2000 Jan 01
Mergers Point to a Consolidated Industry
by David M. Raab
Relationship Marketing Report
January-February, 2000

Maybe it’s a sign of maturity or maybe it’s a sign of decadence, but today’s marketing software companies now seem more interested in acquiring other people’s products than building their own. The past year saw a spate of mergers and acquisitions among members of the industry. Some were traditional efforts to strengthen capabilities related to a company’s core offering. For example, Kana (www.kana.com), a provider of email response management software, purchased companies that do outbound email campaigns (Connectify), real-time Internet dialogs (Business Evolution, Inc.) and self-service Web-based support (NetDialog). Similarly, Sagent (www.sagent.com), a provider of tools to help load operational data into a warehouse or marketing system, acquired QMSoft, which has specialized technologies for data matching and enhancement. Roughly in this category–although perhaps more a consolidation in a shrinking segment–was the combination of Retail Target Marketing Systems with Experian’s AnalytiX group. Both provide traditional campaign management systems using proprietary database engines–an increasingly tough sale in a world committed to using standard technologies.

But other acquisitions had a bolder purpose: assembling a complete set of customer management capabilities. This group includes E.phiphany’s (www.epiphany.com) purchase of RightPoint, Broadbase’s (www.broadbase.com) purchase of Rubric, and, to a lesser extent, Exchange Applications’ (www.exapps.com) purchase of GBI and ClientLogic’s (www.clientlogic.com) purchase of MarketVision. The object of such transactions is to provide an instant infrastructure to firms with no existing customer management capabilities–transforming them from laggards to leaders in one simple step. Clueless to flawless, as it were. For marketers afraid of being left behind as their competitors do a better job of customer management, this is an irresistable proposition.

It is also the purest snake oil. Any experienced marketer or remotely honest vendor will tell you that the real work in becoming customer-centric is the organizational and process change. Delusions that simply buying the right product will solve the problem will be quickly shattered–though not until after the vendor has been paid.

This does not mean that integrated product suites lack value. The technoloyg of customer management is far from trivial, so selecting appropriate products does have a major impact on project success. This means it’s worth looking at just what the vendors of integrated suites have to offer.

The first step is to establish a framework for comparison. Nearly every marketing product claims to support “closed loop marketing”. The general impression conveyed by this term is of a system that executes marketing programs and captures the results so they can be evaluated and fed into improved future programs. But it turns out there are more loops in customer management than a three-mile roller coaster. Vendors naturally tend to define the kinds of loops that they can actually deliver. So it’s important to identify the components of the full customer management cycle in order to see which pieces any given vendor can support.

In broad terms, the cycle can be broken into five components. The first includes ‘front office’ systems that actually interact with customers: these are where transactions originate and where, eventually, marketing messages will be delivered. The second component includes the data extract and preparation tools that pull transactions from the front office systems and load them into the marketing database or data warehouse. For simplicity, assume this component also includes the database itself. The third component is the analysis tools used to assess the marketing data and guide marketing strategies. The fourth component is the campaign engine that assigns customers to groups and associates those groups with specific campaigns that embody the strategies. This component also generates outbound campaign messages. The final component is real-time interaction management, which feeds marketing decisions to the front office systems as customer interactions occur. Reactions to these decisions are captured by the front office systems and then fed back into the marketing database for analysis, thereby “closing the loop”.

It seems self-evident that a true “closed loop” system would contain all five components. But in fact there is a great divide in the marketing system world. Standing alone on one side are the front office systems, which are large, real-time transaction processing products run by operational departments like sales and customer service. These systems may have thousands of users in a large company; because of their size, they are where most of the money in customer management is spent. This is the turf of traditional “customer relationship management” (CRM) vendors like Siebel, Vantive and Clarify, and is being approached by other enterprise software vendors like Oracle and SAP. A related and somewhat overlapping set of vendors like Pivotal, Kana, Brightware and Silknet provide Internet-based front office products.

On the other side of the divide is everybody else: database, analysis, campaign and interaction management tools. These systems have much smaller numbers of users and (except for interaction managers) use mostly batch processing, which is better suited for most kinds of analytical work. Traditionally, these components have been provided by many small vendors who are specialists in their particular field.

With this picture in mind, the recent mergers and acquisitions come into clearer focus. E.piphany, Broadbase and Exchange Applications all are on the non-front-office side of the cycle, and so are the companies they acquired: E.piphany provides data transformation, analysis and some campaign management, to which RightPoint adds interaction management; Broadbase provides data transformation and analysis, to which Rubric adds campaign management; Exchange Applications provides campaign managment and some analysis, to which GBI adds outbound email. Thus, these acquisitions all represent an attempt to build multi-function integrated systems that can rise above single-function, stand-alone products that have traditionally dominated this sector. This strategy has several advantages: it leads to larger revenue streams; it makes the vendor attractive to companies that are new to customer management (still the vast majority); and it lets the vendor win against single-purpose products that are superior within their specialty. In fact, by helping deny revenues (and investment financing) to single-function products, the strategy has the welcome long-term effect of reducing competition and stifling the growth of firms that might eventually grow into full-spectrum rivals.

No strategy is guaranteed to succeed, and this one does has its drawbacks. The most obvious is that not all firms want to buy an integrated solution–and, in fact, the companies most likely to want a complete customer management solution are precisely the early adopters who already have partial solutions in place and therefore only need some incremental enhancements. These are a minority of the business world but may well constitute the majority of the market for the foreseeable future. Of course, the integrated product vendors are willing to sell their different modules separately. But these components are often less than best-of-breed and will be increasingly difficult to deploy independently as they become more tightly integrated with the rest of the vendor’s suite.

There is also the cost of expending technical and management resources on absorbing acquisitions rather than adding new system functions. This could lead the intergrated vendors to fall further behind specialists who create best-of-breed products in one area and build alliances with best-of-breed providers in others. This is the strategy adopted by Exchange Applications in setting up alliances with SAS and MarketSwitch for predictive modeling and with Microstrategy for reporting.

The integrated vendors also risk a backlash when buyers and investors realize that their “closed loop” products exclude the front office portion of the customer management cycle. Software buyers, who are used to vendor hyperbole, will presumably make this discovery between any money changes hands. But the investment community, entranced by visions of a multi-billion dollar CRM software market, may be less forgiving when discover most of the funds will be spent in the one area–the front office–that these vendors exclude.

Indeed, skillful handling of front office integration will probably be the key to long term success for the non-front-office vendors. Because the sheer size of the front office systems–in terms of complexity, number of users, operational impact and acquisition cost–they tend to be purchased on their own merits rather than as an adjunct to the other customer management products. This means it would be extremely difficult for a non-front-office vendor to successfully introduce its own front office products: in fact, this is so obvious that none of those vendors has even tried. Instead, they have created generic data exchange capabilities and, in many cases, have also built specific connectors to major CRM systems. Their problem is that the front office vendors themselves have their eyes on the non-front-office sector, and can either build or buy the components to provide the necessary services. So far, there have been no major acquisitions across the front-office/non-front-office divide. (ClientLogic’s purchase of campaign management vendor MarketVision is a near exception, but ClientLogic provides front office services rather than software.) But when the front office vendors start crossing the line, the non-front-office vendors will face a serious challenge.

Since interaction management represents the connection between front-office and non-front-office systems, it is the most likely point of contact between the two sets of vendors. Interaction management is also an uneasy fit with other non-front-office products, since it is inherently real-time rather than batch. This makes E.piphany’s acquisition of RightPoint–the most mature interaction management product–particularly intriguing. How E.piphany integrates RightPoint with its other offerings and manages its connections with front-office systems will be extremely important to its long term success.

Other products for interaction management are being developed mostly by traditional campaign management vendors (Exchange Applications, Harte-Hanks, Recognition Systems, Prime Response) or independent companies (Verbind, Trivida, Manna FrontMind, Black Pearl, DataSage). Whether the front office vendors acquire any of these, develop their own interaction managers, or leave interaction management to others bears close watching by both customers and investors in the marketing software industry.

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The thrust of last month’s article was that mergers and acquisitions among marketing system vendors have generally expanded capabilities in either front-office or non-front-office areas, but rarely crossed the line between the two. (Front office systems, such as sales automation and call center systems, execute customer interactions; non-front-office systems, such as campaign managers and data analysis tools, help define strategies to guide those interactions.) The split is not surprising, since the two kinds of systems involve fundamentally different technologies and users.

But the split is also inevitably temporary. Once vendors fill out their capabilities in either area, they will want expand into the other to generate more revenues, block entry by potential competitors, and serve buyers who prefer one-stop shopping. While vendors in both areas will eventually want to expand, most of the revenue is on the front office side. This means the front office vendors are much more likely to become the buyers. Front-office systems are generally priced on the number of users, while non-front-office prices are usually determined by the size of the database. So this will be the Invasion of the Body Counters.

No sooner was last month’s article written than it became clear that the invasion had begun. In December, SAP (the largest provider of enterprise resource planning software, and a new contender in front office systems) announced an alliance with Recognition Systems Inc., developer of one of the most advanced and integrated campaign management/data analysis/email marketing tools. Ordinarily, alliances among software vendors are about as significant as two junior high school students announcing they are “going together”–they’ll talk on the phone a lot and attend a few parties together, and that’s about it. But SAP has historically avoided such relationships, so their decision to participate may actually indicate more significant intentions. If nothing else, the deal represents a recognition of the importance of non-front-office marketing functions as components of a complete customer management solution. Tactically, it also seems to be an attempt by SAP to outflank rivals who are well-entrenched within the front office itself.

Chief among these rivals is Siebel Systems, which countered SAP in January by purchasing Paragren Technologies, another provider of advanced campaign management software. Paragren relies on third-party systems for statistical analysis, but does have some interesting capabilities in data extraction and aggregation–other key functions missing in traditional front office systems. Since this is a full acquisition rather than an alliance, close integration of Paragren with other Siebel products seems more certain than integration of SAP with Recognition Systems.

While SAP and Siebel are the market leaders in the enterprise resource planning and front office segments respectively, Oracle is a major player in both. It has also moved to expand its non-front-office marketing systems, acquiring Darwin data analysis software from Thinking Machines and releasing significantly enhanced versions of its own campaign management products.

Of course, Oracle is primarily known for its database management software, and its purchase of Darwin also fits a pattern among database software vendors of expanding their analytical capabilities. For example, NCR last year added substantial analytical capabilities to its Teradata database, as well as announcing a major alliance with analytical software vendor MicroStrategy. Microsoft embedded a large set of analysis functions within its SQL Server software. And database vendor Informix purchased Ardent, a provider of data transformation tools.

As it happens, Ardent’s assets included a pretty good campaign manager called Customer Advisor, and NCR also released a suite of campaign management tools. But except for Oracle, none of these vendors seems especially interested in attacking the front office market itself. Their addition of analysis and campaign management functions is probably more related to their ambitions in the data warehouse market.

Naturally, front-office vendors also have their eyes on the Internet. Most have enhanced their front office capabilities to support email and Web interactions, although the prices of Internet software companies are so high that this is usually done through development or alliances rather than acquisition. Of course, the Internet companies themselves don’t have this problem, since they can buy each other using their own inflated stock as currency. This has let Internet front office vendors like Kana be active purchasers of other Internet software companies. Still, most of these acquisitions have stayed within the front office.

One recent exception is the acquisition of DataSage, developer of well-regarded data analysis and personalization software. The buyer was Vignette, whose Web site management software runs the Internet equivalent of the front office. Vignette’s primary competitor, personalized Web site expert Broadvision, has taken the opposite approach of building alliances with many non-front-office vendors rather than acquiring a single product of its own.

Whether alliances or acquisitions will prove the more successful strategy is so far unknown. Either way, the development of integrated product suites represents a major change for the marketing software industry. Instead of evaluating stand-alone products primarily on their technical merits, buyers now must first choose whether they want to accept the cost, time and risk of integrating separate products, or avoid those by purchasing a suite. This makes it considerably harder for stand-alone products to survive, both because their market is smaller–comprising only firms willing to undertake the necessary integration–and because they must lower their price to compensate buyers for the integration costs they could have avoided by sticking within a suite.

The existence of suites also changes the evaluation process itself. The larger set of functions makes it more work to compare products based strictly on functionality, and means it is less likely that one product will be superior to the others in all areas. In addition, functionality becomes less important because buyers must pay more attention to the vendor’s long-term viability: with so many more eggs in the same basket, buyers are at higher risk if the vendor fails. Both factors make it harder for new firms to compete even if they are technically superior or priced below the more established products. Of course, the desire to shift the terms of competition in their favor is exactly why vendors seek to create integrated solutions to begin with.

For software buyers, the significance of all this is that they cannot ignore industry mergers and acquisitions even though they might like to. At the minimum, buyers must consider whether any suite really does a good enough job to meet their current and foreseeable future needs–recognizing that once committed to a suite, it will be much harder to substitute a superior stand-alone application for any particular function. Of course, the suites themselves will also improve over time, but the need to retain close integration with many different components makes the suite vendors move more slowly than independent competitors. Buyers should also closely examine the actual degree of integration among suite components, particularly if some parts were acquired: components developed separately do not suddenly become compatible simply because ownership changes hands.

Above all, suite buyers should assess–and insist on–a suite’s ability to integrate easily with third-party tools. The marketing software industry is still evolving too quickly to assume that any single vendor will remain at the forefront in all areas. This makes it almost inevitable that the buyer will want to substitute an external product for some suite component at some point in time. Moreover, today’s marketing systems are increasingly expected to interact with other systems, both within the company and at outside suppliers and customers. This means the ability of a suite to work with other products is essential. Happily today’s technologies make such integration possible with little cost in performance, so it is not an unreasonable request.

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David M. Raab is a Principal at Raab Associates Inc., a consultancy specializing in marketing technology and analytics. He can be reached at draab@raabassociates.com.

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