The Changing Face of CRM — Part 1 of 3: Market Consolidation via Transformational M&A

Customer Relationship Management (CRM) software is a roughly $25bn a year market today and Gartner projects that it will be the fastest growing enterprise SaaS segment over the next few years, reaching over $40bn in annual spend in 2019. The importance of this market is being underscored by the all-out war between tech titans Microsoft, Salesforce, and Oracle who have already spent close to $40bn in the past two months on CRM-related acquisitions including LinkedIn ($26.2bn cash), NetSuite ($9.3bn cash), and Demandware ($2.8bn stock). Companies today are striving to leverage what is rapidly approaching the zettabyte scale data loads that customers are uploading to the cloud every year, and most CEOs understand that getting a better customer 360 will be a key driver of their firms’ success. Ten years from now looking back, 2016 will be recorded in the annals of technology history as a year of transformation in the CRM industry, and it behooves us as participants in this market and users of CRM systems to understand how what’s going on today will affect the future of the customer journey and our roles as sellers.

This is the first of a three part series aiming to provide insights into the current state and the trajectory of the CRM industry going forward. I’m going to start by providing analysis on recent large-scale M&A activity in the CRM space which we’ll cover here. Then over the next two weeks I’ll take a look at the impact of artificial intelligence startups on the coming CRM revolution as chatbots, smart assistants, and natural language processing technologies reshape how we understand and sell to customers. *Note — I am a Microsoft employee and will be discussing the LinkedIn / Microsoft acquisition in this post but possess no non-public information and hence can only offer my own conjecture of how we will integrate our products and our roadmap for the future (that all happens way, way above my paygrade and again I have absolutely no material non-public information).

It’s M&A season in Silicon Valley and it’s coming on full blast like the AC in a VC’s Tesla P90D cruising down Sand Hill Road. Within the span of a month two of the largest tech deals in recent history were announced, both with the hopes of helping mature incumbent technology companies transition to the cloud-first world. As large cap tech companies face a secular decline in sales and eroding margins in legacy verticals like the PC market, everyone is now turning to cloud software services as the major lever for future growth. The CRM market has come to be dominated by Salesforce, one of the pioneers of the cloud SaaS revolution, which now claims roughly 21% market share overall and much higher than that in the enterprise space. Over the past five years or so your only real options for enterprise grade CRM have been Salesforce, Oracle, and SAP. Salesforce is well known for bullying customers who object to their frequent and significant prices increases with the, “Where else are you going to go?” argument. After rumors emerged of failed acquisition talks between Microsoft and Salesforce due to a dispute over the price that Mark Benioff was asking, Microsoft is now making a greater push to capture a piece of this very large and still growing market. Its offering, Dynamics CRM, has traditionally been a player mostly in the SMB and mid-market space and has gotten short-shrift as an enterprise solution due to previous iterations of the product which were really just not competitive on a features basis. Microsoft has been seeking to change that perception and prepare Dynamics for the big leagues with both a fundamental reengineering of CRM Online as well as a series of recent acquisitions to build out the product’s capabilities. In fact, it looks like Satya Nadella has made his bet that CRM will be a major pillar of the company’s growth strategy by purchasing LinkedIn, a deal that is three times larger than Skype which was previously Microsoft’s largest acquisition, and arguably a much smarter move than acquiring Salesforce.

Microsoft / LinkedIn: Productivity, Prospecting, and Professional Data

It recently came out that Microsoft narrowly eked out Salesforce by offering to pay $26.2bn cash for LinkedIn, something that Salesforce just couldn’t swallow. I was surprised that Salesforce would have even considered the acquisition as it only has a hair under $2bn in cash. I was even more blown away when I learned Microsoft is expected to be able to pay for the entire amount without touching a penny of its cash hoard as it will tap the ever eager high-grade debt market to finance the purchase. There simply aren’t many companies on earth that could fathom raising $26bn in debt, and this is a testament to the fact that Microsoft remains one of only two companies in the US that maintains a AAA credit rating (the other being Johnson & Johnson), though Moody’s has placed that rating under review as a result of this transaction. This deal has been on the tips of the tongues of many here in Silicon Valley and it certainly merits a peek under the hood to see what kind of solutions may emerge from the tie-up.

The value drivers Microsoft laid out in the public deal announcement are primarily focused on revenue for Office 365 and Dynamics. It seems the overarching goal is to more tightly weave together the office productivity and collaboration tools that Microsoft offers with the networking and recruiting power, as well as the data treasure trove, that LinkedIn provides. However, it’s fairly clear based on the presentation that special attention is being given to the impact that LinkedIn’s flagship sales productivity tool, Sales Navigator, can have on the Dynamics business as can be seen in one of the slides shown here:

In conversations with sales leaders I usually ask what tools in their tech stack they use the most and what their reps are getting the greatest value from; the answer is very frequently Sales Navigator. It’s such a powerful tool for seeing what’s top of mind for your clients, doing organizational mapping, and finding and connecting with key business decision makers. While Sales Navigator currently has integrations with Dynamics CRM as well as other CRM providers including Salesforce, it’s not hard to imagine Microsoft developing much deeper integration between Dynamics, Sales Navigator, Office 365, and more which will empower salespeople with best in class productivity, collaboration, and communication tools that will enable organizations to shave significant amounts of time from their sales processes, improve customer data collection, and drive higher adoption of CRM licenses purchased.

Additionally, LinkedIn’s trove of data on now more than 450 million professionals provides an arsenal for Microsoft’s bevy of new artificial intelligence algorithms and analytics tools. These hold tremendous promise for making salespeople and organizations even more effective in understanding and selling to their customers. My take is that the backbone of the CRM industry is sales force automation tools which will increasingly be driven by artificial intelligence — salespeople will ultimately become “trainers” for hybrid AI algorithms and will be a smiling face for a human buyer to shake hands with when that buyer feels sufficiently educated. Salespeople will eventually become a token to give the element of human trust to buyers to help in making a decision (you can hang a salesperson if things go wrong or the product doesn’t perform as expected, an algorithm, not so much). If I’m right then the evolution of this market will dramatically favor Microsoft which arguably has the world’s best AI technology as well as Salesforce which is an active investor in and partner to many interesting sales tech startups building machine learning software (more on that later).

My personal take on the holy grail of the Microsoft / LinkedIn mashup for CRM: a seamless end-to-end solution for companies to do just about everything under the sun including:

  1. Artificial intelligence embedded everywhere (e.g. Cortana will: ping you when contacts are active on LinkedIn so you can reach out via Skype or email, build personalized InMail templates for you based on sentiment analysis and psychographic profiles, and down the road you won’t even need to type or manually use the applications but will be able to do it with a hybrid natural language and holographic interface)
  2. Productivity and collaboration tools embedded everywhere (e.g. Sales Navigator leads can be exported to Excel and contacted via Outlook/Skype taking a process that used to take hours down to minutes)
  3. Recruiting and talent management tools for building the best sales, marketing, and customer service teams
  4. Advanced organizational mapping capabilities with real time updates on changes in roles/positions of key business decision makers
  5. Highly targeted B2B/B2C marketing combining the power of Bing advertising, Azure Machine Learning, plus LinkedIn data and advertising solutions
  6. Intelligent and personalized prospecting via a graphic visualization of networks, top-of-mind business goals, and personal causes (HoloLens and Azure Machine Learning will almost certainly play a role in this down the road)
  7. Executive alignment tools for B2B environments (escalation of large sales motions to the executive level faster to enable lower level salespeople to drive larger amounts of revenue via partnerships)

Salesforce should be really, really nervous about what can happen if Microsoft and LinkedIn get this right. If the leadership of both companies continue to execute as they have been recently (LinkedIn just shattered their Q2 earnings expectations, showing continued acceleration in revenue, user growth, and profits), this could spell serious trouble for Salesforce as more and more compelling solutions emerge from this marriage.

Oracle / NetSuite — Moving into the Mid-Market

I personally found the Oracle / NetSuite deal to be less interesting than Microsoft / LinkedIn and I believe that the media chatter as well as mindshare that it got in the streets of Silicon Valley also reflect less intrigue around this merger. Nevertheless, it is an important reminder that big tech companies really care about the CRM market and are willing to pay a significant premium in order to build their positions, even though both LinkedIn and Netsuite were not profitable when acquired. Oracle has been stalling on its cloud initiatives and is widely viewed as being at a significant competitive disadvantage in the current cloud onslaught being brought by Salesforce, Amazon, Microsoft, and to a lesser extent Google. NetSuite started off as an ERP provider but has moved into sales and marketing solutions with a robust CRM product that has garnered around 30,000 SMB clients. The buzz is that Oracle went for NetSuite in order to bolster its efforts to recapture market share in the SMB and mid-markets after losing share to Salesforce and Microsoft. I believe that the combined ERP and CRM strengths of Oracle in the enterprise and NetSuite in the mid- and small-tier space could result in some interesting new features, but I don’t believe it’s likely that anything groundbreaking will come of this.

One aspect of this acquisition that I do find interesting is what it portends for what I perceive as the convergence of ERP and CRM. Microsoft recently announced Dynamics 365 which is its attempt to combine its ERP platform Dynamics AX with Dynamics CRM to offer an end-to-end solution where you have your marketing and sales funnel on the front-end and then billing, procurement, accounting, etc. on the back-end. The acquisition of NetSuite could be a smart move to head off Microsoft’s ambitions to continue winning market share for combined ERP/CRM solutions in smaller accounts, but overall I don’t see any visionary or transformative products coming out of Oracle / NetSuite. Oracle, which as far as I can tell is neither developing significant AI capabilities in-house nor acquiring talent externally, is going to be at a significant disadvantage and my bet is they will become decreasingly relevant in CRM as time goes on and it will become a duel between Microsoft and Salesforce (unless Salesforce gets acquired by Amazon in which case it will be a fascinatingly gruesome war between Amazon and Microsoft on all things cloud — I hope I’m not giving any executives any ideas here).

Salesforce / Demandware + Quip

Gartner projects that spending on digital commerce platforms will grow to ~$8.5bn in 2020, making Salesforce’s $2.8bn (stock) acquisition of Demandware look like a solid move. The big news here is that now Salesforce has a powerful e-commerce solution to sell to its existing customers as it announced that Demandware will be rolled into a whole new product line called Commerce Cloud. TechCrunch noted that the acquisition also enables Salesforce to up- and cross-sell products from Salesforce’s other clouds to Demandware’s existing customer base. Overall I believe this acquisition will continue to cement Salesforce’s edge over Microsoft, Oracle, and SAP in the marketing cloud game, as the rest simply lack the applications to convincingly manage online sales and marketing efforts that are slowly devouring brick and mortar retailers.

Quip was perhaps a more interesting acquisition as it portends a potential attempt by Salesforce to go after Microsoft’s flagship productivity and collaboration suite, Office 365. Quip produces collaborative cloud-based spreadsheet and word-processing tools and I imagine Salesforce is hoping that millennials entering the workforce will prefer the Quip user interface to Office 365, as is often the case with Google Apps. It’s worth pointing out, however, that people have been trying to disrupt the Office product suite for about 3 decades with extremely limited success. There’s a reason for that and Facebook CIO Tim Campos’ comments at Microsoft’s recent Worldwide Partner Conference gives us some insights as to why that is.

Marketo / Vista Take Private

Vista Equity’s all cash purchase of Marketo for $1.8bn at the end of May also made waves, as they paid a 64% premium to acquire the marketing automation company. Most importantly, Vista’s move here takes Marketo off the table for the other CRM players mentioned above. That said, the average hold period for private equity firms has dropped to around 5.5 years, so I wouldn’t be surprised if Vista pulls some operational levers and then puts it back on the market in 3–5 years, especially if the CRM market continues its rapid growth and consolidation in the industry continues.

As the deals above demonstrate, we’re witnessing a bid by the largest tech companies to strengthen their positions in the pursuit of a larger slice of one of the largest and fastest growing slices of the enterprise SaaS pie. Stay tuned for more insights next week as we start a two-part deep dive on the impact of artificial intelligence on the CRM market.

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