove us to this acquisition as we saw them really point the way and say that this was the right technology for them, but they wanted it in the multi-tenant architecture.

“We recognised that our knowledge based management was not where our customers wanted it, so while they were really ready to step up for our whole applications suite, that was one area that they felt that we were deficient in. They asked us to partner with different companies to kind of complement what we were doing and that’s really where we met InStranet. We were working on a large high tech transaction in our first quarter. It was a big call centre opportunity and we partnered with InStranet on the opportunity. That’s when we said this is technology that we could redevelop into the multi-tenant platform on the and deliver that as an integrated solution to our customers.”

"The choice of on-premise knowledge management apps vendor InStranet, already a partner, is an intriguing one for the SaaS CRM pure-play."

China Martens, The 451 Group will continue to support and sell on-premise implementations. “We will support the on-premise customers,” said Armstrong. “When we bring out the SaaS version, we expect most customers to migrate – firstly because it's the most highly requested enhancement to our offering from our customers and secondly this is where the market's going. But we will support InStranet customers. It's about customer satisfaction.”

The move had been tipped for quite some time. "We've been expecting to make an acquisition in the customer service market for some time to fill an acknowledged hole in its product portfolio,” said China Martens of analyst firm The 451 Group. “The choice of on-premise knowledge management apps vendor InStranet, already a partner, is an intriguing one for the SaaS CRM pure-play. We won't be fully able to gauge the success of the acquisition until at least 2009 when hopes to debut an on-demand version of InStranet's Contact Centers In-Line contact centre app based on the CRM vendor's development platform.

“ hopes acquiring InStranet will help it become a leader in the customer service and support software arena. Certainly, the purchase will assist the CRM player in competing with RightNow, a peer that has its roots in service automation and then married that technology to salesforce automation by buying Salesnet in 2006.

" has been seriously eyeing the e-service apps market for some time and cites InStranet's ease of deployment versus its competitors as a key differentiator. As companies look to make their call centre operations more cost efficient, the ability to arm reps with as much current and historical information about the customers they deal with has become increasingly important. The goal is to enable such reps to resolve increasingly complex customer queries as simpler user questions are handled either by self-service apps or automated agents.”

The deal may also improve's competitive pitch against RightNow in the customer service space. “Historically has not had an effective knowledge base solution, giving RightNow a major advantage in business to consumer (B2C) sales cycles, which emphasize self-service,” said Patrick Walverns, analyst with JMP Securities. "Over time this acquisition could improve’s competitiveness in this area. There are two important caveats. First, the fact that felt compelled to make this acquisition is itself a positive indicator of the strength of RightNow’s position, in our opinion. Second, acquisitions do not always work. RightNow’s knowledge base is a proven scalable solution that is deeply embedded into its offerings; will need to do a lot of integration work to compete.”

The 451 Group's Martens predicted that the InStranet deal may spark another round of consolidation in the applications market. “Given that wasn't the only bidder for InStranet, we expect to see more picking off of the remaining e-service players by CRM vendors or call centre app players,” she said. “Still standing are eGain, InQuira and Kana and we see InQuira, a key competitor to InStranet, as the next likely acquisition target and we'd put Consona, Microsoft, Oracle or SAP in the frame as potential purchasers. For both eGain and Kana, we'd position their key partners - Cisco for eGain and IBM for Kana - as the most likely purchasers. SaaS apps vendor and consultancy nGenera kicked off the latest round of consolidation in the e-service market when it bought Talisma earlier this year.”

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