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Author's profile photo Former Member Poster Child for Cloud 1.0

/wp-content/uploads/2015/06/salesforce_logo_635_no_248x177_720193.jpgSince its debut in 1999, has been the poster child for cloud computing and chief executive Marc Benioff, has been the chief evangelist for Software as a Service (SaaS). The SaaS subscription model enables companies to access software online and only pay for the services and applications used.

But recent events have shone a spotlight on the cloud computing pioneer and raised questions for me about the market for traditional Sales Force Automation and CRM (Customer Relationship Management) software, the shift in demand towards integrated cloud-based suites and the broader question about whether cloud adoption has reached a tipping point.

Under Benioff, San Francisco-based Salesforce has ridden the SaaS wave, eschewing profitability in favor of revenue growth. Its revenues grew by 32% last year and the company an annual revenue run rate of about $6bn. But Salesforce has yet to post consistent profits.

In the latest quarter the company reported profits of $4.1 million, or a penny a share, on sales of $1.51 billion, thanks to one-time savings of $37 million from the termination of a lease. It was the first time since the third quarter of 2012 that Salesforce had reported quarterly profits on an unadjusted basis.

In the intervening period, Salesforce has almost doubled its revenues and shareholders have rewarded the company with a market valuation that now tops $48 billion.

Salesforce leads the CRM market with an estimated 22.3% market share (ahead of SAP and Oracle), according to market research firm, Gartner.  CRM is the largest component of SaaS which in turn is the fastest-growing segment of cloud computing.

Salesforce’s market share has also attracted the attention of Microsoft, which has a much smaller share of the CRM market, but big cloud ambitions. Recent media and analyst reports suggest that Microsoft approached Salesforce with a $55 billion takeover offer last month – an offer that Benioff rejected asking instead for a minimum of $70 billion.

Good Time To Sell

Like most analysts, I think a deal at such a lofty price is unlikely. “The odds of a merger and acquisition event for are still low, maybe about 30%,” said Evercore ISI, the equity research firm in a recent note. Similarly, in a note published after reports of Microsoft’s interest first surfaced, Jefferies’ analysts said: “While we appreciate the possibility of a sale, we believe the probability is very low, especially with the stock already trading at an inflated valuation.”

The real issue is that Salesforce is fundamentally a one dimensional company.  Although it has begun to (slightly) broaden its offerings to include, for example, customer analytics, it is still essentially a CRM and cloud-only vendor.

A second concern is that despite the latest quarterly figures, Salesforce’s revenue growth – which has supported its sky high valuation – is slowing. “Salesforce’s new business growth, by our estimation, has been decelerating at a meaningful rate over the last several years, while the cost of new business continually increases,” say the Jefferies analysts. They also argue that Salesforce has managed to maintain the appearance of growth by inflating billing by, for example, pulling renewal business forward. “If we are right, now would be a good a time to sell the company, with the stock at all-time highs and many growth levers having been exhausted.”

Cloud 1.0 Thinking

Salesforce supporters dismiss such suggestions, but there are other concerns including increased competition from rivals such as SAP and Oracle, the second and third largest CRM vendors. This increasing competition is coming at a time when customers are placing growing emphasis on application integration in the cloud and demanding simplified IT systems that are fast, agile and can adapt quickly to rapidly changing consumer tastes across multiple sales channels.

Enterprise customers discovered a long time ago that integrated on-premises systems provided benefits that were difficult to replicate using disparate software systems. Now, as they move large chunks of their IT operations into the cloud, they are demanding the same integration among their cloud-based business applications.

“Vendors have heard this message, loud and clear,” says Neal Shact, the founder and CEO of CommunITech Services, a Systems Integrator. “They’re in a race to move suites of business applications to the cloud and vying for the opportunity to control and “own” the business applications market in the cloud.” This is especially true in the traditional CRM space which historically has been a single software application, one that tracks customer relations.

Shact notes that Salesforce became a dominant player in the first-generation cloud market by being early, executing well, and making easy-to-use software working directly with the business unit. “Having had a good experience with this approach, enterprises are seeking to put more applications in the cloud – and they want everything to work together,” he says.

The problem is that traditional sales force automation tools and CRM systems – including SaaS versions – were designed to manage customer information and manage the front-office staff who are engaging the customer, rather than from the customer’s perspective. That’s CRM 1.0 and Cloud 1.0 thinking, but the nature of business has moved on.

Maturing Market, Better Choices

Today, the consumer/customer is in full control. The way to for companies to compete and win in today’s digital world is to create an environment where true, omni-channel engagement with customers is possible. In order to meet customer expectations and fend off rivals, businesses must be able to respond to them in real time, whenever, wherever and whatever device they choose to use – in a physical store, in an online marketplace or through a smartphone app

We have moved beyond Cloud 1.0 and the era of CRM 1.0 to a world of real-time digital customer engagement. This transition is happening at the same time that the cloud adoption and SaaS in particular appear to have reached a tipping point.

Among the indicators of this shift in the marketplace are slowing billings growth at companies like Salesforce and Workday, and the growing competition from more established software and IT service vendors. So, for example, shares in Workday, which is often seen as a younger cousin of fell almost 10% last month after the cloud-based provider of human capital management software reported seemingly strong headline results

The reason? Despite reporting 57% revenue growth and touted the closing of three sizable deals in its quarterly report billings growth – a key metric for the company and an important forward looking indicator – decelerated to 30% in the latest quarter from 72% growth in the prior quarter and the 94% growth reported in the same period a year ago. In other words, increased competition is beginning to take its toll.

But rather than signaling an imminent tech boom bust as some have suggested, I believe that more realistic appraisals of the outlook for cloud/SaaS pioneers like Salesforce and Workday are a positive sign that the cloud computing market is maturing and that enterprise customers now have more, and perhaps better, choices.

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