Salesforce.com battles rivals

As Salesforce.com's star continues to rise, analysts are stepping up their warnings to customers that hosted applications can carry steep costs over the long run, especially for larger organizations.

Salesforce.com recently reported first-quarter results showing growth of more than 80% in its paid-subscribers count and revenue from the year-ago period, and followed that news by announcing two high-profile endorsements this week: a partnership with Accenture and a 5,000-seat licensing deal at Merrill Lynch.

Gartner estimates that after three years, the cost for complex organizations of running Salesforce.com will surpass that of traditional, packaged CRM software. Salesforce.com's strength is salesforce automation features; while it offers tools for customization and adding additional applications to its platform, building out those features requires a customer to invest the resources himself or work with a third-party independent software vendor.

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As Salesforce.com's star continues to rise, analysts are stepping up their warnings to customers that hosted applications can carry steep costs over the long run, especially for larger organizations.

Salesforce.com recently reported first-quarter results showing growth of more than 80% in its paid-subscribers count and revenue from the year-ago period, and followed that news by announcing two high-profile endorsements this week: a partnership with Accenture and a 5,000-seat licensing deal at Merrill Lynch.

Gartner estimates that after three years, the cost for complex organizations of running Salesforce.com will surpass that of traditional, packaged CRM software. Salesforce.com's strength is salesforce automation features; while it offers tools for customization and adding additional applications to its platform, building out those features requires a customer to invest the resources himself or work with a third-party independent software vendor.

Gartner cites integration of production planning and scheduling information from logistics systems, complicated pricing contracts, detailed quotation information and access to customer financial data from accounting systems as areas where Salesforce.com may not be robust enough to support complex customers' needs without additional, potentially pricey, customization.

In a report issued recently probing the return on investment Salesforce.com delivers to customers, Nucleus Research found most customers reported positive returns, with the scale of those returns depending primarily on how rudimentary the customers' previous CRM efforts were. More than 70% of the 29 Salesforce.com customers Nucleus polled were replacing a basic or paper-based contact management system; for these users, the ability to access information in one unified database delivered immediate time-saving and better sales visibility.

Nucleus also found that while Salesforce.com touts marquee customers such as Merrill Lynch, big enterprise deals remain rare exceptions for the company. Salesforce.com's average deal size is for 17 users, and in Nucleus' survey, 45% of respondents were running Salesforce.com for fewer than 100 users. More than 90% of those polled had fewer than 500 users. The danger for Salesforce.com is that smaller customers are the ones most likely to jump ship: More than a third of Nucleus' respondents said they would consider changing CRM vendors or were in the process of doing so.

"People are more open to switching," said Rebecca Wettemann, Nucleus' vice president of research. "If you've reached the point where you have positive ROI from an on-premise solution, you're probably not going to change. Whereas with an on-demand solution, unless you've done a lot of work on customization, you haven't invested as much and might be open to other options."

Salesforce.com doesn't disclose its renewal rates. Executives brush aside questions about the issue by pointing to Salesforce. com's track record of constant subscriber growth over the past four years; Phil Robinson, Salesforce.com's vice president of global marketing, said the company is satisfied with its ability to hold on to current customers and win new ones.