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The biggest mouth in Silicon Valley

Marc Benioff wants to transform the software industry

By Erick Schonfeld
Business 2.0

Arnold Schwarzenegger, left, became an unwitting prop in a Marc Benioff production when the CEO bought 500 tickets to a charity premiere of T3.
Arnold Schwarzenegger, left, became an unwitting prop in a Marc Benioff production when the CEO bought 500 tickets to a charity premiere of T3.

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Salesforce hosts customer-relationship management (CRM) software in its own data center, and charges a monthly fee to 7,000 companies for each salesperson who uses it.

The firm had revenue of $51 million in the fiscal year ending January 31 and has just turned profitable, earning $562,000 in the most recent quarter. It's on track to hit $100 million in revenue for the full fiscal year.

With the possible exception of Google's, no prospective tech IPO makes market-watchers drool more than Salesforce's.
Marc Benioff
New Products
Computer Software

(Business 2.0) -- Sitting in the movie seat right next to Arnold Schwarzenegger at the San Francisco premiere of Terminator 3 in June, Marc Benioff looks extremely pleased with himself.

The lights have dimmed, the movie is rolling, and Benioff has just pulled off another marketing coup for Most of the people in the audience are his personal guests. An hour earlier they were celebrating the launch of the latest version of his company's software, S3, at a pre-movie party across the street from the theater.

Schwarzenegger made an appearance with his crew of bodyguards, even though he is not endorsing the product. The premiere is actually a charity event for an afterschool program Schwarzenegger sponsors.

When Benioff was asked if he wanted to buy a few seats, he smelled a marketing windfall. (The new product is S3. The movie is T3. Get it?) He bought 500 seats. In return for a $150,000 donation, most of which he collected from business partners to help sponsor the event, Benioff has drawn to his launch a huge crowd of influential customers, Silicon Valley bigwigs, and several journalists. (He will later squeeze more good branding vibes from the moment by shamelessly slapping a photo of Schwarzenegger accepting the check onto Salesforce's Web site.)

In the theater, delighted with his artful orchestration, Benioff leans over to offer Schwarzenegger a Snickers bar. The former Mr. Universe -- and future candidate for governor of California -- scarfs it down, seemingly unaware that he has just become a prop in another Marc Benioff marketing production.

The man, the showman

At 38, Benioff is perhaps Silicon Valley's master showman. But he has something big to sell: the idea of software as a utility. Salesforce offers software that corporate customers can rent rather than buy, and that they can access over the Web instead of installing on their own servers. Many tech giants, including IBM and Microsoft, talk about the coming era of utility computing, when companies will lease their software the way they do electricity or phone service. But little four-year-old Salesforce is actually building its entire business around that model.

And there are signs that it's working. Yet what Benioff is really pitching is a transformative vision of software's future: If utility software services truly catch on, they could change the economics of the whole industry -- to the detriment of most existing players.

Gone would be the high initial cost of stand-alone software. Gone would be upgrades and the need for customers to dig into their pockets again and again to pay for them. Gone would be the endless consulting, installation, and maintenance fees that today accompany the latest enterprise applications. Remaining, in Benioff's grand plan, would be Salesforce, a multibillion-dollar behemoth, an almost unrivaled power -- a Microsoft, in a word.

It's an audacious notion, but then, this is an audacious guy. Wherever he appears, Benioff plays up his plan's menace to the old order by wearing a pin with the word "Software" crossed out.

Carnival barker and strategist

With a 6-foot-5 frame and ample girth, he is partial to draping blue suits, and his choice in shirts alternates between tropical (Tommy Bahama) and tasteful (Thomas Pink).

His personality similarly veers between carnival barker and thoughtful software strategist and spiritual adventurer.

One minute he's revving his $116,000, 500-horsepower Mercedes S55 up a San Francisco hill, boasting, "This is the fastest production four-door sedan on the market."

The next minute he's arguing, rather persuasively, that "Oracle , SAP, and PeopleSoft are the Packards and Dodges" of business software, doomed to irrelevance. Then he may be off to his twice-weekly private sessions of "advanced yoga" training, or to host an A-list Republican Party fund-raiser.

Benioff is such an outsize character that he inspires an inevitable question: Is he just a blowhard? His ambitions for Salesforce have him charging at some of the toughest competitors in tech -- even the smallest of which are 15 times his company's size -- and there are major doubts about whether he can truly deliver. But at a time when larger enterprise software firms are fighting over a shrinking pie and waging pitched consolidation battles, Salesforce is undercutting them on price and enjoying eye-popping growth.

Always selling

Benioff's life, some who know him say, may be a constant sales pitch, but it's a fascinating and unorthodox pitch, and he is utterly relentless. "When you have a relationship with him," says his personal assistant, Tim Lynn, who was Benioff's roommate in college, "he never goes away."

The industry Benioff is trying to change, narrowly defined, is the CRM business, which was pioneered and is still dominated by Siebel Systems. Last year Siebel had $1.6 billion in sales, down from $2 billion in 2001. Salesforce is built on the shoulders of Siebel. That company's founder, Tom Siebel, previously worked for Larry Ellison at Oracle. So did Benioff.

After writing code for Atari game consoles as a high schooler and working for a summer at Apple Computer during college, Benioff joined Oracle, and eventually became one of the most successful sales execs in its history. In 1994, he was one of seven seed investors in Siebel. Five years later he left Oracle, sold the bulk of his initial $50,000 Siebel stake for more than $25 million, and founded Salesforce.

From the start, Benioff has gotten mileage from a fundamental characteristic of the traditional CRM business: For a lot of customers, it has been a nightmare.

"CRM is the most oversold, underimplemented concept of the past five years," says management consultant Michael Treacy.

Many clients have found CRM too expensive and too complicated; research firm Gartner estimates that 42 percent of all CRM software sold is not even being used. Benioff sells his Web-based approach as the antidote to CRM's problems. Salesforce's software helps salespeople manage their accounts, track leads, and evaluate marketing campaigns. It helps companies monitor the sales cycle "from campaign to cash," Benioff says, fingering invisible money with his right hand. Yet unlike traditional CRM software from Siebel and others that can cost hundreds of thousands of dollars to install and take months to get up and running, Salesforce costs as little as $65 a month per user.

Siebel, SAP, and other CRM stalwarts typically send in scores of consultants to get their systems up and running. Salesforce does the same thing with hardly any consultants, since it hosts the apps on its own servers. There are no associated hardware or IT labor costs.

How business works

Customers access the software over the Web and pay by the drink (for more on how the software works, see "Connecting With Customers"). When a new version comes out, everybody gets upgraded at the same time, for the same price as before. The software is so cheap that sales managers often sign up for it themselves, bypassing their IT departments. Treacy himself is a satisfied customer; his small consultancy recently bought the Salesforce service. "It's almost too cheap," he says. "How can you go wrong?"

But as Salesforce goes after bigger and bigger accounts, the sales challenges mount. The company was recently put through the wringer to get its first contract for 1,000 users at SunGard Data Systems, which provides data recovery and other IT products to financial services firms.

"They sent an army of people and drilled deeper than any other customer," recalls Salesforce president Jim Steele. "It was an excruciating four-month process."

Bettina Slusar, SunGard's head of global accounts, says she was prepared to walk away from the deal at any time if her simulations, demos, and security reviews turned up anything questionable. Yet she had "no appetite for a five-year implementation or the $18,000-a-head" cost of traditional CRM software. The ultimate test, Slusar says, is that "unless the reps like it, it is never going to work." The verdict? "The reps like it."

Overcoming doubts

To keep winning those big accounts, Salesforce will have to overcome several perceived disadvantages to its software utility.

"Customers are still the largest form of resistance against" the rent-an-app idea, says investor Roger McNamee of Silver Lake Partners. He ticks off a list of concerns: security, lack of control, problems with customizing, the difficulty of integrating the software with other corporate applications.

"Customers would rather buy than rent," he concludes flatly. Gartner analyst Beth Eisenfeld characterizes Salesforce as a "stripped-down system" that's a "good low-cost option," but says the gulf between it and a full-fledged CRM package is "the difference between a tract house and a custom-built home."

Competitors echo those sentiments. "It's not about automating" just CRM, says Oracle exec Tim Chou. "It's about automating the whole way a corporation runs."

Siebel, like Salesforce, specializes solely in CRM, but says its software is easily customizable to meet whatever demands a customer has. Salesforce, charges Siebel director of product marketing Rich Reimer, "provides one piece of software, like the Model T, and everybody is supposed to be happy with it."

Benioff, of course, has an answer to every objection. To protect customers' data, Salesforce employs state-of-the-art encryption and security systems. And, at the insistence of large corporate customers, Benioff recently built a redundant data center in Dublin, Ireland.

Meeting needs

He is also addressing the one-size-fits-all uniformity of Salesforce's software: The recently released S3 gives users more flexibility to tailor the software to their needs. It contains upgraded features meant to allay concerns that Salesforce software doesn't have the firepower of more expensive CRM packages from Siebel or SAP.

In addition, Salesforce has come up with Sforce, a new set of Web-based application development tools that enable programmers in corporate IT departments to more easily integrate Salesforce software with data from other vendors' enterprise apps. Both corporate customers and other software partners can also use Sforce to build their own hosted applications on top of Salesforce's.

"In a year," predicts Parker Harris, a Salesforce co-founder and its head of software development, "we won't have to say, 'You have to give up something to go with the Salesforce model.'"

"We still have so much people don't understand," Benioff tells his assembled managers. "Everyone thinks we are a great marketing organization," he reflects, "but we are not, because we do not illuminate what we have."

He wonders aloud if the company should move beyond CRM into other areas such as managing contracts, billing, and support as their own separate utilities. "I think now we need to look at providing other offerings," he suggests. "We need to show we are not a one-trick pony."

Possibilities for IPO

Benioff might well want to expand his company's scope, especially with a hotly anticipated public offering in the cards. But an IPO may not happen anytime soon: Benioff says the market is too uncertain, and at the moment, the company is generating plenty of cash to fund operations.

For now, Salesforce is focusing on strengthening its business and expanding overseas (the service is available in nine different languages, including Chinese and Swedish).

Cakebread, the CFO, is talking about other looming challenges. Larger opponents like SAP and Oracle that sell more than just CRM software will often throw in CRM for free. Beyond that, the big players aren't oblivious to Salesforce's inroads.

Siebel, which tried a few years ago to set up a Web-based service similar to Salesforce's, only to shut it down after pouring more than $35 million into it, is working on a revamped version, according to a Siebel customer who has been briefed on the project. (Siebel declined to comment on any utility software plans.)

Oracle offers its entire suite of business apps as an outsourced service; Chou, who runs the operation, expects it to be a billion-dollar business for Oracle in three to five years. Microsoft and SAP offer hosted software through partners.

The question is whether the offerings will provide Salesforce's rivals with incremental new revenue or become the dominant way they do business. If it's the latter, Cakebread says, the transition from getting paid in large lump sums to getting the smaller, steadier trickle that comes from a subscription service could prove painful for the larger players. (The big guys currently charge users no differently for hosted services than for traditional packaged software.)

Pondering Napoleon

Cakebread's observation clicks with Benioff. "Our goal is to deliver a new industry," he chimes in. "And if we do it, the old industry is screwed!"

He's rolling now. He launches into a diatribe against everyone from Siebel to Microsoft. By the end of the evening, he suggests that the only reason PeopleSoft CEO Craig Conway decided to buy J.D. Edwards instead of Siebel is because Tom Siebel has a greater Napoleon complex than Conway does.

"Tom is even shorter than Craig," he notes, "which is really short."

That's the barker in him coming out again. But he seesaws back toward software-mystic mode. "In our industry, the present never equals the future," he muses. Then he lets slip that Microsoft once made an offer to buy Salesforce. Benioff says that, in a December 2000 meeting, Microsoft CEO Steve Ballmer told him, "You know what is interesting about you? You have wide eyes."

This was Ballmerese, Benioff maintains, for having the ambition to go for the big score. Benioff says he later turned down a $75 million offer as too low; Microsoft subsequently built its own CRM software. (Microsoft won't comment on whether it ever bid for Salesforce.)

Worried about Microsoft?

start quoteMicrosoft is the present, but we have the potential to be the future.end quote
-- Marc Benioff, CEO

Isn't Benioff concerned about Microsoft? Nah, not as long as its business is based on selling Windows desktop and server software, he says. He contends that going to a software utility model would introduce too much channel conflict, since Microsoft sells indirectly through thousands of resellers that wouldn't look kindly on getting cut out of the action.

Then he turns the question around to drive home yet another key marketing message: "Microsoft's goal is very simple: to sell you every piece of software they can!" He thumps on the table with his right fist. "Our goal is also simple," he says, thumping the table harder. "To never sell you software again."

There's a thin line between inspired salesmanship and insufferable hucksterism.

Benioff's shtick constantly pushes that line, to the irritation of competitors and even some partners.

Microsoft fights tooth and nail with Salesforce for CRM customers, but the two companies are actually partners when it comes to software development.

Still, Microsoft's top Silicon Valley envoy, Dan'l Lewin, razzes Benioff: "I don't get the 'No Software' thing. Do you have hamsters in the background moving around electrons?"

Bill Wohl, an SAP spokesman, says it's ridiculous for Benioff "to run around saying we're all dinosaurs and he's going to slay us" and dismisses Salesforce as an "ankle biter." Even one of Benioff's own board members, Craig Ramsey, a former Oracle and Siebel executive, calls some of Benioff's act "marketing hyperbole."

Attracting attention

On the other hand, Benioff has achieved a valued goal of marketing: He's drawn a lot more attention to his company than its current stature might warrant. He may not reach some of his more grandiose goals; Ramsey, for one, says Salesforce is no SAP- or Siebel-slayer. But he says it nonetheless "will be a billion-dollar company in five years."

Whether that happens or not, the distance Salesforce has traveled in its short life makes it clear that there's a lot more to Benioff and his company than bluster. (Further evidence of that: Benioff recently hired away two high-ranking Siebel sales execs.) In any case, Benioff isn't likely to change his style soon.

"I am not a trash talker," he insists. That Napoleon crack about Craig Conway and Tom Siebel? Too much pinot noir, Benioff explains. Then he adds that SAP, Siebel, PeopleSoft, and other competitors "are dinosaurs!"

For more technology news visit Business 2.0.

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